BUSINESS ORGANIZATIONS

1. BUSINESS ORGANIZATIONS

3. Business Organizations • Section Focus: • What are the different types of • business organizations? • 2. Describe the characteristics of • sole proprietorships, partnerships, • and corporations. • 3. Analyze the advantages and disadvantages of • business organizations. • 4. What is the difference between • stocks [owner] andbonds [lender]? • 5. What are theadvantages and • disadvantagesof franchises? • 6. What makesMcDonald’s the greatest franchise ever? • [not the greatest hamburgers, just the greatest franchise]

4. Business Organizations 22 Million businesses Sole Proprietorships 72%-over 16 million Partnerships 8% - 1.5 million Corporations 20% - 4 million Total Business Sales Sole Proprietorships 5% $434 billion [Ave. $60,000] Partnerships 11% $500 billion [Ave. $250,000] Corporations [Ave. $3 M] 84% $8 trillion 45 made over $20 bil. 143 Made over $10 bil. Only 20 nations have GDPs greater than Wal-Marts $379 bil. Let’s start a dance company.

5. THE BUSINESS POPULATION Business Shares of Domestic Output Percentage of Firms Percentage of Sales Corporations 20% Partnerships 8% Corporations 84% Sole Proprietorships 72% Partnerships 11% Farmer Sole Proprietorship 5%

6. Business Failures Over 500,000 small businesses are launched each year. One third of these start-ups fail within two years.

7. 1.Sole proprietorships–oneindividualin business for himself. They make up72%of all businesses and take in5%of total profits. They are thesimplest to formbecause of the small amount of capital needed to start up.Examplesare beauticians, dentists, lawyers, dry-cleaning and lawn care and lemonade stands.

8. Distribution of Sole Proprietorships Based on Annual Sales and Industry

9. 2. Advantages of a Sole Proprietorship A.Easyto quit the business if the owner decides to do so. There are no co-owners to consult. B. Owners receive theentireprofit. C.Easyto form–no complicated legal documents or complicated tax forms, small amount of capital needed. Personal satisfaction (psychological-being your own boss) prestige and a sense of accomplishment. D.Totalcontrol – can make decisions quickly, can hire and fire easily, can respond quickly to trends.

10. A.Unlimitedliability (debt) - have to forfeit their personal possessions as well as their businesses. (auto, other business, house, savings) B. Burden ofsoleresponsibility – must have business sense. C.Limitedpotential for growth – collateral (any thing of value to guarantee a loan [like giving up your personal possessions) [Let’s say you put your home up for collateral but have to give it up] D.Difficultto attract qualified employees–can’t offer fringe benefits. [Let’s say you ask for more benefits] E.Shortlife span – depends on owner’s health and competence. If the owner dies, it is over. 3. Disadvantages of Sole proprietorships I want medical benefits!

11. 4Partnership - business operated by 2 or more people.They are theleast commonwith only8%and take in only11%of profits. Two Forms of Partnerships 51.General– equal decision making &unlimited liability among partners. 62.Limited– some non-active partners join as an investment (and thus have limited liability-just the investment,not the property). He is a“silent”partner. Let’s say your silent partner puts up $30,000 to insure the loan. I gave $30,000 as a silentpartner, so I don’t have to do anything.

12. Advantages of Partnerships [“Two heads are better than one.”] Two Headsbetter thanOne Head Specialization– specific duties assigned to different partners. A. Sharingof losses. Can borrow more and can sustain heavier losses. B. Easyto form. Small amount of money to start & operate. C. Shareddecision making – more informed decisions. D. Personal satisfaction– sense of accomplishment. 7

13. Distribution of Partnerships Based on Annual Sales & Industry

14. 8.Disadvantages of Partnerships A. Disagreements among partners – conflicts delay decisions, lower employee morale, & lessen efficiency. Each partner is responsible for the acts of all other partners. Must choose good partners. B. Have to sharethe profits. C. Unlimited liability – can lose their business and personal possessions. D. Limited life – sickness, conflicts, or death can end the partnership. Take That!

