4. Forms of Business Structures.pptx

4. Forms of Business Ownership By Amber Hatter Learning Objectives 1. What are the advantages and disadvantages of the sole proprietorship form of a business organization? 2. What are the advantages of operating as a partnership, and what downside risks should partners consider? 3. How does the corp...

4. Forms of Business Ownership By Amber Hatter Learning Objectives 1. What are the advantages and disadvantages of the sole proprietorship form of a 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 corporations? 4. What other options for business organization does a company have besides sole proprietorships, partnerships, and corporations? 5. What makes franchising an appropriate form of organization for some types of business, and why does it continue to grow in importance? 6. Why are mergers and acquisitions important to a company’s overall growth? 7. What current trends will affect the business organizations of the future? Chapter Summary The chapter discusses the primary business ownership forms: proprietorship, partnership, and corporation, highlighting their unique pros and cons. It also mentions alternative structures like limited liability companies and franchises, and growth strategies through mergers and acquisitions. Key trends include the booming service sector driven by an aging population and the rise in global investment and outsourcing. This overview showcases the variety of ways businesses can structure and adapt to thrive in a competitive environment. I. Going It Alone: Sole Proprietorship > Learning Outcome 1 I. Going It Alone: Sole Proprietorship A sole proprietorship is a business model where a single individual is responsible for its creation, ownership, operation, and typically, its financing. This model's simplicity and costeffectiveness lead to 72 percent of all businesses starting as sole proprietorships. This choice is frequently seen as provisional; as the business expands, the owner might face challenges in sustaining operations due to constrained financial and managerial resources. What types of businesses are commonly operated as sole proprietorships? A. Advantages of Sole Proprietorships Sole proprietorships are favored for their numerous benefits, including: Their formation is straightforward and cost-effective. The owner exclusively receives all profits. The owner exercises complete control over the business operations. They enjoy a degree of autonomy from government regulations. They are not subject to complex tax structures. Dissolving the business is simple and uncomplicated. B. Disadvantages of Sole Proprietorships Sole proprietorships come with significant challenges, including:  Owners face unlimited liability, putting personal assets at risk.  Raising capital can be difficult, limiting growth opportunities.  There's often a lack of managerial expertise and difficulty in attracting skilled employees, which can hinder operational efficiency.  The business demands a substantial personal time commitment from the owner.  The stability and longevity of the business can be uncertain.  All financial losses are the sole responsibility of the owner, increasing personal financial risk. i. Examples of Sole Proprietorship o This business structure is favored for their simplicity & control, seen in: Freelance professionals (writers, designers) Retail and online shops (boutique and craft sellers) Personal service providers (hair salons, personal trainers) Home-based businesses (catering, daycare) Professional services (lawyers, accountants) Artisans (artists, carpenters) Real estate agents Consultants across various fields #1 Knowledge Check 1. What percentage of all businesses are formed as a sole proprietorship? A) 50%, B) 72%, C) 85%, D) 65% 2. Which of the following is NOT an advantage of sole proprietorships? A) Easy and inexpensive to form, B) Profits that all go to the owner, C) Limited liability, D) No special taxing. 3. What is a major disadvantage of sole proprietorships? A) Ease of formation, B) Direct control of the business, C) Unlimited liability, D) Freedom from government regulations. II. Partnerships: Sharing the Load > Learning Outcome 2 II. Partnerships: Sharing the Load A partnership forms when individuals unite to run a profitseeking business. In a general partnership, partners equally manage, share profits, and own assets, but also face unlimited liability for debts. A limited partnership differentiates between general partners, with unlimited liability and operational control, and limited partners, whose financial liability matches their investment. What kinds of businesses are typically run as partnerships? A. Advantages of Partnerships Partnerships provide key benefits for business development: Ease of Formation: Less complex and requiring fewer legalities than corporations. Capital Access: Combines partners' financial resources, enhancing flexibility. Skill Diversity: Merges varied expertise, driving innovation and competitive advantage. Decision Flexibility: Enables swift adaptation to market shifts. Tax Efficiency: Avoids corporate double taxation, with profits taxed once at the individual level. B. Disadvantages of Partnerships Partnerships come with inherent challenges: Unlimited Liability: Partners shoulder financial risks for business debts. Partner Conflicts: Disagreements can interfere with effective decision-making and operations. Profit Sharing: Income is divided among partners, which may reduce individual earnings. Exiting Complexity: Leaving or dissolving a partnership is more complicated than in sole proprietorships, potentially affecting business growth and restructuring. M&A’s Limitations: