CHAPTER

FIVE

Forms of
Business Ownership
 World’s 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.
 America’s
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
 Largest U.S. Companies
Market Capitalization
(In Millions)
1. Microsoft $602,432
2. General Electric 507,216
3. Cisco Systems 366,498
4. Wal-Mart Stores 307,865
5. Intel 275,008

Source: Wall Street Journal

 Basic Forms
of Ownership
Number Sales
• Sole Proprietorship
74% 5%

• Partnership
8% 5%
• Corporation
18% 90%
Forms of Business Ownership
 Sole Proprietorship

Advantages Disadvantages
 Ease of start/end  Unlimited liability
 Limited financial
 Be your own boss resources
 Difficulty in mgmt.
 Pride of ownership  Time commitment
 Few fringe benefits
 Retain profit
 Limited growth
 Limited life span
 No special taxes
 Partnership
Advantages Disadvantages
More financial Unlimited liability
resources
Division of profits
Shared mgmt.
Disagreements
Longer survival among partners

Difficult to terminate
Types of Partnerships
General Limited

GP
Passive Passive
GP Investor
GP Investor
GP
GP

Passive
Investor
 Uniform
Partnership Act
Common Ownership

Shared Profits & Losses

Management Participation
 Types of Corporations
Regular ‘C’

Subchapter ‘S’

Limited Liability Corporation

 Corporation
Advantages Disadvantages
More money for Initial cost
investment
Limited liability Paperwork
Separation of
ownership/mgmt. Two tax returns
Ease of ownership
change Termination
Perpetual life difficult
Size
Double taxation
 S Corporations
S No more than 75 S <25% of income
shareholders can be passive
S Shareholders S Tax rate = +5%
S Individuals S Slower-growing
S Estates companies
S U.S. citizens or S Benefits change with
residents new tax rules
S 1 class of stock
Figure 5.4 How Owners Affect Management
 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%
 External Corporate Growth
• Merger/Acquisition
– Horizontal
– Vertical
– Conglomerate
• Leveraged Buyout
(LBO)
 Types of
Mergers/Acquisitions
A Horizontal B
= AB

Conglomerate

Vertical
 Leveraged Buyout
Individual + Loan = Purchase of Company

Purchase Loan

Company = Collateral
 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
 Top Growth Franchises
#New Stores in 1999
Kumon Math & Reading Centers4,586
McDonald’s 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
 Survival After Startup
Franchise vs. Independent
100
90
80
70
60
50 Independent
40 Franchise
30
20
10
0
1st Year 5th Year 10th Year
 Franchises
Advantages Disadvantages

+ Management & - High start-up costs

marketing ass’t - Shared Profit
+ Personal ownership - Management
+ Recognized name regulation
- Coattail effects
+ Financial advice &
ass’t - Restrictions on
selling
+ Lower failure rate - Fraudulent
franchisors
 Franchise System
Franchiser

Franchisee

Franchise Agreement
Franchise Contract
Franchisor, Inc.
Branded
Product/Service

Performance
Monitoring

$$$$$

Franchisee
 Franchisor
 Assigns Territory  Provides
Training/Support
 Provides Financial
Aid/Advice  Business Expansion
Using O.P.M.
 Offers Merchandise/
Supplies at
Competitive Price
 Franchisee
Pays Up-Front Costs
Makes Monthly Payment to Franchisor
Runs Business by Franchisor’s
Rules/Procedures
Buys Materials from Franchisor/ Approved
Supplier
 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
 Benefits of a
Home-Based Business
Flexible work hours
.
Quality lifestyle
Doing the work of
your choice
Opportunity to
expand using
technology
Self-motivation