Exploring Business Forms: Advantages and Disadvantages

1. Busn 100 Chapter 05 Form of Businesses

2. Goals • Forms of Businesses • Advantages and Disadvantages of Sole Proprietorship • Partnerships: • General and Limited Partners • Advantages and Disadvantages of Partnerships • Corporations • Advantages and Disadvantages of Corporations • Types of Corporations • C Corps • S Corps • Limited Liability Corporations (LLC)

3. Goals • Define and give examples of three types of corporate mergers • Leveraged Buyouts • Taking a Firm Private • Franchises • Advantages and Disadvantages of Franchises • Cooperatives

4. Forms of Businesses • Sole Proprietorship • A business that is owned, and usually managed, by one person • Partnership • A legal form of business with two or more owners • Corporation • A legal entity with authority to act and have liability separate from its owner

5. Basic Forms of Business Ownership Source: US Internal Revenue Service

8. Terms • Asset • Things like buildings, autos, cash • Liability • Debt = Owe • Unlimited Liability • With the business form, Sole Proprietorship, if the sole proprietor owes money, the creditor can take the business’s assets and the sole proprietor's assets • Limited Liability • With the business form, Corporation, if the Corporation owes money, the creditor can take the business’s assets but not the owners' assets • Resources: Ability to get Capital (equity or debt)

9. Ease of start/end Be your own boss Pride of ownership Leave a legacy Retain profit No special taxes, but you must pay payroll taxes Unlimited liability Limited financial resources Management difficulty HUGE Time commitment Few fringe benefits Limited growth Limited life span Sole Proprietorship Advantages Disadvantages

10. Types of Partnerships General Limited GP Passive Investor Passive Investor GP GP GP GP Passive Investor

11. Partnerships • General Partnerships • A partnership in which all the owners share in operating the business and in assuming liability for the business debts • Limited Partnerships • A partnership with one or more general partner and one or more limited partners • General Partner • An owner that has unlimited liability and is active in managing the firm • Limited Partner • An owner that invests money in the business buy does not have any management responsibility or liability for losses beyond the investment

12. Mutual Agency(Advantage and Disadvantage) • Agent • One empowered to act for or represent another (http://www.answers.com/agent ) • Someone who is supposed to act in the best interest of someone else • Mutual Agency • The ability of each partner to act as an agent of the firm, thereby committing the entire firm to a binding contract • Each partner can enter into binding contracts in the name of the firm for the purchase or sale of goods or services within the normal scope of the firm’s business

13. Partnership Disadvantages Advantages • Unlimited liability • Division of profits • Disagreements • among partners • Difficult to • terminate • Mutual Agency • More financial • resources • Shared • management • Longer survival • No special taxes, but you must pay payroll taxes • Mutual Agency

14. New Forms of Partnerships • Master Limited Partnership (MLP) • A partnership that looks much like a corporation (in that it acts like a corporation and is traded on a stock exchange) but is taxed like a partnership and thus avoids the corporate income tax • Limited Liability Partnership (LLP) • A partnership that limits partners’ risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision

15. New Forms of Partnerships • Master Limited Partnership • Traded Publicly • Taxed As A Partnership • Limited Liability Partnership • An individual is responsible for their actions • Solves the Mutual Agency problem

16. Types of Corporations • Conventional ‘C’ • S Corporation • Limited Liability Companies

17. Corporations • Private: Not Traded on Any Stock Exchange • Public: Shares are Traded on One or More Stock Exchanges • Non-Profit: Performs Public Service, Has Special Tax Considerations to Encourage Formation

18. Corporation Advantages Disadvantages • Extensive paperwork • Double taxation • Two tax returns • Size • Termination difficult • Conflict with • Stockholder & Board • Initial cost • Separation of • ownership/mgmt. • Limited liability • More money for • investment • Size • Perpetual life • Ease of ownership • change • Ease of drawing • talented employees • Separation of • ownership/mgmt. • Dividends paid in proportion to ownership

19. How Owners Affect Management

20. Citigroup General Electric American Intl Group Bank of America HSBC Group ExxonMobil Royal Dutch/Shell BP ING Group Toyota Motor UBS Wal-Mart Stores Royal Bank of Scotland JP Morgan Chase Berkshire Hathaway BNP Paribas IBM Total Verizon Communication Chevron Texaco World’s Largest Corporations 2008 Source: Forbes, 2005

21. World’s Largest Corporations 2010

22. America’s Largest Private Companies • Cargill /agricultural commodities, food $66,669 • Koch Industries /chemicals, energy, tech60,000 • Mars /candy, pet food electronics19,100 • PricewaterhouseCoopers /accounting18,700 • Publix Supermarket / supermarkets18,686 Revenue 2004 (In Millions) Source: Forbes, 2005

23. America’s Oldest Companies

24. Formation of a Corporation • A person or persons applies for a charter • The appropriate state official issues the charter • Charter • Written permit, issued by a state government, for a corporation to exist • State-approved articles of incorporation

25. Articles of Incorporation • Application for a charter • Include the following information: • Name and address of the corporation • Nature of the business • Amount and description of the capital stock to be issued • Name(s) of the promoter(s) or sole incorporator who will hold an initial meeting to elect an acting board of directors • Become the governing instrument of the corporation • Must be accompanied by a charter fee, which is based on the dollar amount of the maximum stock investment as specified in the charter

