Business FormsBusiness Forms

I.I. Sole ProprietorshipSole Proprietorship

A.A. CharacteristicsCharacteristics1.1. Sole ownership of a businessSole ownership of a business2.2. All rewards and all costs and all risks are the All rewards and all costs and all risks are the

owner’s aloneowner’s alone3.3. Simplest business formSimplest business form4.4. Most numerous business form in the USMost numerous business form in the US

1.1. Over 70% of all US businesses Over 70% of all US businesses

B.B. Examples:Examples:1.1. Stores in a strip mall Stores in a strip mall 2.2. ““Mom & Pop” storesMom & Pop” stores3.3. Small business ownersSmall business owners4.4. Laundromats, liquor stores, etc. Laundromats, liquor stores, etc.

C.C. AdvantagesAdvantages

1.1. Low start-up costs Low start-up costs 2.2. Minimal working Minimal working

capital required capital required 3.3. Greatest freedom Greatest freedom

from regulation from regulation

4.4. Owner in direct Owner in direct control of decision control of decision making making

5.5. Does not share Does not share profits profits

6.6. Psychological Psychological reward reward

D.D. DisadvantagesDisadvantages

1.1. Unlimited liability Unlimited liability a.a. 100% responsible for business obligations, 100% responsible for business obligations,

losses, debts, and contractslosses, debts, and contractsb.b. If the business fails, owner’s personal assets If the business fails, owner’s personal assets

can be taken to satisfy debtcan be taken to satisfy debt

2.2. Difficulty in raising Difficulty in raising capital capital

The Fate of Most Businesses in 10 YearsThe Fate of Most Businesses in 10 Years

3.3. Limited life Limited life a.a. Lack of continuity of business organizationLack of continuity of business organization

  in absence of owner  in absence of owner

4.4. Limited management experienceLimited management experiencea.a. Poor management: # 1 reason for small Poor management: # 1 reason for small

businesses failurebusinesses failure

5.5. Difficulty attracting Difficulty attracting qualified employeesqualified employees

a.a. Proprietorships are Proprietorships are smallsmall

b.b. Less opportunity for Less opportunity for advancementadvancement

c.c. Few, if any, fringe Few, if any, fringe benefits benefits (health care)(health care)

II.II. PartnershipPartnership

A.A. CharacteristicsCharacteristics1.1. Least numerous business formLeast numerous business form2.2. Shares many strengths and Shares many strengths and

weaknesses of a proprietorshipweaknesses of a proprietorship3.3. Two types of partnershipsTwo types of partnerships

1.1. General partnership: all partners equally General partnership: all partners equally responsible for managementresponsible for management

2.2. Limited partnership: at least one partner has Limited partnership: at least one partner has helped finance the business, but is not active helped finance the business, but is not active in daily managementin daily management

B.B. ExamplesExamplesA.A. Law firmsLaw firmsB.B. Accounting firmsAccounting firms

C.C. AdvantagesAdvantages1.1. Ease of formation Ease of formation 2.2. Low start-up costs Low start-up costs 3.3. Additional sourcesAdditional sources

of investment capital (2 or more sets of of investment capital (2 or more sets of assets)assets)

4.4. Limited regulation Limited regulation 5.5. Broader management base Broader management base

D.D. DisadvantagesDisadvantages1.1. Unlimited liability Unlimited liability 2.2. Partners can legally bind each other without prior Partners can legally bind each other without prior

approval approval 3.3. Divided authority Divided authority 4.4. Hard to find suitable partners Hard to find suitable partners 5.5. Possible development of conflict between Possible development of conflict between partners partners

III.III. CorporationsCorporations

A.A. CharacteristicsCharacteristics1.1. Also known as a limited liability companyAlso known as a limited liability company2.2. Run by a Board of DirectorsRun by a Board of Directors3.3. A legal separate entity A legal separate entity 4.4. Shareholders of stock become part ownersShareholders of stock become part owners5.5. Produces and sells more than any other Produces and sells more than any other

business formbusiness form6.6. Accounts for 1/5 of all business forms, but Accounts for 1/5 of all business forms, but

90% of all sales90% of all sales7.7. Generates largest income (over 70%)Generates largest income (over 70%)

