Forms of Business Ownership: The Future of Business Gitman & Mcdaniel 6Th Edition

CHAPTER 5
Forms of Business Ownership
THE FUTURE OF BUSINESS

Gitman & McDaniel
6th Edition
Prepared
Preparedby
by
Deborah Baker
Deborah Baker
Chapter 5
Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved Texas
TexasChristian 1
ChristianUniversity
University
Learning Goals
What are the advantages and disadvantages of the

1 sole proprietorship form of business organization?
What are the advantages of operating as a

2 partnership, and what downside risks should
partners consider?
How does the corporate structure provide

3 advantages and disadvantages to a company, and
what are the major types of corporations?
Chapter 5
Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved 2
Learning Goals
What other options for business

4 organization does a company have in
addition to sole proprietorships,
partnerships, and corporations?
What makes franchising an appropriate

5 form of organization for some types of
business, and why does it continue to grow
in importance?
Chapter 5
Learning Goals
Why are mergers and acquisitions

6 important to a company’s overall growth?
What current trends will affect the business

7 organizations of the future?
Chapter 5
Business Ownership
Financing?
Employees?
Business taxes?
Debt liability?
Operating control?
Ownership?
1 Chapter 5
Sole Proprietorships
What are the advantages and disadvantages of the

sole proprietorship form of business organization?
1 Chapter 5
Sole A business that is established,

Proprietorship owned, operated, and often financed
by one person.
2 Chapter 5
Advantages Disadvantages
 Easy and inexpensive  Unlimited liability

to form
 Difficulty raising capital
 Profits go to the owner
 Limited managerial
 Direct control of the expertise
business
 Trouble finding
 Freedom from government qualified employees
regulations
 Personal time commitment
 No special taxation
 Unstable business life
 Ease of dissolution
 Losses are owner’s
responsibility
1 Chapter 5
Concept Check
What is a sole proprietorship?
Why is this a popular form of business organization?
What are the drawbacks to being a sole proprietor?
1
Chapter 5 9
Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved
Partnerships
What are the advantages of operating as a

partnership, and what downside risks should
partners consider?
2 Chapter 5
Partnerships
Partnership An association of two or more

individuals who agree to operate a
business together for profit.
2 Chapter 5
Partnerships
Advantages
Disadvantages
 Ease of formation  Unlimited liability

 Availability of capital  Potential for conflicts
between partners
 Diversity of skills and
expertise  Sharing of profits
 Flexibility  Difficulty exiting or
dissolving
 No special taxes
 Relative freedom from
government control
2 Chapter 5
Concept Check
How does a partnership differ from a sole

proprietorship?
Describe the three main types of partnerships and

explain the difference between a limited partner and a
general partner.
What are the main advantages and disadvantages of a

partnership?
2
Chapter 5 13
Corporations
How does the corporate structure provide

advantages and disadvantages to a company,
and what are the major types of corporations?
3 Chapter 5
Corporations
Corporation A legal entity with an existence and

life separate from its owners, who are
not personally liable for the entity’s
debts.
A corporation is chartered by the

state in which it is formed and can
own property, enter into contracts,
sue and be sued, and engage in
business operations under the terms
of its charter.
3 Chapter 5
The 10 Largest U.S. Corporations
1. ExxonMobil Source: “The 2006 Fortune 500,”
Fortune, http://www.fortune.com
2. Wal-Mart Stores (May 22, 2006).
3. General Motors
4. Chevron Texaco
5. Ford Motor
6. ConocoPhillips
7. General Electric
8. Citigroup
9. American International Group
10. International Business Machines
3 Chapter 5
16
The Incorporation Process
Select
Select company’s
company’s name
name
Write
Write articles
articles of
of incorporation
incorporation
Pay
Pay required
required fees
fees and
and taxes
taxes
Hold
Hold organizational
organizational meeting
meeting
Adopt
Adopt bylaws,
bylaws, elect
elect directors,
directors,
pass
pass operating
operating resolutions
resolutions
3 Chapter 5
Articles of Incorporation
 Name of corporation
 Company’s goals
 Types of stock and number of shares issued
 Life of the corporation
 Minimum investment by owners
 Methods for transferring shares
 Address of the corporate office
 Names and addresses of the first board of directors
3 Chapter 5
The Corporate Structure
Stockholders
Elect
Directors
Hire
Officers
President VP Treasurer Secretary
3 Chapter 5
Corporations
Advantages
Disadvantages
 Limited liability  Double taxation of

