5-1. Business in a Changing World McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved. Chapter 5 Options for Organizing

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Business in aChanging World

McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.

Chapter 5Options for Organizing Business

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Zingerman’s Deli- Innovation, quality, & growth

Thanks to the Internet, haggling has never been easier, especially in the area of online apparel sales.

http://www.zingermansroadhouse.com/

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Forms of Business Ownership

•Sole proprietorship•Partnership•Corporation

Comparing the Forms of Business Ownership

Source: U.S. Bureau of the Census, Statistical Abstract of the U.S. 2003, (Washington, D.C.: U.S. Government Printing Office, 2004), p. 459.

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Various Forms of Business Ownership


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Businesses owned and operated by one individual; the most common form of business organization in the United States

Sole Proprietorship

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•Many restaurants•Hair salons•Flower shops•Dog kennels•Independent grocery stores

Sole Proprietorship

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Sole Proprietorship -- Facts

• 15-20 million in the U.S.• 80% of all businesses• Men 2x more likely than

women to start own business

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•Ease and cost of formation•Secrecy•Distribution and use of profits•Flexibility and control of the business•Government regulation•Taxation

Advantages of a Sole Proprietorship

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•Unlimited liability•Limited sources of funds•Limited skills•Lack of continuity•Lack of Qualified Employees•Taxation

Disadvantages of a Sole Proprietorship

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A form of business organization defined by the Uniform Partnership Act as “an association of two or more persons who carry on as co-owners of a business for profit”

Partnership

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•General partnership•Limited partnership

Types of Partnerships

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A partnership that involves a complete sharing in both the management and the liability of the business

General partnership

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A business organization that has at least one general partner, who assumes unlimited liability, and at least one limited partner whose liability is limited to his or her investment in the business.

Limited partnership

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Articles of Partnership

Legal documents that set forth the basic agreement between partners.

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1.Name, purpose, location2.Duration of the agreement3.Authority and responsibility of each partner4.Character of partners (i.e., general or limited, active or silent)5.Amount of contribution from each partner6.Division of profits or losses7.Salaries of each partner

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8.How much each partner is allowed to withdraw9.Death of partner10.Sale of partnership interest11.Arbitration of disputes12.Required and prohibited actions13.Absence and disability14.Restrictive covenants15.Buying and selling agreements

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Partnerships Advantages & Disadvantages

Advantages•Ease of organization•Capital & credit•Knowledge & skills•Decision making•Regulatory controls

Disadvantages•Unlimited liability•Business responsibility•Life of the partnership•Distribution of profits•Limited sources of funds•Taxation of partnerships

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Keys to Success in Business Partnerships

1.Keep profit sharing and ownership at 50-502.Partners should have different & complementary skill sets3.Honest is critical4.Maintain face-to-face communications5.Transparency – sharing information6.Awareness of funding constraints and limited resources7.To be successful, you need experience8.Family is priority; limit associated problems9.Do not become too infatuated with “the idea” think implementation10.Couple optimism with realism in sales and growth expectations

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Legal entities created by the state whose assets and liabilities are separate from its owners..

Corporations

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Typically owned by many individuals and/or organizations who own shares of the business – stock (shareholders or stockholders)

Corporations

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Corporations

Stock – shares of a corporation that may be bought or sold

Dividends – profits of a corporation that are distributed in the form of cash payments to stockholders.

Stock & Dividends

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Corporations

A Corporation is created (incorporated) under the laws of the state in which it incorporates. The individuals creating the corporation are called incorporators.

Creating a Corporation

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Corporations

Legal documents filed with basic information about the business with the appropriate state office (often the secretary of state).

Articles of Incorporation

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Articles of IncorporationCommon Elements

1.Name & address of corporation2.Objectives of the corporation3.Classes of stock (common, preferred, voting, nonvoting)4.Number of shares of each class of stock5.Financial capital required at time of incorporation6.Provisions for transferring shares of stock7.Regulation of internal corporate affairs8.Address of business office9.Names and addresses of the initial board of directors10.Names and addresses of the incorporators

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Corporations

Private corporationPublic corporationQuasi-public corporationNon-profit corporation

Types of Corporations

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Corporations

Private corporation – a corporation owned by just one or a few people who are closely involved in managing the business


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Corporations

Public Corporation– a corporation whose stock anyone may buy, sell, or trade.


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Corporations

Initial Public Offering (IPO) – A private corporation who wishes to go “public” to raise additional capital and expand. The IPO is selling a corporation’s stock on public markets for the first time.


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Corporations

Quasi-public corporation – Corporation owned and operated by the federal, state, or local government -- (NASA, U.S. Postal Service).


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The Largest U.S. CorporationsFortune’s 2007 rankings of America’s largest corporations

Rank Company Revenues ($millions)

1 Wal-Mart $378,799

2 Exxon Mobil $372,824

3 Chevron $210,783

4 General Motors $182,347

5 Conoco Phillips $178,558

6 General Electric $176,656

7 Ford Motor $172,468

8 Citigroup $159,229

9 Bank of America $119,190

10 AT&T $118,928

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Corporations

Non-profit corporation – focuses on providing a service rather than earning a profit but are not owned by a government entity (American Red Cross)


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Corporations

•Board of directors•Preferred stock•Common stock

Elements of a Corporation

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Corporations

Board of Directors – a group of individuals elected by the stockholders to oversee the general operation of the corporation who set the corporation’s long-range objectives.

Board of Directors

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Corporations

Inside Directors – individuals who serve on the board and are employed by the corporation (usually executives of the corporation).

Outside Directors – individuals who serve on the board who are not directly affiliated with the corporation (usually Executives of other corporations).

Board of Directors

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Corporations

Preferred stock – a special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.

Common Stock – stock whose owners have voting rights in the corporation, yet do not receive preferential treatment regarding dividends.

Stock Ownership

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Corporations

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• Advantages:– Limited liability– Transfer of ownership– Perpetual life– External sources of

funds– Expansion potential

• Disadvantages:– Double taxation– Forming a corporation– Disclosure of

information– Employee-owner

separation

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Other Types of Business Ownership

•Joint Ventures•S Corporations (S-Corp)•Limited Liability Companies (LLC’s)•Cooperatives (Co-op’s)

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Joint Venture -- a partnership established for a specific project or for a limited time

(Audi & Volkswagen joint venture)

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S-Corporation (S-Corp) – corporation taxed as though it were a partnership with restrictions on shareholders. Very popular with entrepreneurs.

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Limited Liability Company (LLC)– form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members. (Segway)

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Cooperative (Co-Op)– an organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization.

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Trends in Business Ownership

•Mergers

•Acquisitions

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Merger – the combination of two companies (usually corporations) to form a new company

Acquisition – the purchase of one company by another, usually by buying its stock and/or assuming its debt.

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Types of Business Ownership

Rank Year Acquirer Target Transaction

Value

1 2000 AOL Time Warner $164,747

2 2000 Glaxo Welcome SmithKline Beecham PLc $75,961

3 2004 Royal Dutch Petroleum

Shell Transport & Trading $74,559

4 2006 AT&T BellSouth Corp $72,671

5 2001 Comcast AT&T Broadband $72,041

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Major Mergers and Acquisitions Worldwide Transaction in millions of U.S. dollars

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Leveraged buyout (LBO) – a purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one) using the assets of the purchased company to guarantee repayment of the loan.

Documents

5-1. Business in a Changing World McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved. Chapter 5 Options for Organizing