Business OwnershipBusiness OwnershipChapter 8Chapter 8

It’s just paper. All I own is a It’s just paper. All I own is a pickup truck and a little pickup truck and a little

Walmart stock.Walmart stock.

………………………………………………………………....Sam Sam WaltonWalton

Sole ProprietorshipSole Proprietorship

A business owned and managed by A business owned and managed by one individual; the business and one individual; the business and the owner are one and the same in the owner are one and the same in the eyes of the law the eyes of the law

Sole ProprietorshipSole Proprietorship

AdvantagesAdvantages Easy to start upEasy to start up Ease of managementEase of management Owner keeps the profitsOwner keeps the profits Owner does not have to Owner does not have to

pay separate business pay separate business income taxincome tax

Psychological satisfactionPsychological satisfaction Easy to discontinueEasy to discontinue

Sole ProprietorshipSole ProprietorshipDisadvantagesDisadvantages Unlimited liabilityUnlimited liability Limited access to raising Limited access to raising

financial capitalfinancial capital Small size-may have Small size-may have

limited inventorylimited inventory Limited managerial Limited managerial

experienceexperience Difficulty of attracting Difficulty of attracting

qualified employeesqualified employees Limited lifeLimited life

PartnershipPartnershipAn association of An association of

two or more two or more people who co-people who co-own a business own a business for the purpose for the purpose of making a of making a profitprofit

A partnership agreement or the Uniform Partnership ActA partnership agreement or the Uniform Partnership Act

PartnershipPartnershipAdvantagesAdvantages Ease of start upEase of start up Ease of managementEase of management Lack of special taxes Lack of special taxes

on partnership’s on partnership’s incomeincome

Larger pool of capitalLarger pool of capital Ability to attract Ability to attract

limited partnerslimited partners More efficient More efficient

operations that come operations that come from larger sizefrom larger size

PartnershipPartnershipDisadvantagesDisadvantages

Unlimited liability Unlimited liability of at least one of at least one partnerpartner

Limited lifeLimited life Lack of continuityLack of continuity Potential for Potential for

personality and personality and authority conflictsauthority conflicts

Special PartnershipsSpecial Partnerships Limited partnership-one or more partners

are not active in the running of the business, and whose liability for the partnership’s debt is restricted to the amount invested in the business

General partnership- all partners are jointly responsible for management and debts(most common form)

Articles of Partnership: contract between partners spelling out the rules of partnership.

Dividing profit Dividing responsibility Admitting new partners Buying out partners

CorporationsCorporations

A separate legal entity apart from A separate legal entity apart from its owners which receives the its owners which receives the right to exist from the state in right to exist from the state in which in which it is incorporatedwhich in which it is incorporated

DomesticDomestic ForeignForeign AlienAlien Publicly heldPublicly held Closely heldClosely held

Corporations- 20% of Business 74%-profits

CorporationsCorporationsCertificate of IncorporationCertificate of Incorporation NameName Statement of purposeStatement of purpose Time horizonTime horizon Names and addresses of incorporatorsNames and addresses of incorporators Place of businessPlace of business Capital stock authorization’Capital stock authorization’ Capital required at time of incorporationCapital required at time of incorporation Provisions for preemptive rightsProvisions for preemptive rights Restrictions on transferring sharesRestrictions on transferring shares Names and addresses of officersNames and addresses of officers By-lawsBy-laws

Corporate Structure

StockCommon stock – (owners are voters) gives a voice in how the corporation is run and a share in variable dividends – high dividends if profits are high. The Board of Directors may wish to withhold all dividends if the money is needed for plant expansion or payment on debts. Because they can vote, they determine how a corporation is managed. They get one vote for every share they own. In a good year, they will receive a higher dividend than preferred stockholders. (Preferred stock dividends are fixed, common stock is not, so they are taking more risk.)

Stock (cont)

Preferred Stock – (non-voters) guaranteed dividends that are paid from profits before the company pays any dividends on common stock. If the company is unable to pay this fixed dividend in full, it makes up the difference when the company’s profits increase. They are like a silent partner because they can not vote and have no say in how the business is run.

On this day, Sam WaltonSam Walton,the richest man in the world,had a paperpaper lossloss of of $1.5 $1.5 billionbillion.

508508 points points2424% drop% dropin one dayin one day

10-19-8710-19-87

CorporationsCorporationsAdvantagesAdvantages Ease of raising financial Ease of raising financial

capitalcapital Limited liability for its Limited liability for its

ownersowners Board of directors can Board of directors can

hire professional hire professional managers to run the firmmanagers to run the firm

Unlimited lifeUnlimited life Ease of transferring Ease of transferring

ownership of the ownership of the corporationcorporation

CorporationsCorporationsDisadvantages Double taxation of

corporate profits Difficulty and expense of

getting a charter Shareholders (owners) have little voice in how the

business is run Subject to more government

regulations than others forms of business

Franchises Franchising is a form of business organization in which a firm that

already has a successful product or service (franchisor) licenses its trademark and method of doing business to another business or individual (franchisee) in exchange for a franchise fee and an ongoing royalty payment.

Some franchisors are established firms (like McDonald’s) while others are first-time enterprises being launched by entrepreneurs.