B.B. IncorporatingIncorporating1.1. Apply for Certificate of Incorporation from Apply for Certificate of Incorporation from

govt.govt.2.2. Charter grantedCharter granted3.3. Charter specifies number of shares of stock Charter specifies number of shares of stock

to be soldto be sold

C.C. OrganizationOrganization

D.D. ExamplesExamples1.1. Ford MotorsFord Motors2.2. IBMIBM3.3. VerizonVerizon4.4. Exxon MobilExxon Mobil5.5. DisneyDisney6.6. Time-WarnerTime-Warner7.7. General ElectricGeneral Electric8.8. TargetTarget9.9. City BankCity Bank10.10. Dow Chemical Co.Dow Chemical Co.11.11. Toys R UsToys R Us12.12. McDonaldsMcDonalds

E.E. AdvantagesAdvantages

1.1. Limited liabilityLimited liability1.1. Owners (stockholders) are not liable for company’s Owners (stockholders) are not liable for company’s

debts and obligationsdebts and obligations

2.2. Specialized managementSpecialized management1.1. Chief Executive Officer (CEO)Chief Executive Officer (CEO)2.2. Chief Financial Officer (CFO)Chief Financial Officer (CFO)3.3. Chief Informations Officer (CIO)Chief Informations Officer (CIO)4.4. Chief Operations Officer (COO)Chief Operations Officer (COO)5.5. Managers over sales, production, finance, payroll, Managers over sales, production, finance, payroll,

research and development, quality control, etc.research and development, quality control, etc.

3.3. Attracts top talentAttracts top talent

QuestionQuestion

Suppose you just graduated from Harvard Suppose you just graduated from Harvard Business School and was offered two Business School and was offered two jobs. One was from a sole proprietorship jobs. One was from a sole proprietorship with a starting salary of $50,000. The other with a starting salary of $50,000. The other was from an established corporation with a was from an established corporation with a starting salary of $40,000. Which one starting salary of $40,000. Which one would you take? Why?would you take? Why?

4.4. Unlimited life (continuous existence)Unlimited life (continuous existence)5.5. Transferable ownershipTransferable ownership

Question:Question: How would an owner of a corporation end How would an owner of a corporation end

his/her ties to the firm?his/her ties to the firm?

6.6. Separate legal Separate legal entity entity

1.1. Can sue and be Can sue and be suedsued

2.2. Can buy and sell Can buy and sell propertyproperty

3.3. Earns a “salary”, Earns a “salary”, separate from the separate from the salary of the salary of the President or CEOPresident or CEO

4.4. Pays taxesPays taxes5.5. Can open bank Can open bank

accounts and accounts and borrow moneyborrow money

6.6. But can’t adopt But can’t adopt children … yetchildren … yet

7.7. Easier to raise capital Easier to raise capital a.a. Banks more likely to lendBanks more likely to lendb.b. Sell stocks and bondsSell stocks and bonds

1.1. Common stock: voting ownership of stock in a Common stock: voting ownership of stock in a company. One share of stock = one vote at stock company. One share of stock = one vote at stock holders meeting holders meeting

2.2. Preferred stock: non-voting share holder, but is Preferred stock: non-voting share holder, but is paid dividends (a check representing a portion of paid dividends (a check representing a portion of the corporate earnings to each stock holder) the corporate earnings to each stock holder) before common stock holdersbefore common stock holders

3.3. Bonds: sells bonds to individuals who get paid Bonds: sells bonds to individuals who get paid back the original amount (principal) with interest back the original amount (principal) with interest on a preset date. A bond is a loan made by an on a preset date. A bond is a loan made by an individual to a corporation. The company is individual to a corporation. The company is borrowing from those who buy corporate bondsborrowing from those who buy corporate bonds

F.F. DisadvantagesDisadvantages1.1. Highly regulated Highly regulated

1.1. Extensive record Extensive record keeping necessarykeeping necessary

2.2. Most expensive form Most expensive form to organize to organize a.a. Several thousand Several thousand

dollars in start up dollars in start up legal feeslegal fees

3.3. Original owner loses control over day-to-day Original owner loses control over day-to-day business decisionsbusiness decisions

4.4. Double taxationDouble taxation1.1. Corporate taxCorporate tax2.2. Same money taxed Same money taxed again as salary to again as salary to corporate staff andcorporate staff and on dividends earned on dividends earned on stock (capital on stock (capital gains tax)gains tax)

ActivityActivity

If you were to go into business, which If you were to go into business, which business form would you prefer?business form would you prefer?What 3 advantages of the form you chose What 3 advantages of the form you chose most attract you? Why?most attract you? Why?What 3 disadvantages of the other two What 3 disadvantages of the other two most repel you?most repel you?

