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Forms of Business Ownership

Chapter 5

Introduction to Business

Learning Goals
1 What are the strengths and weaknesses of the sole proprietorship form of business organization? 2 What are the advantages of operating as a partnership, and what downside risks should partners consider? 3 How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations? 4 Does a company have other business organization options in addition to sole proprietorships, partnerships, and corporations?
Chapter 5

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Learning Goals
5 What makes franchising an appropriate form of organization for some types of business, and why is it growing in importance?

6 Why are mergers and acquisitions important to a companys overall growth?


7 How will current trends affect the business organizations of the future?

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Principles of Business Ownership

Financing? Employees? Business taxes? Debt liability?

Operating control?
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Ownership?
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Learning Goal 1

What are the strengths and weaknesses of the sole proprietorship form of business organization?

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SOLE PROPRIETORSHIPS
A business that is established, owned, operated, and often financed by one person.

Sole Proprietorship

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1 Advantages

SOLE PROPRIETORSHIPS
Disadvantages
Unlimited liability Difficulty in raising capital Limited managerial expertise Trouble finding qualified employees Personal time commitment Unstable business life Losses are owners responsibility
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Easy and inexpensive to form Profits go to the owner Direct control of the business Freedom from government regulations No special taxation Ease of dissolution

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Learning Goal 2

What are the advantages of operating as a partnership, and what downside risks should partners consider?

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PARTNERSHIPS
An association of two or more individuals who agree to operate a business together for profit.

Partnership

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Advantages

PARTNERSHIPS
Disadvantages


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Ease of formation Availability of capital Diversity of skills and expertise Flexibility No special taxes Relative freedom from government control

Unlimited liability Potential for conflicts between partners Sharing of profits Difficulty exiting or dissolving

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Learning Goal 3

How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?

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CORPORATIONS
A legal entity with an existence and life separate from its owners, who are not personally liable for the entitys debts.

Corporation

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The 10 Largest U.S. Corporations

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The Incorporation Process


Select companys name Write articles of incorporation Pay required fees and taxes Hold organizational meeting

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Adopt bylaws, elect directors, pass operating resolutions


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The Corporate Structure


Stockholders

Elect Directors

Hire
Officers
President
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VP

Treasurer

Secretary

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Advantages

CORPORATIONS
Disadvantages

Limited liability Ease of transferring ownership Unlimited life Tax deductions Ability to attract financing

Double taxation of profits Cost and complexity of formation More government restrictions

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Types of Corporations
C Corporation
Conventional or basic corporate form of organization

S Corporation

A hybrid entity that is organized like a corporation, but taxed like a partnership

Chapter 5

Limited Liability Company (LLC)

A hybrid organization that offers the same liability protection as a corporation but may be taxed as either a partnership or a corporation
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Learning Goal 4

Does a company have other business organization options in addition to sole proprietorships, partnerships, and corporations?

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Cooperatives
Legal entities formed by people with similar interests, to reduce costs and gain economic power.

Cooperatives

Seller Cooperatives
Buyer Cooperatives

Individual producers join together to compete more effectively with large producers A group of cooperative members who unite for combined purchasing power
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Chapter 5

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Learning Goal 5

What makes franchising an appropriate form of organization for some types of business, and why is it growing in importance?

Chapter 5

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Franchising
A form of business organization based on a business arrangement between a franchisor, which supplies the product concept and the franchisee, who sells the goods or services of the franchisor in a certain geographic area.

Franchising

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5
Advantages

Franchises
Disadvantages
Loss of control Cost of franchising Restricted operating freedom

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Increased ability for franchisor to expand Recognized name, product, and operating concept Management training and assistance Financial assistance

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Top 10 Fastest-Growing Franchises

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Learning Goal 6

Why are mergers and acquisitions important to a companys overall growth?

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MERGERS AND ACQUISITIONS


The combination of two or more firms to form a new company, which often takes on a new corporate identity.

Merger

Acquisition
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The purchase of a corporation by another corporation or investor group.

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Types of Mergers
Horizontal Merger Vertical Merger Conglomerate Merger Leveraged Buyout
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Selected Megamergers

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Learning Goal 7

How will current trends affect the business organizations of the future?

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Trends in Business Ownership

Changing Demographics

Franchise Innovations

Mergers
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Franchise Innovations
Multiple-concept franchises Expanded product offerings Cross-branding

Franchise Differentiation

New ideas
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Identifying Merger Opportunities


A purchase price that is low enough A target that is smaller than the buyer, and that the buyer understands A buyer who pays in cash and not overinflated stock

Evidence the deal isnt the brainchild of an egocentric CEO


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Chapter 5

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