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Choosing a
Form of
Business
Ownership
Nickels

McHugh

McGraw-Hill/Irwin
Understanding Business, 8e

*
CHAPTER

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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

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
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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Worlds 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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Americas 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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Americas 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

5-12

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GMs 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 Dont Work!

Companies Overpay to
Acquire Another Firm

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

Assigns Territory

May Provide
Financial Aid/Advice

Offers Merchandise/
Supplies at
Competitive Price

Provides
Training/Support

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 Franchisors

Rules/Procedures

Buys Materials from Franchisor/

Approved Supplier

5-23

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Franchises
Advantages

Management &
marketing assistance

Personal ownership

Lower failure rate

Recognized name
Financial advice &
assistance

Disadvantages

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%

McDonalds

$45,000

8%

Wendys

$25,000

8%

Dominos

None

8.5%

Subway

$10,000

11.5%

Krispy Kreme

$40,000

5.5%
5-25

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How to Avoid a
Franchise Lemon!
1.

Research officers & their

business experience

2.

Get summary of any bankruptcy

& litigation

3.

Estimate all costs to set up

franchise

4.

Review franchise contract & three

most recent financial statements
5-26

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Benefits of a
Home-Based Franchise

Flexible work hours

Quality lifestyle
Doing the work of your

choice
Opportunity to expand
using technology
Self-motivation

5-27

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Franchising & E-Commerce

Technology- Faster
Customer Service

Access to International
Markets

5-28

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Cooperatives

Farm Cooperative
Owned & Controlled by People
Who Use It

Pool of Resources
Economic Power
5-29