15. Demonstration of “Unlimited Liability” Harold Nodoe, Gloria Poorand Jack Rich owned the Trio Dress Shoppe as a partnership. Under the terms of Their partnership agreement, Nodoe and Poor were entitled each to 40% of the profits, while the remaining 20% went to Rich. Last month the firm collapsed. After selling off everything it owned, the company still owed its creditors $10,000. Since Nodoe and Poor had no assets of their own, the creditors recovered the total amount owed to them from Jack Rich’s personal bank account. Harold Nodoe Gloria Poor Jack Rich

16. Largest Corporate Profits - 2007 • Wal-Mart $379 B • Exxon Mobil 359 • Chevron 204 • Conoco 187 • General Motors 173 • GE 173 • Ford 172 • Citigroup 146 • Bank of America 116 • AIG 110 • HP 104 • J.P. Morgan 100 • Berkshire-Hath 99 • Verizon 93 • HP 92 • IBM 99 • Valero 91 • Home Depot 90 • McKesson 88 • Citigroup 82 • Largest Employers • 1.Wal-Mart 1.35 M “associates” • [1.6 million ‘associates” worldwide] • 2. Sears Holding 400,000 • 3. General Motors 386,000 • 4. McD’s 364,000 • 5. UPS 359,000 • 6. IBM 316,000 • 7. GE 313,000 • Wal-Mart has 4,179 total stores • in the U.S.; 1,868 Wal-Mart stores, • 1,586 Wal-Mart Super Centers, & • 725 Sam’s Clubs in the U.S. • The GDPs for the Virgin Islands • is $1.8 billion; for Djibouti, it • is $582 million; and for • Afghanistan, it is $21 billion.

17. Wal-Mart example • Wal-Mart’s IPO was in 1972. 300,000 shares were sold at $16.50 per share. • The stock has split 11 times(2 for 1 splits) since then – last split was in 1999. • If you purchased 100 shares of Wal-Mart on the day of the IPO you would have spent $1,650. • Today you would have 204,000 sharesof stock. • Today current value of your shares would be $11,044,560 (stock closed at $54.14 yesterday). • Each quarter you would be receiving a check for $136,680 (at current dividend of .67). Annual income for dividends alone would be $546,720!

18. 9 Corporations– a business organization recognized as a separate legal entity (existence). 10 Stockholders– are the owners of a corporation who invest by buying shares. Stock– thecertificate of ownership. 9Corporations make up about20%of business organizations but produce over90%of total sales. Corporations can operate like a sole proprietor. Inc. means the business is a corporation. [Treated by the courts as an “artificial person”. They can sue, be sued, enter into contracts, and pay taxes. Two Types of Corporations 11Publiclyowned – anyone can invest by buying shares, sounlimited# of owners. Includes most corporations. 12Closed– is owned by alimitednumber of stockholders. Ford Motor Company was family owned (closed) until 1956. They went public in 1956 & issued 10,200,000 shares of stock. 13Wal-Mart leads all other corporations in sales at $371 billion.

19. Corporate Trivia • A corporation can be sued but the people who own the corporation (stockholders) can not be sued. • A corporation has potentially perpetual life. • 1.) Nearly all large companies are corporations. • 2.) Nearly all corporations are small companies. • 3.) Therefore, a small minority of corporations constitute nearly all the large companies. • In other words, of 4 million corporations, about 2,000 are large companies, and these 2,000 large corporationsconstitute the vast majority of the nation’s large companies. • Also, the 15% of corporations that do more than $1 million in sales take in in 85% of the receipts of corporations.

20. Where The Jobs Are And Were 20071980 • Wal-Mart 1,350,000GM 853,000 • McDonald’s 418,000Ford 495,000 • Sears Holding 400,000GE 405,000 4.UPS 355,000IT&T 368,000 5. Ford 327,500[International Telephone & Telegraph] 6. GM 325,000 IBM 337,000 Then there are new jobs in new technologies that didn’t exist in 1980. Cisco has 34,000; Microsoft has 55,000; Oraclehas 40,000; & Dellhas 46,000 Surviving as a business is no small feat. 1/3 of the firms in the Fortune 500 list in 1970 no longer exist.