Can restrict their ability to engage effectively in mergers and acquisitions. i. Examples of Partnerships o Partnerships span various industries, including: Law and Accounting Firms: Embrace partnership for shared profits and management, boosting corporate restructuring. Medical Practices: Utilize pooled resources to cut operational costs, aiding growth. Consulting and Advertising Agencies: Leverage specialized expertise to attract a diverse client base, including corporate projects. Construction and Engineering Firms: Collaborate on bids for large projects, resulting in significant investments and acquisitions. Retail Businesses: Share investment and management efforts to support strategies like franchising and #2 Knowledge Check 1. In partnerships, how is profit typically handled? A) Kept by one partner, B) Shared among partners, C) Donated to charity, D) Reinvested into the business without distribution. 2. What type of liability do general partners in partnerships face? A) No liability, B) Limited liability, C) Unlimited liability, D) Shared liability. 3. Which types of businesses often operate as partnerships? A) Social media platforms, B) Law firms and medical practices, C) Supermarkets, D) Online gaming companies III. Corporations: Limiting Your Liability > Learning Outcome 3 III. Corporations A corporation is a legally distinct entity that operates independently from its owners, shielding them from personal liability for the company's debts. It is established under state law and possesses the rights to own assets, enter into contracts, initiate or face lawsuits, and conduct business according to its founding charter. What types of businesses typically operate as corporations? A. The Incorporation Process The incorporation process involves several critical steps, each foundational for a company's growth and strategic positioning: 1.Choosing a Company Name: Essential for compliance and branding in the global market. 2.Drafting and Filing Articles of Incorporation: Formalizes the business structure, enabling future growth and acquisitions. 3.Handling Fees and Taxes: Fulfills legal financial requirements, securing the company's legal standing. 4.Organizing the Initial Meeting: Sets the operational direction and goals for market expansion and acquisitions. 5.Adopting Bylaws and Electing Officials: Establishes governance and leadership, crucial for managing partnerships and global strategies. B. The Corporate Structure The corporation is owned by its stockholders (or shareholders), who possess shares granting specific rights. These stockholders appoint a board of directors to oversee the corporation's governance. The corporation's executive management, or officers, are appointed by the board to lead the company's operations. C. Advantages of Corporations o Corporate structures enhance business growth with key benefits: Limited Liability: Protects owners' assets from company debts, offering a clear advantage over sole proprietorships. Ease of Ownership Transfer: Simplifies share transactions, allowing for quick adaptation and scalability. Perpetual Existence: Ensures longevity beyond founders, supporting continuous growth and global expansion. Tax Advantages: Provides financial efficiency through potential deductions, aiding in corporate restructuring. Financing Opportunities: Boosts investment attraction via stock issuance, crucial for mergers, acquisitions, and global market entry. D. Disadvantages of Corporations o Corporations encounter specific challenges: Double Taxation: Earnings face taxes at both corporate and divided levels, affecting financial efficiency. Formation Complexities: Establishing a corporation involves more detailed and expensive procedures than simpler entities like sole proprietorships. Increased Regulation: Greater government oversight can restrict flexibility and complicate strategic planning. Impersonal Nature: The scale of corporations may diminish personal engagement with customers and employees. Shareholder Expectations: The need to meet shareholder demands can clash with long-term business objectives. E. Types of Corporations Three corporate structures offer limited liability: C Corporation: The traditional corporate form, providing limited liability but subject to corporate taxation. S Corporation: A hybrid structure that combines corporate organization (stockholders, directors, officers) with partnership-like taxation. Limited Liability Company (LLC): Offers corporate-level liability protection and flexible taxation options, allowing taxation as either a partnership or a corporation. i. Examples of Corporations C Corporations: Apple Inc.: Tech giant. Walmart Inc.: Largest retailer. ExxonMobil: Major oil company. General Motors: Leading automaker. Amazon.com, Inc.: Ecommerce and tech leader. The Coca-Cola Company: Iconic beverage company. Microsoft Corporation: Software and tech powerhouse.  S Corporations: Local Law Firms: Offering specialized legal services. Accounting Firms: Providing regional accounting and tax services. Consulting Businesses: Specializing in management, technology, or marketing. Family-Owned Businesses: Such as restaurants and retail stores. Medical Practices: Groups of healthcare professionals. Real Estate Agencies: Benefiting from pass-through taxation. Technology Startups: Seeking limited liability and favorable tax treatment. LLC Corporations: Consulting Firms: Industryspecific expertise providers. Real Estate Investment Groups: Entities managing real estate portfolios. Freelance Professionals: Independent writers, designers, and programmers. Small Retail Stores: Boutique and specialized local shops. Restaurants and Cafes: Various dining establishments. Construction Contractors: Companies in the construction sector. Tech Startups: Innovative #3 Knowledge Check 1. Who owns a corporation? A) The government, B) Its employees, C) Its stockholders (or shareholders), D) The CEO. 2. What does double taxation mean for corporations? A) Taxing profits and salaries, B) Taxing profits twice, C) Taxing profits, then dividends, D) A tax for international corporations. 