Ferrell Hirt Ferrell
A CHANGING WORLD
EIGHTH EDITION
FHF
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
part
Starting and Growing
A Business
2
CHAPTER 4 Options for Organizing Business
CHAPTER 5 Small Business, Entrepreneurship, and Franchising
FHF
4-2
Forms of Business Ownership

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
Sole proprietorship
Partnership
Corporation
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4-3
Comparing Forms of Business
Ownership
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4-4
Sole Proprietorship
Businesses owned and operated by one
individual; the most common form of business
organization in the United States
 15-20 million in the U.S.
 Nearly three-quarters of all businesses
 Men 2x more likely than women to start own business
o
o
o
o
o
Restaurants
Hair salons
Flower shops
Dog kennels
Independent grocery stores
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Sole Proprietorship
Advantages
Disadvantages
Ease and cost of formation
Unlimited liability
Secrecy
Limited sources of funds
Distribution and use of profits
Limited skills
Flexibility and control of the business
Lack of continuity
Government regulation
Lack of Qualified Employees
Taxation
Taxation
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Partnership
A form of business organization defined by the
Uniform Partnership Act as “an association of two
or more persons who carry on as co-owners of a business
profit”
 General partnership
 Limited partnership
 Articles of Partnership
• Legal documents that set forth the basic agreement between partners
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Two Types of Partnerships
General Partnership

A partnership that involves a complete sharing in both
the management and the liability of the business
Limited Partnership

A business organization that has at least one general partner, who assumes
unlimited liability, and at least one limited partner whose liability is limited
to his or her investment in the business
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Articles of Partnership
 Name, purpose, location
 Duration of the agreement
 Authority and responsibility of each partner
 Character of partners (i.e., general or limited, active or silent)
 Amount of contribution from each partner
 Division of profits or losses
 Salaries of each partner
…continued on next page
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Articles of Partnership
 How much each partner is allowed to withdraw
 Death of partner
 Sale of partnership interest
 Arbitration of disputes
 Required and prohibited actions
 Absence and disability
 Restrictive covenants
 Buying and selling agreements
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Partnerships
Advantages
Disadvantages
Ease of organization
Unlimited liability
Capital & credit
Business responsibility
Knowledge & skills
Life of the partnership
Decision making
Distribution of profits
Regulatory controls
Limited sources of funds
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Corporations
Legal entities created by the state whose assets and
liabilities are separate from its owners
 Have most of the rights of people
 Typically owned by shareholders /stockholders
 A corporation is created (incorporated) under the laws of the state in which it
incorporates
 The individuals creating the corporation are called incorporators
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Articles of Incorporation
Legal documents filed with basic information
about the business with the appropriate state office
(often the Secretary of State)
 Common elements:
 Name & address of corporation
 Objectives of the corporation
 Classes of stock (common, preferred, voting, nonvoting) and number of
shares of each class of stock
 Financial capital required at time of incorporation
…continued on next page
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Articles of Incorporation
 Provisions for transferring shares of stock
 Regulation of internal corporate affairs
 Address of business office
 Names and addresses of the initial board of directors
 Names and addresses of the incorporators
 The state issues a corporate charter based on the
information in the articles of incorporation.
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Types of Corporations
 A corporation doing business in the state in which
it is chartered is a domestic corporation.
 When a corporation does business in other states, it is then
referred to as a foreign corporation.
 If a corporation does business outside the nation in which it is
incorporated, it is termed an alien corporation.
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Types of Corporations
Private Corporation
 A corporation owned by just one or a few people who are
closely involved in managing the business
Public Corporation
 A corporation whose stock anyone may buy, sell, or trade
Initial Public Offering
 A private corporation who wishes to go “public” to raise additional capital
and expand. The IPO is selling a corporation’s stock on public markets for
the first time
…continued on next page
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Types of Corporations
Quasi-Public Corporation
 Corporation owned and operated by the federal, state,
or local government
 NASA, U.S. Postal Service
Non-Profit Corporation
 Focuses on providing a service rather than earning a profit but is not owned
by a government entity
 Mercy Corps., The Conservation Fund
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Elements of a Corporation
Board of Directors: A group of individuals, elected
by the stockholders to oversee the general operation
of the corporation, who set the corporation’s long-range
objectives.
 Inside Directors
 Individuals who serve on a board and are employed by the corporation
(usually executives of the corporation)
 Outside Directors
 Individuals who serve on a board who are not directly affiliated with the
corporation (usually executives of other corporations)
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Stock Ownership
Preferred Stock
 A special type of stock whose owners, though not generally having a say in
running the company, have a claim to profits before other stockholders do.
Common Stock
 Stock whose owners have voting rights in the corporation, yet do not receive
preferential treatment regarding dividends.
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Corporations
Advantages
Disadvantages
Limited liability
Double taxation
Transfer of ownership
Forming a corporation
Perpetual life
Disclosure of information
External sources of funds
Employee-owner separation
Expansion potential
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4-20
Other Types of
Business Ownership
Joint Venture
 A partnership established for a specific project or for a limited time
 Control can be divided equally, or with one party taking more responsibility
for decision making
S-Corporation (S-Corp)
 Corporation taxed as though it were a partnership (no double-taxation) with
restrictions on shareholders.
 Very popular with entrepreneurs
…continued on next page
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Other Types of Business Ownership:
S-Corporations
Subchapter S-Corporation
 Popular because the form eliminates double-taxation
 Combines the taxation structure of partnerships with legal
environment of C-corporations
 Qualifications:
• Only 1 class of stock
• Less than 100 shareholders
• Shareholders must be U.S. citizens or residents
…continued on next page
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Other Types of Business Ownership:
Limited Liability
Limited Liability Company (LLC)
 Form of ownership that provides limited
liability and taxation like a partnership but
places fewer restrictions on members
…continued on next page
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4-23
Other Types of Business Ownership:
Cooperative
Cooperative (Co-Op)
 An organization composed of individuals or small
businesses that have banded together to reap the benefits
of belonging to a larger organization
 Can take many different forms (retail, housing, social, worker)
 Co-ops are increasingly popular with small farmers and artisans
 Gives small producers more power as a group
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Trends in Business Ownership
Merger
The combination of two companies (usually corporations)
to form a new company
 Horizontal merger: When firms that make and sell similar products merge.
 Vertical merger: When companies operating at different but related levels of
an industry merge.
 Conglomerate merger: When firms in unrelated industries merge.
…continued on next page
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4-25
Trends in Business Ownership
Acquisition
The purchase of one company by another, usually by buying
its stock and/or assuming its debt.