26. Initial Meeting • Called by the promoters or sole incorporator to • Elect an acting board of directors • Formulate bylaws • Charter and bylaws provide the basic rules for conducting the corporation's affairs

27. After Acceptance of Charter and Bylaws • Directors meet to appoint officers to serve as active managers of the business • Corporation issues capital stock to buyers of stock who have paid in full • Stockholders elect a permanent board of directors

28. S Corp • Small (less than 100 owners) corporation that is taxed like a sole proprietorship/partnership and has Limited Liability • Benefits: • Taxed Once • Limited Liability

29. S Corporations • No more than 100 shareholders • Individual or Estates • U.S. citizens or permanent residents • 1 class of stock • <25% of income can be passive • Benefits change with new tax rules

30. Limited Liability Company (LLC) • Similar to Corporations except: • Taxed once (like Sole Proprietorships and Partnerships) • Can share profits in whatever proportion they want (not like S or C corps) • Less Required paperwork (no annual meetings, minutes, articles of organization, but does file written operating agreement) • No stock (cannot transfer ownership) • Must say when company will end

31. Limited Liability Tax Choice Flexible Ownership Rules Flexible Profit & Loss Distribution Operating Flexibility No Stock Limited Life Span Fewer Incentives Paperwork Limited Liability Companies Advantages Disadvantages

32. Nolo Press This is a great place to find books about how to start and create any of the Business Forms discussed in the book http://www.nolo.com/all_books_cat.cfm

33. Define and give examples of three types of corporate mergers • Merger • The result of two companies forming one company • Acquisition • One company’s purchase of the property and obligations of another company • Vertical Merger • The joining of two firms involved in different stages of related businesses • Horizontal Merger • The joining of two firms in the same industry • Conglomerate Merger • The joining of firms in completely unrelated industries

34. Types of Mergers Horizontal Vertical Conglomerate No Relationship between companies

35. Types of Mergers • Conglomerate then Horizontal: • During the 1960s, Shasta was purchased by the Sara Lee food company (then known as Consolidated Foods). In 1985, it was acquired by the National Beverage Corp., which also owns the popular Faygo line. • http://en.wikipedia.org/wiki/Shasta_(soft_drink) • Vertical: • Cabinet manufacturer purchased wood producing factory • Horizontal • JPMorgan buys WaMu • Wells Fargo buys Wachovia

36. Why Mergers Don’t Work! • Companies Overpay to Acquire Another Firm • GM & Hummer www.gm.com/vehicles/ • AOL & Time Warner (2002 $100 M write down) • Acquiring Company Overestimates Cost Savings and Synergies • The cultures of the two companies do not mix well • 1998 Daimler-Benz AG & Chrysler Corporation • Managers Disagree About Integrating Operations • Obsession with Cost Cutting Hurts Business, Costing Top Employees & Customers

37. Terms • Leveraged Buyouts (LBO) • An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing • Taking a Firm Private • Individuals buying all public stock for themselves • There are far fewer regulations and restrictions if the company is a “private corporation”

38. Franchise System • Franchise • The right to use a specific business’s name and sell its products or services in a given territory • Franchisor • The company that develops the product/service and sells the rights to use the product/service • Franchisee • The person who buys the franchise • Franchise Agreement • The contact between the franchisor and Franchisee

39. Franchise Contract Franchisor, Inc. Branded Product/Service Performance Monitoring $$$$$ Franchisee

40. Assigns Territory May Provide Financial Aid/Advice Offers Merchandise/ Supplies at Competitive Price Provides Training/Support Business Expansion Using O.P.M. Franchisor

41. Franchisee • Pays Up-Front Costs • Makes Monthly Payment to Franchisor • Runs Business by Franchisor’s Rules/Procedures • Buys Materials from Franchisor/ Approved Supplier

42. Management & marketing assistance Personal ownership Recognized name Financial advice & assistance Lower failure rate High start-up costs Shared Profit Management regulation Coattail effects Restrictions on selling Fraudulent franchisors Franchises Advantages Disadvantages

43. Cost of Fast-Food Franchise

44. Terms • Benefits of aHome-Based Franchise • Flexible work hours • Quality lifestyle • Doing the work of your choice • Opportunity to expand using technology • Self-motivation • Franchising & E-Commerce • Technology- Faster Customer Service • Access to International Markets

45. Cooperatives • A business owned and controlled by the people who use it – producers, consumers, or workers with similar needs who pool their resources for mutual gain • Examples: • Grocery stores • PCC http://www.pccnaturalmarkets.com/member/governance.html • Electricity • Childcare • Financial services • Farms

46. Goals Summarized • Sole Proprietorship • Easy to start • Taxed one time • Unlimited Liability • Partnerships • Easy to start • Taxed one time • Unlimited Liability • More resources than Sole Proprietorship • Corporations • Limited Liability • Easy to get resources (compared to SP and P) • Perpetual life and easy to change owners

47. Goals Summarized • Three types of corporate mergers • Vertical • Horizontal • Conglomerate • Leveraged Buyouts • Lots of debt to take over ownership of firm • Taking a Firm Private • From Public Corp to Private Corp • Franchises • Large Start up cost, But you have a proven product/service • Cooperatives • A good business form for groups of people with similar interests