22. If a company had only 200 shares and you bought a share, you would own 1/200th of the company.

23. 14Stockholders(owners) and bondholders(lenders) For companies, stocks and bonds are 2 ways to raise money. For consumers, they are away toearn money. 15Common stock– (owners arevoters) gives a voice in how the corporation is run and a share in variable dividends – high dividends if profits are high. The Board of Directors may wish to withhold all dividends if the money is needed for plant expansion or payment on debts. Because they can vote, they determine how a corporation is managed. They get one vote for every share they own. In a good year, they will receive ahigherdividend than preferred stockholders. (Preferred stock dividends are fixed, common stock is not, so they are taking more risk. Preferred Stock– (non-voters) guaranteed dividends that are paid from profits before the company pays any dividends on common stock. If the company is unable to pay this fixed dividend in full, it makes up the difference when the company’s profits increase. They arelike a silent partnerbecause they can not vote and have no say in how the business is run.

24. 16Corporate Bonds– a certificate issued by a corporation in exchange for money borrowed from investors. There is a written promise to repay the amount borrowed at a later date (anI.O.U.) lending money for 10, 20, or 30 years. Bondholders are creditors, notowners. 17Advantages of Corporations from a StockholdersViewpoint A1.Limitedliability – limited to the amount invested. His personal assets may not be seized to pay corporate debts. B2. May earn a profitwithoutworking. 18Advantages From the Corporation’s Viewpoint A1.Separationof ownership from management– can hire the best management available. Specialized talent can be hired in all areas. B2.Easyto raise capital– can issue stocks or sell bonds allowing the corporation to tap the savings of thousands. C3.Longevity– they have a lifeindependentof their owners.

25. Disadvantages of a Corporation • Disadvantages from the stockholders point of view. • When stockholders earn a profit, they feel no great sense • of pride. 19Disadvantages from the corporation’s point of view. A 1. Slow in decision making – must go thru chain of command. B2.Many government restrictions– must follow regulations of the SEC, comply with laws on merging and maintain many records. C3.Heavyorganizing expenses– pay for its charter and then depending on the state, expenses can run from a few hundred to thousands of dollars. D4.Doubletaxation– when a company distributes profits (dividends) to its stockholders, they have to pay personal income tax on dividends in excess of $100. Corporations earnings are subject to taxation. The income tax on corporations is15%on the first $50,000; 25%from $50,001- $75,000;34%from $75,001-$100,000; 39%from $100,001-$335,000;35%from 335,001-$10 mil. 38%from 10M-18.3million; & a flat35%over$18.3 million.

26. BullandBearMarkets Then there is thekangaroo market.

27. Decrease in Wealth 508 points 24% drop in one day 10-19-87 On this day, Sam Walton, the richest man in the world, had a paperloss of$1.5 billion.

28. DateDecline% Decline 10/19/87 508 points 24% 10/28/29 38 points 13% 10/29/29 31 points 12% 11/26/29 26 points 10% 12/18/1899 6 points 8% 8/12/32 6 points 8% 3/14/07 7 points 8% 10/26/87 156 points 8% 7/21/33 8 points 8% 10/18/37 11 points 8% 2/01/17 7 points 7% 10/27/97 554 points 7% [$700 billion lost in one day] 4/14/2000 661 points 6% 3/2000-2/2003 $7.7 trillion was lost [Market value was worth $17 trillion] Bad Days On Wall Street

29. Advantages/Disadvantagesof Sole Proprietorships Advantages Disadvantages Freedom Unlimited Liability Ease of Formation Lack of Continuity Low Start-up Costs Difficulty Raising Money Single Taxation Reliance On One Person Advantages/Disadvantagesof General Partnership Advantages Disadvantages Larger Talent Pool Unlimited Liability Larger Money Pool Lack of Continuity Ease of Formation Ownership Transfer Difficult Possibility of Conflict Single Taxation

