Chapter 5: Forms of Ownership PDF

Chapter 5: 5. Fewer Limitations on personal income a. You keep all the after tax a business generates...

Chapter 5: 5. Fewer Limitations on personal income a. You keep all the after tax a business generates 6. Personal Satisfaction Forms of Ownership a. Main advantage is working for themselves, taking risks and enjoying rewards 1 Define sole proprietorship, and explain the six advantages and six Disadvantage (7): disadvantages of this ownership model. 1. Financial Liability a. Owner and business are legally inseparable, any Sole Proprietorship: A business owned by a single person legal damages or debts the owner has responsibilities Profits & Taxation: 2. Demands on the Owner ○ Profit and losses affect directly the owner - individual a. Working long hours, stress of making all the tax rates decisions, solving all the problems, no discussing Liability Exposure: problems with anyone (Social media has helped) ○ Owner has unlimited personal liability 3. Limited managerial perspective Ease of Establishing: a. Limited new ideas and little to none to discuss ○ Easy to set up, usually requires just a business decisions licence 4. Resource limitation a. Fewer financial resources and fewer ways to get Advantages (6): additional funds from lenders or investors 1. Simplicity 5. No Employee Benefits for the Owner a. Easy to establish a. No paid vacations, sick leave, health insurance, 2. Single Layer taxation 6. Finite Life Span a. Income tax is straightforward a. The owner's death can mean demise of the 3. Privacy business, business does not transfer to an heir the a. Arent mostly meant to report anything to anyone new founders unique skills are gonna be crucial to its 4. Flexibility and control successful operation a. No need to get approval from a business partner or boss, no board of directors, can make their own Unlimited liability: A legal condition under which any debts incurred decisions by a business are the owners personal responsibility 2 Define partnership, and explain the six advantages and Advantages (6): three disadvantages of this ownership model. 1. Simplicity a. Easy to establish, only a business licence is needed Partnership: A company that is owned by two or more people but 2. Single Layer translation it's not a corporation. A joint authority to make decisions for the firm, a. Income ta, profit is sleep among the owners based joint liability and financial obligations on percentages agreed 3. More resources General Partnership: Two or more owners, each partner entitled to a. Increased amount of money available to launch, equal control operate and grow the business Profits & Taxation: 4. Cost Sharing ○ Profit and losses directly to the partners, equally a. Opportunity to share costs Liability Exposure: 5. Broader skill and experience ○ All partners have unlimited liability a. Skills of two or more professionals, much more Ease of Establishing: effective to build a business ○ Easy to set up, no required agreement but 6. Longevity recommended a. Increase chances that the organisation will endure, new partners can be drawn into the business to Limited Partnership: Two or more owners, one or more general replace those that die or retire partners manage the business, limited partners don't participate in management Disadvantages (3): Profits & Taxation: 1. Unlimited Liability ○ Profit and losses directly to the partners 2. Potential for Conflict Liability Exposure: a. More bosses = more chances for disagreement ○ Limited partners have limited liability - only liable for b. Partners can disagree over strategy, profits the amount they invested 3. Expansion, succession and termination issues Ease of Establishing: a. Expanding by adding an additional partner, ○ Easy to set up no required agreement bu replacing, terminating, retire can destroy recommended partnerships Limited Liability: A legal condition in which the maximum amount each owner is liable for is equal to whatever amount each invested Partnership Agreement: A carefully written agreement to maximise in the business advantages of the partnership and minimise disadvantages. Factors of consideration in agreement (8) 3 Define corporation, and explain the four advantages and 1. Type of Partnership six disadvantages of this ownership model. 2. Investment Percentages 3. Profit sharing percentages Corporation: A legal entity distinct from only individual persons, that 4. Management responsibilities has the power to own property and conduct businesses. Unlimited 5. Decision making strategies shareholders, no limits on stock or voting arrangements 6. Succession plans and exit strategies in case one owner wants to leave the partnership Profits & Taxation: 7. Criteria for admitting new partners ○ Profits are taxed at corporate rates, profits are taxed 8. Dispute resolution procedures, for dealing with owners who again at indiv. Rates when they are distributed as aren't meeting their responsibilities dividends Liability Exposure: ○ Investors liability is limited to their investments Ease of Establishing: ○ More complicated and expensive to establish, requirements vary from states Shareholders: Investors who purchase shares of stock in a corporation Advantages (4): 1. Ability to raise capital selling shares of stock 2. Liquidity: A measure of how easily and quickly an asset such as corporate stock can be converted into cash by selling 3. Longevity: Long life span due to liquidity, ownership is passed to a new generation 4. Limited Liability a. Corporation itself has unlimited liability, various shareholders who own the corporation only face  limited liability, their max. Loss is only the amount Types of corporations (11) they have invested in the company 1. Public corporation: Disadvantages (6): a. Corporation whose stocks are sold to the general 1. Cost and