Corporate raider: A company or individual who wants to acquire or take over
another company and first offers to buy some or all of its stock at a premium in a
tender offer.

Poison pill: The firm allows stockholders to buy more shares of a stock at lower
prices than the current market value to head off a hostile takeover.

Shark repellant: Management requires a large majority of stockholders to approve a
takeover.

White knight: A more acceptable firm that is willing to acquire a threatened
company.
…continued on next page
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Trends in Business Ownership
Leveraged Buyout (LBO)
A purchase in which a group of investors borrows money from banks
and other institutions to acquire a company (or a division of one), using the
assets of the purchased company to guarantee repayment of the loan.
 Mergers and acquisitions (particularly the merger mania in the late 20th
century) have been criticized
 Executives have to focus excessively on avoiding takeovers, not on
managing the business
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part
Starting and Growing
A Business
2
CHAPTER 4 Options for Organizing Business
CHAPTER 5 Small Business, Entrepreneurship, and Franchising
FHF
5-2
Entrepreneurship
[
The process of creating and
managing a business to achieved
desired objectives
]
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5-3
What is Small Business?
 “Smallness” is relative
 Small business is any independently owned and
operated business, not dominant in its competitive
area
 Employs less than 500 people
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5-4
Impact of Small Businesses
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5-5
Small Businesses Represent
 64% of new net jobs, annually, created in the
last 15 years
 99.7% of all businesses employ fewer than
500 people
 89% of businesses employ fewer than 19 people
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5-6
Small Business Innovation
Small businesses represent 55%
of all innovations
 Airplane
 Audio tape recorder
 Double-knit fabric
 Fiber-optic examining equipment
 Heart valve
 Optical scanner
 Personal computer
 Soft contact lenses
 Zipper … and much more
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5-7
Traits of Successful
Entrepreneurs
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5-8
Popular Industries for
Small Business
Especially attractive industries to entrepreneurs:
 Retailing and wholesaling
 Services
 Manufacturing
 High technology
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Retailing and Wholesaling
Selling directly to consumers

