Understanding business 8th by mcchugh nickels chapter 05

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Choosing a
Form of
Business
Ownership
Nickels

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McHugh

McGraw-Hill/Irwin
Understanding Business, 8e

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CHAPTER

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5

McHugh
1-1

5-1

© 2008 The McGraw-Hill Companies, Inc., All Rights


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Basic Forms of
Business Ownership
Type of Ownership

Number

Sales

Sole Proprietorship

72%

6%

Partnership

8%

13%

Corporation

20%

81%

Source: US Internal Revenue Service

5-2


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Sole Proprietorship
Advantages
•
•
•
•
•
•

Ease of start/end
Be your own boss
Pride of ownership
Leave a legacy
Retain profit
No special taxes

Disadvantages
•

•
•
•
•
•
•

Unlimited liability
Limited financial
resources
Management difficulty
Time commitment
Few fringe benefits
Limited growth
Limited life span

5-3


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Types of Partnerships
Genera
l

Limite
d

GP
GP

GP

Passive
Investor

GP

Passive
Investor

GP
Passive
Investo
r
5-4


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New Forms of
Partnerships

• Master Limited Partnership
• Traded Publicly
• Taxed As A Partnership

• Limited Liability Partnership
5-5


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Partnership
Advantages
• More financial
resources
• Shared
management
• Longer survival
• No Special
Taxes

Disadvantages
• Unlimited
liability
• Division of
profits
• Disagreements
among
partners
• Difficult to

5-6

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Types of Corporations

• Conventional ‘C’
• S Corporation
• Limited Liability Companies
5-7


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Corporations
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Private: Not Traded on Any
Stock Exchange

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Public: Shares are Traded on
One or More Stock Exchanges

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Non-Profit: Performs Public
Service, Has Special Tax
Considerations to Encourage
Formation
5-8


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Corporation
Advantages
• Limited liability
• More money for
investment
• Size
• Perpetual life
• Ease of ownership
change
• Ease of drawing
talented
employees
• Separation of
ownership/mgmt.

Disadvantages
• Extensive
paperwork

• Double taxation
• Two tax returns
• Size
• Termination
difficult
• Conflict with
Stockholder &
Board
• Initial cost

5-9


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World’s Largest
Corporations

1. Citigroup
2. General Electric
3. American Intl Group
4. Bank of America
5. HSBC Group
6. ExxonMobil
7. Royal Dutch/Shell
8. BP
9. ING Group
10. Toyota Motor

11.UBS
12.Wal-Mart Stores
13.Royal Bank of Scotland
14.JP Morgan Chase
15.Berkshire Hathaway
16.BNP Paribas
17.IBM
18.Total
18.Verizon Communication
20.Chevron Texaco

Source: Forbes, 2005

5-10


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America’s Largest
Private Companies
Revenue 2004
(In Millions)

1.
2.
3.
4.

5.

Cargill / agricultural commodities, food

$66,669

Koch Industries / chemicals, energy, tech

60,000

Mars / candy, pet food electronics

19,100

PricewaterhouseCoopers / accounting

18,700

Publix Supermarket / supermarkets

18,686

Source: Forbes, 2005

5-11


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America’s Oldest
Companies
Company

Year Started

Type of Company

J. E. Rhoads & Sons

1702

Conveyer Belts

Covenant Life Ins.

1717

Insurance

1752

Insurance
Contributorship

Dexter

1767

Adhesives & Coatings

D. Landreth Seed

1784

Seeds

Bank of New York

1784

Banking

Philadelphia

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GM’s Ownership In:

Source: USA TODAY

5-13

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How Owners Affect
Management

5-14


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S Corporations
• No more than 100 • 1 class of stock
shareholders
• <25% of income
• Individual or
can be passive
Estates
• Benefits change
• U.S. citizens or
with new tax
permanent
rules
residents
5-15

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Limited Liability Companies
Advantages
• Limited Liability
• Tax Choice

• Flexible Ownership
Rules
• Flexible Profit &
Loss Distribution
• Operating Flexibility

Disadvantages
• No Stock

• Limited Life Span
• Fewer Incentives
• Taxes
• Paperwork
5-16


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Types of Mergers

Horizontal
Vertical
Conglomerate

No
Relationship
between
companies

5-17


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Leveraged Buyout
Individual

+

Loan
= Purchase of
Company

Purchase Loan

Company =
Collateral

5-18


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Why Mergers Don’t Work!
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Companies Overpay to
Acquire Another Firm

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Acquiring Company
Overestimates Cost Savings
and Synergies
• Managers Disagree About
Integrating Operations
• Obsession with Cost Cutting Hurts Business,
Costing Top Employees & Customers
5-19


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Franchise System

• Franchise

Agreement

• Franchisor
• Franchisee
5-20


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Franchise Contract
Franchisor, Inc.

Branded
Product/Servic
e
Performanc
e

$$$$$

Monitoring

Franchisee

5-21

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Franchisor
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Assigns Territory

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May Provide
Financial Aid/Advice

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Offers Merchandise/
Supplies at
Competitive Price

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Provides
Training/Support

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Business

Expansion Using
O.P.M.

5-22


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Franchisee

• Pays Up-Front Costs
• Makes Monthly Payment to
Franchisor

• Runs Business by Franchisor’s
Rules/Procedures

• Buys Materials from Franchisor/
Approved Supplier

5-23


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Franchises

Advantages

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Management &
marketing assistance

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Personal ownership

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Lower failure rate

Recognized name
Financial advice &
assistance

Disadvantages

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High start-up costs
Shared Profit
Management regulation
Coattail effects
Restrictions on selling
Fraudulent franchisors

5-24


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Cost of Fast-Food
Franchise
Company

Initial Fee

Royalty

Burger King

$50,000

8.5%

McDonald’s

$45,000

8%

Wendy’s

$25,000

8%

Domino’s

None

8.5%

Subway

$10,000

11.5%

Krispy Kreme

$40,000

5.5%
5-25