Complexity public a. Starting a corporation is very expensive and 2. Private Corporation: time-consuming a. Corporations whose stock is held by a small number 2. Reporting Requirements of owners and is not available for sale to the public a. To help investors to make decisions about stocks 3. S corporation: b. Public corporations need to publish extensive and a. Corporation allowed to sell stock to a limited number financial reports of investors while enjoying the pass through taxation 3. Managerial Demands of a partnership a. Top executives must devote time and energy to meet b. 100 investors with shareholders, financial analysts and new, media 4. Limited Liability Company (LLC): 4. Possible Loss of Control a. Corporate structure with benefits similar to those of a a. Outside investors who acquire enough of the S - corporation, without the limitation on the number company stocks gain seats in the board of directors, of investors having influence on company management b. No restricted number of investors 5. Double Taxation c. Disadvantages: employee benefits are not tax a. Must pay corporate tax on its profits and individual deductible, no stock to sell shareholders must pay income taxes on their share 5. Benefit Corporation: profits received as dividends a. Profit seeking corporation, requires it to pursue a 6. Short-term orientation of the stock market stated social or environmental goal a. Relace financial results once every quarter b. A company must pursue a stated non financial goal b. Executives pressured to show earning of growth such as i. Hiring workers whose life histories make employment difficult to attain ii. Reducing the environment impact of particular products 6. Subsidiary Corporation: a. Corporation primarily owned by another company 7. Parent Company: 4 Explain the concept of corporate governance, and identify the a. Corporation that owns one or more subsidies three groups responsible for ensuring good governance. 8. Holding Company: a. Special type of parent company that owns other Corporate Governance: In a broad sense, all the policies, companies for investment reasons and exercises procedures, relationships, and systems in place to oversee the little operation control over those subsidies successful and legal operation of the enterprise, in a narrow sense, 9. Alien Company: the responsibilities and performance of the board of directors a. Corporation that operates in the US but is specifically incorporated in another country 10. Foreign Corporation: Shareholders: Owners of common stock a. Company that is incorporated in one state but that Most of these don't have involvement in company does business in several other states where it is management but are invited to an annual meeting to present registered the results and plans for the coming year. 11. Domestic Corporation Those who not attend can vote by proxy a. Corporation that does business only in the state where it is chartered Proxy: A document that authorises another person to vote on behalf of a shareholder in a corporation In theory they are the ultimate governing body as these elect the directors Shareholder Activism: Activities undertaken by shareholders to influence executive decision making in areas ranging from strategic planning to social responsibility Board of Directors: A group of professionals elected by shareholders as their representatives with responsibility for the 5 Identify the potential advantages and disadvantages of pursuing overall direction of the company and the selection of top executives growth through mergers and acquisitions, and explain why firms may choose to split off components into separate companies. Boards are a mix of inside directors and outside directors Merger: An action taken by two companies to combine as a single Inside Directors: People with direct stake in the company including entity top company executives and any shareholder who owns more of 10 percent voting shares Pooling their resources together Purchasing the assets of the other Outside Directors: Independent or non executive directors , people who aren't affiliated with the company and have demonstrated Consolidation: Two companies create a new third entity that then major accomplishments in their own fields and can bring a wide purchases the two original companies range of experience and perspectives to board discussions Types of Mergers: Corporate Officers 1. Vertical Merger: When a company purchases a complementary company at a different stage or level in an Chief Executive Officer (CEO): The highest ranking officer of a industry corporation ○ Ex. Furniture maker buying lumber supply Have legal authority to conduct companies business in 2. Horizontal Merger: Two similar companies at the same level, everything from hiring the rest of employees to launching companies can merge to expand their product offerings or new products their geographic market coverage 3. Conglomerate Merger: A parent company buys one or more companies in unrelated industries, often to diversify its business to protect against downturns in specific industries Acquisition: An action taken by one company to buy a controlling 5. Gain access to new expertise systems and teams of interest in voting stock of another company employees who already know how to work together Selling parties usually agree to be purchased, shareholders are also encouraged to vote Disadvantages of Mergers and Acquisitions (6): 1. Executives must agree on how merger will be financed To finance acquisition 2. Managers need to decide who will be incharge of the companies joining forces Hostile Takeover: Acquisition of another company against the 3. Marketing departments must figure out how to blend product wishes of management lines, branding strategies Tender offer: The buyer tries to convince enough 4. Incompatible information