profits
 Ease of transferring
ownership  Cost and complexity
of formation
 Unlimited life
 More government
 Tax deductions restrictions
 Ability to attract
financing
3 Chapter 5
Types of Corporations
Conventional
Conventional or
or basic
basic corporate
corporate form
form of
of
C
C Corporation
Corporation organization
organization
A
A hybrid
hybrid entity
entity that
that is
is organized
organized like
like aa
SS Corporation
Corporation corporation,
corporation, but
but taxed
taxed like
like aa partnership
partnership
A
A hybrid
hybrid organization
organization that
that offers
offers the
the
Limited
Limited Liability
Liability same
same liability
liability protection
protection as
as aa corporation
corporation
Company
Company (LLC)
(LLC) but
but may
may bebe taxed
taxed as
as either
either aa partnership
partnership
3 or
or aa corporation
corporation
Chapter 5
Concept Check
What is a corporation? Describe how corporations are

formed and structured.
Summarize the advantages and disadvantages of

corporations. Which features contribute to the
dominance of corporations in the business world?
Why do S corporations and limited liability companies

(LLCs) appeal to small businesses?
3
Chapter 5 22
Specialized Forms of Business Organization
What other options for business organization

does a company have in addition to sole
proprietorships, partnerships, and
corporations?
4 Chapter 5
Specialized Forms of
Business Organization
Cooperatives A legal entity typically formed by

people with similar interests, such as
suppliers or customers, to reduce costs
and gain economic power.
A cooperative has:
• limited liability
• an unlimited life span
• an elected board of directors
• an administrative staff
• profit distribution to member-owners
4 Chapter 5
Cooperatives
Individual
Individual producers
producers join
join together
together
Seller
Seller to
to compete
compete more
more effectively
effectively with
with
Cooperatives
Cooperatives large
large producers
producers
A
A group
group of
of cooperative
cooperative members
members
Buyer
Buyer who
who unite
unite for
for combined
combined
Cooperatives
Cooperatives purchasing
purchasing power
power
4 Chapter 5
Benefits of Cooperatives
 Empower people to improve their quality of life

 Enhance economic opportunities through self-help
 Provide members with services, such as:
– credit
– finance
– energy
– consumer goods
– housing
– telecommunications
4
Chapter 5 26
Cooperative Principles
 Voluntary and open membership

 Democratic member control
 Member economic participation
 Autonomy and independence
 Education, training, and information
 Cooperation among cooperatives
 Concern for community
4 Chapter 5
Concept Check
Describe the two types of cooperatives and the

advantages of each.
What are the benefits of joint ventures?
4
Chapter 5 28
Franchising
What makes franchising an appropriate form of

organization for some types of business, and why
does it continue to grow in importance?
5 Chapter 5
Franchising
Franchising A form of business organization based

on a business arrangement between a
franchisor, which supplies the product
concept and the franchisee, who sells
the goods or services of the franchisor in
a certain geographic area.
5 Chapter 5
Top Franchises, 2006
1. Subway
2. Pizza Hut Inc.
3. Quiznos Sub
4. Jan-Pro Franchising Int’l, Inc.
5. Curves
6. Jani-King
7. Jackson Hewitt Tax Service
8. The UPS Store
9. Coverall Cleaning Concepts
10.CleanNet USA Inc.
5 Chapter 5
Franchise Agreements
Franchisee
Franchisee Franchisor
Franchisor
Agreement
Agreement Agreement
Agreement
 Use of proven company
 Follow operating rules brand
 Buy standard equipment  Help finding a site
 Keep up sales/service  Building plans
levels
 Training and management
 Take part in franchisor assistance
promotions
 Managerial and accounting
 Maintain a relationship procedures
with franchisor
 Employee training
 Wholesale prices for
supplies
 Financial assistance
5 Chapter 5
Franchising
Advantages
Disadvantages
 Increased ability for  Loss of control