Franchisor- actual owner of the business that lets other investors rent or lease its name, business profile, and way of doing business

Franchisee- investor who rents or leases the business model from the franchisor and then hope to recoup his/her investments by selling the franchisor’s goods or service

15-15-2121

Advantages and Disadvantages of Buying a Franchising

Advantages Disadvantages

•.•A proven product or service

• within an established market.• An established trademark or

business system.

• Franchisor’s training, technical support, and managerial expertise.

• An established marketing

network.

• Availability of financing (varies).

• Potential for business growth.

•Cost of the franchise.

• Restrictions on creativity.

• Duration and nature of commitment.

• Risk of fraud, misunderstandings, or of franchisor commitment.

• Poor performance on the part of other franchisees.

• Potential for failure.

Stop and ThinkStop and Think If you started your own business If you started your own business

what would it be?what would it be? What are some of the 4 Factors of What are some of the 4 Factors of

production you would need.production you would need.2 examples for each2 examples for each

Growth through Reinvestments

Business revenue can be used for Investment in factories Machinery Technologies

Before reinvestments: Must estimate its cash flow. First records its total sales and then

subtracts all expenses, taxes, and depreciation = net income

Net income + depreciation = cash flow (or the bottom line) real measure of business profit.

Decide to reinvest part of cash flow or additional sales and more profits

Figure 3.4Figure 3.4

Growth Through Mergers (cont)

Horizontal mergers: joining of firms that make the same product (Nextel and Sprint)

Vertical Merger: joining of firms involved in different stages of manufacturing or marketing

Growth Through Mergers Firms merge, one gives up it

separate legal identity Company may merge with another

to Grow faster Become more efficient (synergy) Economies of scale (larger size) Acquire or deliver a better product

(diversification) Eliminate a rival Change or lose its corporate identify

Growth Through Mergers (cont)

• Conglomerate: composed of four or more businesses• Marketing unrelated

products • None are responsible

for a majority of sales

• Multinational: corporation with manufacturing and service operations in several countries-Subject to each

nation’s business regulations

Entrepreneurial Startup: Incubators

Incubator: Program designed to support successful development of startups by providing business resources. business, marketing, and networking

advice computing resources (computers, net

access, servers) financial advisors management teams access to loans and banks access to angel investors and/or venture

capitalists legal advisors (such as for intellectual

property rights)

Venture Capitalists

venture capital ("VC"): Financialresources given to early-stage companies. given to startups by VC firms (groups) VC firm gets % of profits or equity (stock) different from bank loans; does not need

to be paid back

Venture Capitalists (cont)

Stages of VC financing: seed funding: initial minimal funds; often given by

angels start-up: early funds from VC firm for marketing/dev growth ("series A"): large investment ($1-2M) for

preferred stock second round: company is successful, but not

profiting expansion ("mezzanine"): $ given to a newly

profitable company exit/bridge: VC firm sells stock once company

matures

Angel Investors Angel investor: An affluent individual who

provides initial capital for a business start-up. amount is generally smallish (~$10-30k) gets company off the ground to prototype stage often decided quickly and on a fairly informal

proposal angels are accredited investors to comply with

SEC regulations in US, many angels (≥40%) are in Silicon Valley

other sources: NYC, Seattle, Austin, Boston, n, Boston, NC Research TriangleNC Research Triangle

Angel Investors (cont)

angels are compensated with: ownership equity (a percentage of

ownership of the company) implies company's value (e.g. $10k for 5% stock => $200k value)

convertible debt (options to buy stock in the company later)

Crowdfunding?Crowdfunding is a method for obtaining project funding, by soliciting contributions from a large group of people, and especially from an online community.

Why does it work?

Small donations from many people can Small donations from many people can raise a lot of money.raise a lot of money.

By tapping into your online social By tapping into your online social connections, you can reach a much connections, you can reach a much broader audience in less time than broader audience in less time than traditional fundraising processes.traditional fundraising processes.

Be a thinker With a neighbor develop 2

examples of each type of mergerVertical

Horizontal

Conglomerate

Why would companies ever want to merge????

Community and Civic Organizations

Nonprofit Organization: business to promote its members’ collective interest, not seek financial gain (Bill Gates foundations) Incorporate to take advantage of a

corporation’s unlimited life and limited liability

If money remains after expenses are paid, the B.O.D. may apply to other projects

Cooperatives Voluntary association of people who carry on

an economic activity that benefits its members Consumer Cooperatives: buy food and other

necessities in bulk Members donate time to the co-op Members pay lower prices for goods

Service Co-ops: credit unions, offer services to its members at lower rates

Producer Co-ops: help members, farmers, promote or sell their products

Labor, Professional, and Business Organizations

Labor unions: represent workers’ interest and negotiate with management through collective bargaining

Professional association: set standards for those in the profession and influence government policies on issues concern members’ interest (NCSS)

Business Associations: industries or trade associations that represent specific businesses (BBB) )

Government Direct Role

Agencies produce and distribute goods and services to consumers such as the TVA (electricity) or US Postal Service

Gov’t Corp: Board of directors Congress’ money v.

investors’ money

Indirect Role: Regulates

public utilities Grants money

to people in form of Social Security and student financial aid