systems may need to be rebuilt shareholders to sale their shares (software) ○ Buyers offer more than their shares are worth so 5. Companies must often deal with layoffs, transfers these are motivate to sell 6. Organisational culture must be harmonised somehow Proxy Fight: Raider tries to persuade other shareholders to vote the way it wants in hope of compiling enough votes to oust the board of directors Merger and Acquisition Defences: Poison Pill: A target company invokes some move that A leveraged buyout (LBO): Acquisition of a companies publicly makes it less valuable to the potential raider with the hope of traded stock, using funds that are primarily borrowed usually with discouraging the takeover the intent of using some of the acquired assets to pay back the ○ Technique to sell newly issued stock to current loans used to acquire the company stockholders at price below the market value of the company existing stock, thereby increase # of shares Advantages of Mergers and Acquisitions (5): the raider has to buy 1. A strategic tool to expand year after year White Knight tactic: A third company is invited to acquire a 2. Increase buying power because of their larger size company that is in danger of being swallowed up in a hostile 3. Increase revenue by cross-selling products to each others takeover customers 4. Increase market share by combining product lines to provide more comprehensive offerings Divestitures: Splitting an entire corporation in 2, these entities are 6 Define strategic alliance and joint venture, and explain why a called spin off company would choose these options over a merger or an acquisition. Reasons to splitting up (3): 1. Increasing shareholder value: Strategic Alliance: A long term partnership between companies to a. Belief that parts of the company will collectively will jointly develop, produce or sell products be more valuable in separate companies 2. Giving parts of a company more freedom to pursue strategic Can accomplish the same goals of a merger or acquisition bust with goals less risk and work than permanently integrating two companies 3. Refocusing a firm's strategy if its lines of business have evolved over the years 1. Help company gain credibility in a new field 2. Expand its market presence 3. Gain access to technology 4. Diversity offerings 5. Share best practices without forcing the partners to become permanently entangled Joint venture: A separate legal entity established by two or more companies to pursue shared business objectives Lets companies create an operation that is more tightly integrated than a strategic alliance without disrupting the original companies to an extent a merger or acquisition does Options for joining forces 7 Explain how companies can use big data and analytics to create value and find competitive advantages. Mergers: Company A + Company B = Company C Big Data: The massive data sets that companies collect and analyse to find important trends and insights Acquisition: Data collection includes numerical quantities, visual Company A → Company AB elements such as photographs and text Company A buys Company B → AB Defined by some variation of the 5 Vs Statutory Consolidation: 1. Volume: Big, often to the point of requiring specialised Company A and Company B create a new firm → Company C computer systems to handle the huge data files Company C buys the original firms 2. Velocity: Big data comes as fast, so to speak 3. Variety: The data records come in a wide variety of formats Strategic Alliance: from all manner of sources Company A and Company B Team up with complementary abilities 4. Value: making sure investment in data collection and Integrated Program analysis payoff meaningful decision making insights 5. Veracity: quality of data a system collects Joint Venture: Company A and B Create a new firm Company C Analytics: Computing tools and techniques used to analyse big data, major types include: Data mining: finding patterns in data Text mining: extracting means from text files Predictive analytics:Identifying the most likely outcomes of decision or scenarios  Chapter 6: Characteristics of a small business: Lifestyle businesses: Built around the personal and financial needs Entrepreneurship and of an individual or a family. ○ Most single person operations Small-business ownership ○ Limited potential to grow beyond providing income for their independent owners 1 Highlight the contributions small businesses make to the U.S. High Growth Ventures: Run by a team rather than by one individual, economy. they expand rapidly by obtaining a sizable supply of investment capital and by introducing new products or services to a large Small businesses: A company that is independently owned and market operated, is not dominant in its field, and employs fewer than 500 Potential to grow if owners desire people. Adding additional retail locations, designing new products Economic roles of small businesses (5): Main difference between large and small companies 1. Provide jobs Narrow focus, offering fewer goods to fewer market 2. Introduce new products that fulfil unmet market needs segments 3. Meet the needs of larger organisations. limited resources (financial) a. Act as distributors, servicing agents, and suppliers to More freedom to innovate and move quickly as they grow larger corporations and to numerous government larger companies tend to get slower and more bureaucratic agencies. 4. Take risks that larger companies sometimes avoid a. Entrepreneurs, risk takers—people willing to try new and unproven ideas. 5. They provide economic opportunities for a diverse range of people 2 List the most common reasons people start their own companies, People start businesses for a variety of reasons including (5): and identify the common traits of successful entrepreneurs. 