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Music stores
Sporting-goods shops
Dry cleaners
Boutiques
Drugstores
Restaurants
Hardware stores
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5-10
Services and Manufacturing
Services
 Service sector is 80% of U.S. jobs
 Attracts individuals whose skills are not required by
large firms
Manufacturing
 Small manufacturers excel at customization
 The Malcolm Baldridge National Quality Award rewards
innovative small manufacturing firms
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5-11
High Technology
Businesses that depend heavily on advanced
scientific and engineering knowledge.
 40% of high-tech jobs are with small businesses
 The government offers small business grants for high-tech
companies
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Small Business Ownership
Advantages
Disadvantages
Independence
High stress level
Costs
High failure rate
50% of all new businesses fail within the first 5
years
Flexibility
Undercapitalization
Lack of funds to operate normally
Focus
Managerial inexperience or
incompetence
Reputation
Inability to cope with growth
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Starting a Business




Start with a concept or general idea
Create a business plan
Devise a strategy to guide planning & development
Make decisions
•
•
•
•
Form of ownership
Financing
Acquire existing business or start new business?
Buy a franchise
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5-14
The Business Plan
A precise statement of the rationale for
the business and a step-by-step explanation
of how it will achieve its goals. Acts as a guide
and reference document.
 Explanation of the business
 Analysis of competition
 Income/Expense estimates
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Forms of Business Ownership
 Sole Proprietorship
 Partnership
 Corporation
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Financial Resources
Provide your own personal capital
 Cash money
 Obtain capital
Financing options
 Loans
 Stocks
 Equity financing
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Equity Financing
[
Selling or borrowing against the value of
an asset such as an (automobile, insurance
policy, savings account) to obtain funds to
operate a business
]
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Venture Capitalists
[
Persons/organizations that agree to
provide funding for a new business in
exchange for an ownership interest or
stock. Usually requires a sharing of
ownership/control
]
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Debt Financing
[
Borrowing financial resources typically
from a bank or lending institution– often
collateral is needed
]
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Line of Credit
[
An agreement by which a financial
institution promises to lend a business a
predetermined sum on demand
]
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Starting from Scratch vs.
Buying an Existing Business
Starting from scratch can be expensive
and will require a lot of promotional efforts
to familiarize customers with the business
 Existing businesses have the advantage of a built-in network of
customers, suppliers and distributors
 Reduces guesswork
 Involves taking on any problems the business already had
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Franchising
A license to sell another’s products or to use
another’s name in business, or both
 Franchiser
 The company that sells a franchise
 Franchisee
 The purchaser of a franchise
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Franchises
Advantages
Disadvantages
Training & support
Fees and profit sharing
Brand name appeal
Standardized operations
National advertising
Restrictions on purchasing
Financial assistance
Limited product line
Proven products
Possible market saturation
Greater chance for success
Less freedom in decisions
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Help for Small
Business Managers
 Organizations and programs exist to help
small businesses
 Small Business Administration
 Small Business Development Centers
 Service Corps of Retired Executives
 Active Corps of Executives
 Small Business Institutes
 U.S. and Local Departments of Commerce
 Other small businesses
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The Future for Small Business
Demographic Trends
 The Baby Boomers
 Generation Y (Millennials)
 Immigrants and shifting demographics
…continued on next page
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The Future for Small Business
Technological & Economic Trends
 Internet usage continues to increase
 Increase in service exports
 Economic turbulence
 Deregulation of the energy market & alternative fuels
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Big Businesses Acting Small
Common Approaches
 Large firms emulate smaller ones to improve
bottom line
 Downsizing (Rightsizing)
• Acting small from inception – Southwest Airlines
 Intrapreneurs
• Individuals in large firms who take responsibility for the
development of innovations within the organization
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