FIVE

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CHAPTER FIVE
Forms of Business Ownership
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Worlds Largest Public Companies
Company
Country

• General Electric U.S.
• Royal/Dutch Shell Britain/Holland
• Coca-Cola U.S.
• Nippon Tele. Japan
• Exxon U.S.
• Microsoft U.S.

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Americas Oldest Companies

• J. E. Rhoads Sons 1702 Conveyer Belts
• Covenant Life Ins. 1717 Insurance
• Philadelphia 1752 Insurance
• Contributorship
• Dexter 1767 Adhesives
• Coatings
• D. Landreth Seed 1784 Seeds
• Bank of New York 1784 Banking

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Largest U.S. Companies
Market Capitalization (In Millions)

• Microsoft 602,432
• General Electric 507,216
• Cisco Systems 366,498
• Wal-Mart Stores 307,865
• Intel 275,008

Source Wall Street Journal
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Basic Forms of Ownership
Number
Sales

• Sole Proprietorship
• Partnership
• Corporation

74
5
8
5
18
90
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Forms of Business Ownership
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Sole Proprietorship
Advantages
Disadvantages

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

• Unlimited liability
• Limited financial resources
• Difficulty in mgmt.
• Time commitment
• Few fringe benefits
• Limited growth
• Limited life span

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Partnership
Advantages
Disadvantages

• More financial resources
• Shared mgmt.
• Longer survival

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

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Types of Partnerships
General
Limited
GP
Passive Investor
Passive Investor
GP
GP
GP
GP
Passive Investor
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Uniform Partnership Act

• Common Ownership
• Shared Profits Losses
• Management Participation

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Types of Corporations

• Regular C
• Subchapter S
• Limited Liability Corporation

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Corporation
Advantages
Disadvantages

• More money for investment
• Limited liability
• Separation of ownership/mgmt.
• Ease of ownership change
• Perpetual life
• Size

• Initial cost
• Paperwork
• Two tax returns
• Termination difficult
• Double taxation

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S Corporations

• No more than 75 shareholders
• Shareholders
• Individuals
• Estates
• U.S. citizens or residents
• 1 class of stock

• lt25 of income can be passive
• Tax rate 5
• Slower-growing companies
• Benefits change with new tax rules

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Figure 5.4 How Owners Affect Management
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Make-up of Corporate Boards
Corporate boards average 11 Directors. Most
Directors by percentage are

• Retired office of another firm 89
• CEO at another company 87
• Major company shareholder 73
• Ex-government official 53
• Academicians 50

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External Corporate Growth

• Merger/Acquisition
• Horizontal
• Vertical
• Conglomerate
• Leveraged Buyout (LBO)

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Types of Mergers/Acquisitions
Horizontal
A
B
AB
Conglomerate
Vertical
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Leveraged Buyout
Individual Loan Purchase of Company
Purchase Loan
Company Collateral
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Top U. S. Mergers
Acquirer
Target
Value

• Time Warner AOL 120 Bil
• World Com MCI 30 Bil
• Bell Atlantic NYNEX 26 Bil
• KKR RJR/Nabisco 25 Bil
• Disney CAP/Cities ABC 19 Bil

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Top Growth Franchises
New Stores in 1999

• Kumon Math Reading Centers 4,586
• McDonalds 3,288
• 7-Eleven Convenience Stores 1,023
• Jackson Hewitt Tax Service 884
• Taco Bell Corp. 841
• KFC Corp. 567
• Coverall Cleaning Concepts 548
• Yogen Fruz Worldwide 520

Source Entrepreneur, March 2000
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Survival After Startup Franchise vs. Independent
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Franchises
Disadvantages
Advantages

• Management marketing asst
• Personal ownership
• Recognized name
• Financial advice asst
• Lower failure rate

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

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Franchise System

• Franchiser
• Franchisee
• Franchise Agreement

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

Franchisee
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Franchisor

• Assigns Territory
• Provides Financial Aid/Advice
• Offers Merchandise/ Supplies at Competitive Price

• Provides Training/Support
• Business Expansion Using O.P.M.

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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

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How to Avoid aFranchise 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

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Benefits of aHome-Based Business

• Flexible work hours
• Quality lifestyle
• Doing the work of your choice
• Opportunity to expand using technology
• Self-motivation

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