1. Gaining more control over their future 2. Wanting to avoid working for someone else Entrepreneurial spirit: The positive, forward-thinking desire to create 3. Having new product ideas that they are deeply passionate profitable, sustainable business enterprises. about 4. Pursuing business goals that are important to them on a Qualities of successful entrepreneurs personal level, or seeking income alternatives when they 1. Confidence can’t find jobs that fit. 2. Passion 5. Successful entrepreneurs are disciplined, willing to work 3. Drive: hard, are confident, and optimistic - they relate to others, inspire them, are curious, and are moderate but careful risk takers Intrapreneurs: Employees who approach their work with the imagination and drive of typical entrepreneurs, in a company. Essential sources of product and process innovation in almost any company Harder to excel in a company as these can be more deliberate, structure and cautious as they mature 3 Explain the importance of planning a new business, and outline Owners freedom and Flexibility: the key elements in a business plan. ○ Less than creating a business, facilities workforce and other assets are already in place Creating a new business Business Processes and systems: Financial Outlay: ○ Already in place, can be a positive or negative ○ Little cash, or lots of capital such as manufacturing Support Networks: Possibilities for borrowing starting capital and investors: ○ Some elements are already in place but may need to ○ Very limited, most lenders want evidence that be upgraded business can generate revenue before they offer Workforce: funds ○ Already in place, there is staff to operate the Owners freedom and Flexibility: business, might need to be upgraded ○ Very high Customer Base, Brand Recognition and Sales: Business Processes and systems: ○ Can have ongoing sales and some brand reputation ○ Must be designed and created from scratch can be time consuming and expensive Buying a Franchise Support Networks: Financial Outlay: ○ Suppliers, bankers and other elements must be ○ Varies widely from few thousands to six figures selected Possibilities for borrowing starting capital and investors: Workforce: ○ Varies, many franchisors do not allow franchises to ○ Must be hired trained at owner's expense buy a franchise with borrow funds, own capital Customer Base, Brand Recognition and Sales: Owners freedom and Flexibility ○ None, must be built from group up, can have strain in ○ Low very low, require adherence to the company company finances until sales build Business Processes and systems: ○ Already established business systems Buying an existing business: Support Networks: Financial Outlay: ○ Varies, some specify which suppliers to use ○ Can be considerable some companies Workforce: Possibilities for borrowing starting capital and investors: ○ Must be hired and trained, many provide training ○ Banks are more willing to lend to established Customer Base, Brand Recognition and Sales: profitable businesses and investors are more likely to ○ Customer base and repeat sales need to be built, invest in them brand recognition is established Parts of a business plan (13): 7. Marketing strategy: a. Provide projections of sales volume and market 1. Summary share outline a strategy for identifying and reaching a. In one or two paragraphs, summarise your business potential customers concept, particularly the business model b. Prices and more b. Describe your product or service and its market potential. 8. Design and development plans: c. Distinguish your firm from the competition a. Describe the nature and extent of what needs to be d. Financial projections, how much money you will done, including costs and potential problems. need from investors or lenders 9. Operations plan: 2. Mission and objectives: a. Provide information on facilities, equipment, and a. Purpose of your business and what you hope to personnel requirements. accomplish 10. Start-up schedule: 3. Company overview: a. Forecast development, completion dates a. Background information on the origins and structure 11. Major risk factors 4. Products or services: a. Identify all potential negative factors and discuss a. Describe their appeal to customers them honestly. 5. Management and key personnel: 12. Financial projections and requirements: a. Summarise the background and qualifications of the a. Identify the company’s financing needs and potential people for the company’s success. sources. 6. Target market: 13. Exit strategy: a. Provide data that will persuade an investor that you a. Explain how investors will be able to cash out or sell understand your target market their investment b. Strengths and weaknesses of your competitors. 4 Identify the major causes of business failures, explain what Pivoting: Adjusting a firm’s business model when a better pivoting means, and identify sources of advice and support for opportunity presents itself business owners. This can range from adjusting the feature set of an individual product all the way up to taking the company in a completely Why businesses Fail (4): new direction, and some companies pivot multiple times until they find the right product-market fit. Strategic Issues Little to no Demand Advice and support for business owners (6) Lack of strategic Planning 1. Government Agencies and Not-for-Profit Organizations Failure to Pivot 2. Business Partners Overpowering competition 3. Mentors and Advisory Boards Leadership Issues Advisory boards: A team of people with subject area expertise or Managerial incompetence vital contacts who help a business owner review plans and Lack of relevant experience decisions. Inability to make the transition from employee to entrepreneur 4. Networks and Support Groups Motivational collapse 5. Business Incubators and accelerators Marketing and Sales Issues Business Incubators: Facilities that help early-stage entrepreneurial Ineffective Marketing teams develop ideas into workable business models and establish Uncontrolled growth company frameworks for commercialising products. Poor Location Customer Neglect Business Accelerators: Organisations that work with existing companies with the primary goal of making them more attractive to Financial Issues investors Inadequate Financing Poor Cash Management Excessive overhead Poor inventory control 5 Discuss the principal sources of funding for small businesses. 