3. What is one of the chief advantages of forming a corporation? A) Unlimited liability, B) Limited liability, C) Automatic profit sharing, D) No need for a board of directors IV. Specialized Forms of Business Organization Learning Outcome 4 IV. Specialized Forms of Business Organization o Various specialized business entities contribute significantly to our economy. Cooperatives Joint Ventures A. Cooperatives A cooperative (coop) is a collaborative business model prioritizing shared ownership and democratic decisionmaking, driving equitable growth across sectors. By fostering inclusivity and offering tax benefits, coops enhance corporate restructuring, partnerships, and global investments. Their role in franchising and mergers and acquisitions underscores their importance in the global business landscape, promoting corporate expansion through collective efforts. i. Examples of Cooperatives o Notable cooperatives in various sectors include: REI: Outdoor gear retailer, scaling like corporations. Land O'Lakes: Agricultural cooperative with global impact. Ocean Spray: Farmer-owned, with international reach. Ace Hardware: Global presence with local ownership. The Greenbelt Cooperative: Communityfocused economic contributor. Mondragon Corporation: Multi-sector federation, showcasing diversification. Credit Unions: Banking alternative with B. Joint Ventures A joint venture is a strategic alliance between two or more parties, typically businesses, who agree to collaborate on a specific project or business activity, sharing resources, risks, and rewards. This partnership is usually formed for a limited duration and specific purpose, allowing each entity to maintain its separate identity while working together towards a common goal. i. Examples of Joint Ventures o Joint Venture Examples: Sony Ericsson: Merges Sony's electronics with Ericsson's telecom skills. Hulu: Joint streaming project by NBC Universal, Providence Equity, News Corp, and Disney. DowDuPont: Combines Dow Chemical and DuPont in materials science and agriculture. Starbucks and Tata: Partnership to grow Starbucks in India. McDonald's and Beyond Meat: Collaboration on plant-based foods. Intel and TSMC: Intel utilizes TSMC's chip manufacturing capabilities. #4 Knowledge Check 1. What defines a cooperative (coop)? A) Government ownership, B) Shared ownership and democratic decisionmaking, C) Non-profit status, D) Single ownership. 2. Which is an example of a joint venture? A) REI, B) Land O'Lakes, C) Starbucks and Tata, D) The Greenbelt Cooperative. 3. What is unique about joint ventures? A) Unlimited duration, B) Separate identities with a common goal, C) Merging into one entity, D) Non-profit exclusive. V. Franchising: A Popular Trend >Learning Outcome 5 V. Franchising Franchising is a business model where a franchisor, the entity providing the product or service concept, enters into an agreement with a franchisee, the individual or company authorized to sell those products or services within a specified geographic area. This arrangement is formalized through a franchise agreement, a contract that grants the A. Advantages of Franchises o Franchising provides key benefits such as: Expansion Potential: Enhances franchisor's growth, supporting strategies from local to global market entry. Brand Advantage: Leverages a recognized name and concept, crucial for competitive positioning in partnerships and mergers. Operational Support: Offers management training and assistance, facilitating smooth operations and corporate restructuring. Investment Aid: Provides financial assistance, aiding in acquisitions and bolstering overall business investment. B. Disadvantages of Franchises o Franchising challenges include: Operational Constraints: Reduces control, affecting agility in corporate restructuring and market adaptation, key for competitive advantage in partnerships and mergers. Financial Commitments: Adds costs, potentially lowering investment returns, affecting financial planning and growth strategies for both small and large businesses. Limited Freedom: Restricts franchisees' autonomy, hindering innovation and growth, crucial for competitiveness and scaling through partnerships, mergers, and acquisitions. C. Franchise Growth Changing demographics drive franchise industry growth in terms of who, how, and what experiences the most rapid growth. The continuing growth and popularity of technology and personal computing is responsible for the rapidly multiplying number of eBay drop-off stores, and tech consultants such as Geeks on Call are in greater demand than ever. Other growth franchise industries are the specialty coffee market, children’s enrichment and tutoring programs, senior care, weight control, and fitness franchises. D. The Next Big Franchising Thing Some trends come and go quickly, as consumers’ tastes change. What’s big today could be out tomorrow. E. International Franchising Obviously, franchising is part of the global marketplace. Most franchise systems either operate units internationally already or plan to expand overseas as the demand for many goods and services grows. Franchisors in foreign countries face many of the same problems as other firms doing business abroad. Besides tracking markets and currency changes, franchisors must understand local culture, language differences, and the political environment. Franchisors in foreign countries also face the challenge of aligning their business operations with the goals of their franchisees, who may be located half a globe away. F.Is Franchisi ng in Your Future? Qualities that rank high on franchisors’ lists are passion about the franchise concept, desire to be your own boss, willingness to make a substantial time commitment, assertiveness, optimism, patience, and integrity. Prior business experience is also a definite plus, and some franchisors prefer or require experience in their field. #5 Knowledge Check 1. What is a key advantage of franchising for a franchisor? A) Limited brand recognition, B) Expansion potential, C) Increased operational constraints, D) Reduced control over business operations. 