30. Advantages/Disadvantages of Corporations Advantages Disadvantages Limited Liability Stockholder Revolts Continuity High Start-up cost Greater likelihood of professional Management High Cost of Regulation Easier Access to Money Double Taxation

31. 3 Types of Corporate Combinations201. What are the three ways corporate merger combinations can take place? (Amergeris when one company absorbs another) 2. What is the current trend in corporate combinations? AHorizontalCombinations – (a grouping of“competitors”) a merger between corporations that make the same product. This would be a merger of two or more banks, or railroads, or airline companies, etc. Firms may merge to catch up with or eliminate their rivals. Chevron-Texaco bought Unical Oil. Royal Caribbean Cruises acquired Celebrity Cruise Line and doubled in size, & became the 2nd largest cruise line behind Carnival. Staples tried to acquire Office Depot but the government blocked it on the grounds that it would reduce competition. Morgan-Chase-Bank One58B Cingular-AT&T Wireless 41 B Compaq-HP 23 B GTE-Bell Atlantic 71 B Chevron-Texaco 43 B Daimler-Chrysler-Benz 41 B Sprint-Nextel 35 B Bank of Am.-FleetBoston Finan. 47 B American Motors Chrysler Chrysler

32. Horizontal Merger

33. Standard Oil's Horizontal Mergers • Standard Oil Trust: John D. Rockefeller had become rich during the Civil War supplying grain and meat, but he realized the potential the discovery of oil would bring about. • In 1863, he built a refinery in Ohio which brought in quick profits • In 1870, he and some associates formed the Standard Oil Company of Ohio. • Because Rockefeller had no need for storage and insurance fees, he negotiated with the railroad for refunds which allowed him to reduce the cost of oil, underselling his competitors • When Rockefeller had enough capital, he intended to “buy out” his competitors refineries (horizontal consolidation), but most state laws prevented one company from buying stock in another • Rockefeller’s lawyer, Samuel Dodd, found a loophole • In 1882, the owners of • Standard Oil and the “allied” • companies would combine • their operations. • Companies would turn over • their assets to 9 trustees and • in turn would get a share of • the profits • This new type of monopoly • would be called a trust • comprising 40 companies

34. BVerticalCombinations – merger of companies that are involved in different phases of production of the same product. [Purchasing one of your“suppliers”] Examples 1. Automaker buys a tire factory 2. Bridgestone Tire buying a rubber plantation 3. Campbell Soup buying mushroom farms 4. Funeral Home bought a cemetery and a floral shop 5. Ford bought a steel mill to produce steel needed for autos Resources [ore, coal, & iron] • ShellOil Co. owns • Oil fields • Refineries, and • Retail gasoline • stations Transportation [shipping & RR co’s] Steel Mills USX (Steel)

35. Vertical Merger

36. Carnegie Steel's Vertical Mergers • Carnegie Steel: At the age of 30, Andrew Carnegie wisely decided to invest his wealth into steel shortly after the Bessemer Steel process came to light. • In the 1870’s, he set up the first American steel mills in Pittsburg, PA. • By 1889, the Carnegie Steel Company was established. • He soon had enough money to buy the companies that performed each phase of production (mines, pig iron furnaces, shipping companies, rail lines…) This is known as verticalconsolidation • This allowed Carnegie Steel to keep low production costs and therefore low prices for consumers. • This was because of the phenomenon known as economies of scale • As production increases, costs are lowered • Small companies could not compete because they did not own all phases of production.