4. Corporate Sponsors: Major corporations run programs to provide selected small companies with financial and Equity: You give investors a share of the business in exchange for managerial assistance their money 5. Credit Cards and lines of credit: Some entrepreneurs have Debt: Borrowed money that must be repaid used them to launch successful, multimillion-dollar businesses, others have damaged their credit ratings and Private Financing for Seed money: The first infusion of capital used racked up debts to get a business started: 6. Small Business Administration Assistance Private Finance (6): a. Offers several financing programs for small 1. Banks and Microlenders: businesses a. Banks require a company to have an established b. Apply to a regular bank or credit union, which track record, positive cash flow, and collateral, actually provides the money buildings/equipment, to back the loan. c. Manages a microloan program in conjunction with not-for-profit, community-based lenders and backs Microlenders: Organisations, often not-for- profit, that lend smaller small business investment companies that offer amounts of money to business owners who might not qualify for loans, venture capital, or a combination of the two conventional bank loans. Public Financing: 2. Venture Capitalists: Investors who provide money to finance The shares offered for sale at this point are the company’s new businesses in exchange for a portion of ownership, with initial public offering (IPO). Going public is an effective the objective of selling their shares at a significant gain. method of raising needed capital It can be an expensive and time-consuming process with no 3. Angel Investors: Private individuals who invest money in guarantee of raising the start-ups, usually earlier in a business’s life and in smaller amount of money needed. amounts than VCs are willing to invest or banks are willing to lend Crowdfunding: Soliciting project funds, business investment, or business loans from members of the public. 6 Explain the advantages and disadvantages of franchising. Money Side of Franchising Initial Franchising Costs: Franchise: A business arrangement in which one company (the 1. One time payment called the franchise fee: for franchisee) obtains the rights to sell the products and use various launching franchise: elements of a business system of another company (the franchisor). a. Access to the system along with a variety of start-up services that can include site location Franchisor: A company that licences elements of its business studies, market research, training… system to other companies (franchisees). b. Costs associated with buying, building, and The company that founded the business equipping a facility as needed ○ A franchisee must also meet minimum levels of liquid Franchisee: An individual or company that buys the rights to use assets and personal net worth some aspect of that business Ongoing Franchising Costs: A business owner who pays for the rights to sell the 1. Royalty Fees: based on percentage of revenue products and use the business system of a franchisor. 2. Regular payments to an advertising fund Types of Franchisee: Advantages of Franchising (8) 1. Business-format franchise: 1. You can be your own boss a. Franchisee gains the right to use an entire business 2. Hire your own employees system, including brand names, store designs, 3. Benefit directly from your own hard work operating process 4. Added benefit of instant name recognition 2. Product-distribution franchisee: 5. National advertising programs a. Independent business owners to affiliate with well 6. Standardised quality of goods and services known brand names and sell popular products 7. A support network of other franchisees without the constraints of operating within a strictly 8. Financial assistance defined business format b. Right to sell products as part of franchisors Disadvantages of franchising (3) distribution system 1. No flexibility in many systems; follow due to the brand 2. Little control over decisions the franchisor makes that affect the entire system 3. No option to independently changing your business in response to the franchise system no longer working 7 Define machine learning and deep learning , and describe their importance to contemporary business. Machine Learning: The general capability of computers to learn and adapt without receiving explicit human instructions. Deep Learning: Deep learning is a type of machine learning that uses layers of artificial neural networks to process incoming data and dynamically learn how to become more accurate Both categories are used widely in business today with applications in virtually every functional area. Importance to Business 1. Text analytics, including understanding social media conversations and summarising 2. Documents 3. Interactive chatbots 4. Image analysis, including identifying people in photos 5. Video analysis, including identifying scenes, following people or objects through a video 6. Text translation 7. Speech-to-text and text-to-speech conversion 8. Manufacturing and maintenance optimization 9. Fraud detection in financial services 10. Content moderation to stop objectionable content from being posted online 11. Virtual health-care assistants 12. Automated and assisted decision-making