Chapter 3 Forms of Ownership

1. Chapter 3Forms of Ownership Sole Proprietorship

2. Forms of Ownership Comparison

3. Sole Proprietorships • Oldest & most common form of business ownership. • Owned & managed by 1 person with a minimum amount of help • Easiest form of ownership to start in terms of paperwork/procedures • $ (capital) used to start the business comes from owner through their own savings and/or loans.

4. + Ease of starting Full Control of Business Owner owns all profits Use Owner’s Abilities Tax Breaks Secrecy Ease of terminating business __ Unlimited Liability Difficult to raise capital Limited management abilities Lack of stability Time demands Employee hiring and retention Sole Proprietorship: Advantages and Disadvantages

5. Partnerships • Two or more people own a business • They share everything • Can be based on a written, oral, or implied agreement (legally)

6. Three types of Partnerships • General Partner- partnership that has at least one partner with unlimited debts of the business. • Limited Partner – partnership that has one general partner with unlimited liability and one or more with limited partnership. • Joint Venture – a partnership for a special project or purpose. When the project is completed, the joint venture is terminated.

7. The Partnership Contract • Called the Articles of Partnership – may or may not be written but heavily suggested. The partnership contract includes the following main features: • Name of business partnership • Type of business • Location of the business • Expected life of the partnership • Names of the partners and the amount of each one’s investment • Procedures for distributing profits and covering losses • Amounts that partners will withdraw for services • Procedures for withdrawal of funds • Duties of each partner • Procedures for dissolving a partnership

8. + More financial capital Combined Managerial skills Ease of starting Clear legal status Tax advantages - Unlimited liability Potential disagreements Frozen investment Difficult to raise financial capital ($) Instability Partnerships: Advantages and Disadvantages

9. Three ways to become a small business: • By succession • By buying an existing business • By starting a new business • The key to a successful business is a Business Plan – a formal document of what the owner intends to do to sell enough of the firms products/services to make a profit.

10. Corporations • A corporation is a business that is a legal entity separate from its owners. • It has legal rights of an individual (it can own property, purchase goods/services, and sue or be sued by other people or corporations). • A corporation is owned by shareholders.

11. + Limited Liability Skilled Managers Transfer of ownership Greater capital base Stability Legal entity status - Start up difficult and costly Lack of control Multiple taxation Lack of secrecy Lack of personal interest Credit limitations Corporations: Advantages and Disadvantages

12. Definitions • Shareholders – person who owns a share or shares of stock in a corporation. • Board of Directors – elected by the shareholders. They approve the bylaws of the corporation. • Bylaws – rules and regulations of a corporation. • Articles of Incorporation – application form filled out and filed with the State requesting to become a corporation (incorporated)

13. Definitions • Charter – a state’s written agreement giving a business the right to operate as a corporation. • Domestic corporation – a corporation that conducts business in the state in which it was incorporated. • Foreign corporation – a corporation that conducts business in a state other than the state it was incorporated in.

14. Definitions (continued) • Proxy – a written statement signed by a shareholder of a corporation allowing someone else to cast his/her number of votes. • Merger – joining together of two corporations into one. • Conglomerate merger – companies that sell goods in unrelated markets merge. • Vertical merger – companies that merge together with their suppliers or distributors.

15. Sissie’s Dairy Sonny’s Fruit Orchard Hickory Tree Verticlal Merger Conglomerate Merger Pop’s Ice Cream Homerun Baseball Company Mom’s Apple Pie Grannie’s Restaurant Gramp’s Restaurant Sports Town USA Horizontal Merger

16. Definitions • Acquisition – the process in which one company buys the assets and assumes the obligations of another company. • Conglomerate – firm that has at least 4 businesses, each making unrelated products.

17. Definitions (continued) • S Corporation – a corporation with 35 or fewer owners that files an income tax return as a partnership to take advantage of lower tax rates. • Coopertive (Co-op) – an organization in which people collectively own and operate a business in order to compete with big competitors. • Professional Service Association – Professional people (doctors, dentists, lawyers) join together to form an organization under professional association laws treated as a corporation for tax purposes. They come together to get better benefits like profit sharing/pension plans, limited liability.

18. Definition of Entrepreneurship • Entrepreneur- an innovative risk taker responsible for much of the change in our economy. • Intrapreneur – a person within a large corporation who takes direct responsibility for turning an idea into a profitable finished product through assertive risk-taking and innovation. • Ex. Post-it Notes: Art Fry, a new product development researcher at 3M Company invented the “Post-it” notes as a temporary bookmarker.

19. FranchisingFranchisee – one who buys a franchise store.Franchisor – one who sells a franchise store (corp) • Define: a business that has signed an agreement with a franchisor (McDonalds, KFC, Dunkin Donuts) to use their name, operating plan, and overall procedures used in the firm to sell its products or services. • Three components must be present to a franchise to exist: • A uniform system of operations • Utilization of trademark or service mark • Fee (one time fee as well as monthly fees)

20. Categories of Franchises

21. Franchise Advantages and Disadvantages! • Advantages • Guidance • Promoted brand name • Proven product • Financial Assistance • Disadvantages • Franchise fees • External control • Overdependence • Poor local reputation can spread

22. Franchise Trivia • What was the first franchise in US? • Singer Sewing Machine • What popular beverage held the next franchise in 1900? • Coca-cola • What was the next to franchise in 1902? • Rexall Drug Store • During 1930-1935 what industry became big in Franchising? • Gasoline (Aammco) • What decade was considered the franchise boom? • 1950’s (90 percent of the franchises that started during the franchise boom still exist today.

23. Other BusinessTerms: • Small Business – • one that is independently owned and operated and is not dominant in its field of operation. • A small business does not control a large market share. • There are sales limits. • Maximum amount of employees – 500 • Minimum amount of employees – 250 • Maximum amount of sales.

24. Small Business cont. • Advantages • Personal gratification • Independence • Financial gain • Disadvantages • Some risks are out of the entrepreneur’s control such as fashion changes, competition, and labor problems. • Irregular income – may have zero profit (should count on not taking profits out of business for at least 3 years) • Long hours – hard on family (60-80 hours a week)

25. Other business terms cont. • Business Incubator – a facility in which young businesses can share space, costs, services, and information to help them get started. Once strong enough, they go out on their own.

26. Other business terms cont. • Small Business Administration • Define: an independent agency of the Federal gvt. Created in 1953 to protect the interests of small business owners: Their four primary area of assistance are in: • Giving loans and financial advise • Management assistance • Minorities and small business • Women and small business