franchisor to expand  Cost of franchising
 Recognized name,  Restricted operating
product, and operating freedom
concept
 Management training
and assistance
 Financial assistance
5 Chapter 5
Franchising
by Industry
5 Chapter 5
Franchise Purchase Tips
Act
Act fast,
fast, yet
yet proceed
proceed with
with caution
caution
Put
Put the
the franchisor
franchisor to
to the
the test
test
Know
Know what
what you’re
you’re getting
getting into
into
Don’t
Don’t invest
invest more
more than
than you
you can
can afford
afford to
to lose
lose
Don’t
Don’t fall
fall in
in love
love with
with aa trend
trend
5
Chapter 5 35
Concept Check
Describe franchising and the main parties to the

transaction.
Summarize the major advantages and disadvantages

of franchising.
Why has franchising proved so popular?
5
Chapter 5 36
Mergers and Acquisitions
Why are mergers and acquisitions important

to a company’s overall growth?
6 Chapter 5
International Economic
Communities
Merger The combination of two or more firms to

form a new company, which often takes
on a new corporate identity.
Acquisition The purchase of a corporation by another

corporation or by an investor group; the
identity of the acquired company may be
lost.
6 Chapter 5
Types of Mergers
Horizontal
Horizontal
Merger
Merger
Vertical
Vertical
Merger
Merger
Conglomerate
Conglomerate
Merger
Merger
Leveraged
Leveraged
Buyout
Buyout
6 Chapter 5
Merger Motives
Improve overall performance of
the merged firms through cost
savings, elimination of
overlapping operations, improve
purchasing power, increase
market share, or reduce
competition.
Financial restructuring:
 cutting costs
Cost-effective expansion  selling off units
Company growth  laying off employees
Broaden product lines  refinancing company
Acquire new markets
Chapter 5
6
Concept Check
Differentiate between a merger and an acquisition.
What are the most common motives for corporate

mergers and acquisitions?
Describe the different types of corporate mergers.
6
Chapter 5 41
Trends in Business Ownership
What current trends will affect the business

organizations of the future?
7 Chapter 5
Trends in Business Ownership
Baby
BabyBoomers
Boomersdriving
drivingfranchise
franchisetrends
trends
Baby
BabyBoomers
Boomerspostponing
postponingretirement
retirement
Mergers
Mergersand
andforeign
foreigninvestment
investmentboom
boom
7 Chapter 5
Concept Check
What are some of the demographic trends currently

impacting American business?
As a prospective business owner what could you do to

capitalize on these trends?
What other economic trends are influencing today’s

business organizations?
7
Chapter 5 44

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CHAPTER 5

Forms of Business Ownership

THE FUTURE OF BUSINESS

What are the advantages and disadvantages of the

What are the advantages of operating as a

How does the corporate structure provide

What other options for business

What makes franchising an appropriate

Why are mergers and acquisitions

What current trends will affect the business

What are the advantages and disadvantages of the

Sole A business that is established,

 Easy and inexpensive  Unlimited liability

What is a sole proprietorship?

Why is this a popular form of business organization?

What are the drawbacks to being a sole proprietor?

What are the advantages of operating as a

Partnership An association of two or more

 Ease of formation  Unlimited liability

How does a partnership differ from a sole

Describe the three main types of partnerships and

What are the main advantages and disadvantages of a

How does the corporate structure provide

Corporation A legal entity with an existence and

A corporation is chartered by the

President VP Treasurer Secretary

 Limited liability  Double taxation of

What is a corporation? Describe how corporations are

Summarize the advantages and disadvantages of

Why do S corporations and limited liability companies

What other options for business organization

Cooperatives A legal entity typically formed by

 Empower people to improve their quality of life

 Voluntary and open membership

Describe the two types of cooperatives and the

What are the benefits of joint ventures?

What makes franchising an appropriate form of

Franchising A form of business organization based

 Increased ability for  Loss of control

Describe franchising and the main parties to the

Summarize the major advantages and disadvantages

Why has franchising proved so popular?

Why are mergers and acquisitions important

Merger The combination of two or more firms to

Acquisition The purchase of a corporation by another

Differentiate between a merger and an acquisition.

What are the most common motives for corporate

Describe the different types of corporate mergers.

What current trends will affect the business

What are some of the demographic trends currently

As a prospective business owner what could you do to

What other economic trends are influencing today’s

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