37. CConglomerate (Unrelated) Combination –merger between four or more companies producing unrelated products. None is responsible for the majority of sales. These mergers may include a number of subsidiaries – acquired companies that havenot been required to abandon their corporate identity. American Brands, Inc. Tobacco Products Distilled Spirits

38. About$3 trillionin mergers each year worldwide & about $1.6 trillion in the U.S. Diversificationis a good reason for conglomerate mergers. You are not “putting all of your eggs in one basket.” Your over- all sales and profits will be protected. R.J. Reynolds-one of biggest 1. Sea-land(containerized shipping) 2. KFC(2nd largest fast-food chain) 3. Del Monte(fruit processor) 4. Heublein(distilled spirits) Pfizermakes Viagra & Lipitor. 1. Chewing gum(Trident,Dentyne) 2. Razors(Schick) 3. Cough drops (Halls) 4. Breath mints(Clorets, Certs) 5. Antacids (Rolaids) Conglomerate Merger

39. The “trends in mergers” in the 90s was toward vertical and horizontalcombinations. The biggest cause of merger failures was mismatched corporations,therefore, conglomerate mergers were the ones most likely to fail. • Advantages of Corporate Mergers • Efficiency – eliminates overlapping jobs, can share resources • and marketing skills. Mergers may lead to lower consumer • prices making them better able to compete in world markets. • 2. Less expensive, compared to having to build new plants and • hire new employees. • 3. Stockholders in the acquired corporations normally benefit • by having stock go up in value by about 30%. • 4. Increased size means they can borrow more money.

40. Disadvantages of Corporate Mergers • Managers of merged corporations may not have • the necessary supervisoryskills. • 2. Added unemployment when some positions are • eliminated. 12,500 were laid off in Fleet Boston- • Bank of America merger saving $650M. • When Cingular bought AT&TWireless, 10,000 • were laid off. • 3. Purchasing corporation’s stock normally declines. • 4. Higher prices and fewer choices for consumers. • 5. Acquiring corporation normally goes into debt.

41. What Town is This?

42. Franchises, Cooperatives and Nonprofit Organizations 22Franchisegives an individual an agreement to market a company’s product in return for a percentage (royalty) of the profits. Semi-independent business. The company is thefranchiser and the individual is the franchisee. The 1st franchise operation was started by Singer Company in 1851 to sell sewing machines. In the last 40 years, franchising has really taken off, led by Ray Kroc of McDonald’s. Today we have franchising for everything from hemorrhoid clinics [“You bend, we mend”] to auto clinics. A typical large city in the U.S. will have its share of Burger Kings, Foto-Mat, KFCs, Goodyear, Taco Bell, Pizza Hut, Dunkin Donuts, and others. There are 3,000franchises in 670industries, with 600,000 outlets. The franchiser will train your personnel, take care of marketing and accounting. Thefranchiseereceives a tried-and-testedbusiness method.

43. 23Advantages of Franchises A1. Benefits of a well knowntradename, systemized management, andnationaladvertisement. B2. Less than5%fail each year (65% of all independently owned businesses fail within the first 5 years). C3. Chance toown your own businesswith minimumrisk. 24Disadvantages of Franchises A1. May betoomanyrestrictions imposed so independence is sacrificed. B2. Takes alotof money for start-up 3. May lose your investment if the company goes bankrupt. Some franchises such aspizza, video rentals, frozen yogurt, instant printing, &tanning parlorswill not make it because they are eithertoo competitiveor too unhealthy. Tanning beds are very dangerous. There aretwo major types of ultravioletradiation-UV-A[think ofA=Aging]. They have a longer wavelength &penetrate more deeplyinto the dermis and damage collagen & elastingiving you thedry, leathery, wrinklylook. UV-B[think ofB = Burning] are a shorter wavelength & causesunburn. Both causemelanoma, damage the DNA of the skin surface and cause skin cancer.

44. 25Cooperatives– voluntary association of people formed to carry on some kind of economic activity benefiting members. Different Types of Cooperatives: 1.Producer Coop– group of farmers who join to get better prices for their goods. They eliminate the middle-man charges. 2. Housing Coop – formed by members to buy the building they live in. 3. Purchasing Coop – retail store owned and operated by its customers. 4. Credit Union – members pool their savings so they can borrow from it at lower rates (the most common form of coop) 5. Service Coop – provides service to its members (electrical or telephone) 6. Baby-Sitting Coop – families swap baby-sitting duties without ever exchanging money. 26NonprofitOrganizations– provides products without making a profit. Churches are the most common. (Boy Scouts, Y.M.C.A., Salvation Army, & Goodwill)