2. Which of the following is considered a disadvantage of franchising for franchisees? A) Enhanced growth strategies, B) Operational support, C) Limited freedom, D) Brand advantage. 3. What is a significant challenge for franchisors when expanding internationally? A) Decreased demand for goods and services, B) Understanding local culture and political environment, C) Reduced need for operational support, D) Easier financial planning. VI. Mergers and Acquisitions > Learning Outcome 6 VI. Mergers and Acquisitions A merger takes place when two or more companies join forces to create a new entity with a singular corporate identity. In contrast, an acquisition involves a corporation or investor group identifying a target company and engaging in negotiations with its board of A. Types of Mergers Horizontal Merger: Firms at similar industry stages merge to reduce costs, expand offerings, and decrease competition, driving growth and improving their position in the global market. Vertical Merger: Forms a partnership where a corporation acquires a business at a different stage within the same industry, enhancing operations and supply chain efficiency. Conglomerate Merger: Joins companies from varied sectors to diversify investment and lower risk, supporting corporate restructuring for stable growth. Leveraged Buyout (LBO): Involves acquisitions financed predominantly through debt, showcasing bold investment strategies B. Merger Motives o Motives for mergers and acquisitions, key to corporate strategy, include: Cost Efficiency: Streamlining operations to save costs. Market Power: Enhancing purchasing power and market share, reducing competition. Business Expansion: Growth through broadening product lines and entering new markets swiftly. Skill Acquisition: Gaining new technology or management expertise. C. Emerging Truths Merger activity, fueled by the 1990s tech boom, utilized high stock values for financing but slowed after the events of September 11, 2001, due to falling stock levels. Recently, mergers have surged again, driven by a strong economy, low interest rates, and rising stock prices, with 2016 marking $3.84 trillion in global mergers and acquisitions. This resurgence highlights the importance of mergers and acquisitions in corporate growth, strategic partnerships, and global expansion, reflecting the evolving strategies for i. Examples of M&A’s Mergers Acquisitions 1.Disney and Pixar (2006) 2.Exxon and Mobil (1999) 3.AOL and Time Warner (2000) 4.Vodafone and Mannesmann (2000) 5.Daimler-Benz and Chrysler (1998) 6.Pfizer and Allergan (2015, proposed but ultimately failed) 7.AT&T and Time Warner (2018) 1.Facebook acquires Instagram (2012) 2.Google acquires YouTube (2006) 3.Microsoft acquires LinkedIn (2016) 4.Amazon acquires Whole Foods (2017) 5.Disney acquires 21st Century Fox (2019) 6.Bayer acquires Monsanto (2018) 7.Dell acquires EMC Corporation (2016) VII.Trends in Business Ownership When studying options for organizing a business or choosing a career path, consider the following trends in franchising and mergers and acquisitions. A. “Baby Boomers” and “Millennials” Drive Franchise Trends Baby boomers and millennials are significantly influencing franchise trends, with boomers driving demand in health clubs, elder care, and adult day services. Millennials, the largest U.S. generation, are reshaping the restaurant industry with their spending habits and showing a strong inclination towards entrepreneurship, valuing autonomy, flexibility, and work-life integration. This demographic shift presents opportunities for franchises to adapt and grow, catering to the evolving preferences of these key consumer groups. B. Boomers Rewrite the Rules of Retirement Today’s boomers are working longer at their jobs and embracing post-retirement second careers, which often involves starting their own small business. C. Mergers and Foreign Investment Boom, Too As mentioned earlier, after shunning big deals for more than three years, corporate America has launched a new merge wave. This current boom in mergers feels different from earlier merger mania, however. New players are entering the arena, and the number of U.S. and foreign companies making cross-border acquisitions has increased. Whether these new mergers will be good for the global economy remains to be seen. #6 Knowledge Check 1. Who acquired Instagram? A) Google, B) Microsoft, C) Amazon, D) Facebook. 2. What is a Conglomerate Merger? A) A merger between companies in the same industry, B) A merger between companies at different stages of production, C) A merger between companies in unrelated industries, D) A merger financed entirely by cash. 3. What is a key motive for mergers and acquisitions? A) Reducing employee benefits B) Increasing operational costs C) Acquiring new technology or expertise D) Decreasing market share. The End