Business Card ProjectBusiness Card Project

IV.IV. MergersMergersA.A. Definition: the combination of two or more Definition: the combination of two or more

businesses to make a single firmbusinesses to make a single firmB.B. Mergers are usually consensual (Covey Inc. Mergers are usually consensual (Covey Inc.

and Franklin Inc. formed Franklin-Covey Co.)and Franklin Inc. formed Franklin-Covey Co.)C.C. Acquisitions, when a company buys a Acquisitions, when a company buys a

controlling share of the other company's stock controlling share of the other company's stock can be consensual or hostilecan be consensual or hostile

D.D. Reasons for mergingReasons for merging1.1. Overcome a rivalOvercome a rival2.2. Grow fasterGrow faster3.3. Improve public imageImprove public image4.4. Become more efficientBecome more efficient5.5. Acquire a better productAcquire a better product

E.E. Types of mergersTypes of mergers1.1. Horizontal mergerHorizontal merger

a.a. When two or more firms that produce the same When two or more firms that produce the same kind of product mergekind of product merge• Wal~Mart and McDonalds?Wal~Mart and McDonalds?• McDonalds and Burger King?McDonalds and Burger King?• Nike and Adidas?Nike and Adidas?

2.2. Vertical MergerVertical Mergera.a. When firms involved in different stages of When firms involved in different stages of

manufacturing or marketing mergemanufacturing or marketing merge• McDonalds and Taco Bell?McDonalds and Taco Bell?• McDonalds and Joe’s TruckingMcDonalds and Joe’s Trucking• McDonalds and United Beef Packing PlantMcDonalds and United Beef Packing Plant• McDonalds and ABC Advertising McDonalds and ABC Advertising

F.F. ConglomerateConglomerate1.1. A firm with at least 4 businesses making A firm with at least 4 businesses making

unrelated products, none accounting for a unrelated products, none accounting for a majority of its salesmajority of its sales

2.2. DiversificationDiversificationa.a. To avoid putting all eggs in one basketTo avoid putting all eggs in one basketb.b. If newspaper industry fails, conglomerate may also If newspaper industry fails, conglomerate may also

be invested in the airplane manufacturing business be invested in the airplane manufacturing business and the computer chip market as welland the computer chip market as well

ExamplesExamplesDisneyDisney– MoviesMovies– TV TV – RadioRadio– Merchandise (toys, clothes, towels, stuffed animals, Merchandise (toys, clothes, towels, stuffed animals,

dishes, figurine and plate collectibles, lunch boxes)dishes, figurine and plate collectibles, lunch boxes)– CDs and DVDsCDs and DVDs– Music productionMusic production– Theme parksTheme parks– Disney on IceDisney on Ice

General Electric (GE)General Electric (GE)– ElectricityElectricity– Light bulbsLight bulbs– Power productionPower production– AppliancesAppliances– Music (RCA)Music (RCA)– FinanceFinance– Jet enginesJet engines– AviationAviation– Electric motorsElectric motors– LocomotivesLocomotives– Industrial automationIndustrial automation– TVTV– Motion pictures (Universal Pictures)Motion pictures (Universal Pictures)

G.G. MultinationalsMultinationals1.1. Corporation that operates (offices, factories, Corporation that operates (offices, factories,

headquarters) in more than one countryheadquarters) in more than one country2.2. Headquarters might be in U.S., Headquarters might be in U.S.,

manufacturing mainly in Mexico, and manufacturing mainly in Mexico, and marketing facilities in Singaporemarketing facilities in Singapore

3.3. McDonalds has stores all around the worldMcDonalds has stores all around the world4.4. Provides host country with:Provides host country with:

a.a. JobsJobsb.b. TechnologyTechnologyc.c. TrainingTrainingd.d. Tax revenueTax revenue

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