Forms of Business Ownership
Business 40
Week 4
Carole K. Meagher
9 February, 2005
Agenda




Roll call, introductions, project ideas
DVD
Article analysis
Before you leave tonight…
 I need a roster with your group and project
idea
 Week 4 Lead-in
“Joe to Go”
 Cluster into your groups
 Think about your own project while
watching this DVD
 Best practices/Good ideas you’ll borrow?
 Lessons learned you’ll watch out for?
Starting your own business
 Yes, decide what type you want to be and
why…
 Sole proprietorship – just get started!
 Partnership – pair up with a friend
 Corporation - function separate from owners
Sole Proprietorship
 Advantages
 Ease of start/end
 Be your own boss
 Disadvantages
 Unlimited liability
 Limited financial
resources
 Retain profit
 Difficulty in managment
 Time commitment
 Few fringe benefits
 Limited growth
 No special taxes
 Limited life span
 Pride of ownership
 Leave legacy
Types of Partnerships




General
Limited
Master Limited
Limited Liability
Partnership
 Advantages
 More financial
resources
 Shared mgmt.
 Longer survival
 No Special Taxes
 Disadvantages
 Unlimited liability
 Division of profits
 Disagreements
among partners
 Difficult to
terminate
Types of Corporations
Regular ‘C’
S Corporation
Limited Liability Companies
Corporations
 Private- Not Traded on Any Stock Exchange
 Public- Shares Are Traded on 1 or More
Stock Exchanges
 Non-Profit- Performs Public Service, Has
Special Tax Considerations To Encourage
Formation
Corporation
 Advantages
 More money for
investment
 Limited liability
 Separation of
ownership/mgmt.
 Ease of ownership
change
 Perpetual life
 Size
 Disadvantages





Initial cost
Paperwork
Two tax returns
Termination difficult
Stockholder & Board
Conflict
 Double taxation
How Owners Affect Management
S Corporations
No more than 75
shareholders
<25% of income
can be passive
Individual or
Estates
Slower-growing
companies
U.S. citizens or
residents
Benefits change
with new tax rules
1 class of stock
Limited Liability Companies
 Advantages
 Limited Liability
 Tax Choice
 Flexible Ownership Rules
 Flexible Profit & Loss
Distribution
 Operating Flexibility
 Disadvantages
 No Stock
 Limited Life Span
 Fewer Incentives
 Taxes
 Paperwork
Why Mergers Don’t Work
 Companies Overpay to Acquire Another Firm
 Acquiring Company Overestimates Cost Savings
and Synergies
 After Merger, Managers Disagree About
Integrating Operations
 After Merger, Cost Cutting Obsession Hurts
Business Costing Top Employees & Customers
GM’s Ownership In:
Source: USA TODAY
Types of Mergers
 Horizontal
 Vertical
 Conglomerate
Leveraged Buyout
Individual
+
Loan = Purchase of Company
Purchase Loan
Company = Collateral
Franchise System
Franchise
Agreement
Franchisor
Franchisee
Franchise Contract
Franchisor, Inc.
Branded
Product/Service
Performance
Monitoring
$$$$$
Franchisee
Franchisor
 Assigns Territory
 May Provide Financial
Aid/Advice
 Offers Merchandise/
Supplies at
Competitive Price
 Provides
Training/Support
 Business Expansion
Using O.P.M.
Franchisee
 Pays Up-Front Costs
 Makes Monthly Payment to
Franchisor
 Runs Business by Franchisor’s
Rules/Procedures
 Buys Materials from Franchisor/
Approved Supplier
Fastest Growing Franchises (2002)
Company
Since
Type
# Stores
Curves
1995
Women’s Only
Fitness
3,778
Subway
1974
Submarine Sandwich
14,800
7-Eleven
1964
24-Hr. Convenience
3,761
Taco Bell
1964
Mexican Fast Food
5,417
Jani-King
1974
Commercial Cleaning
7,843
Source: Entrepreneur, 2003
Franchises
+ Advantages
+ Management &
marketing assistance
+ Personal ownership
+ Recognized name
+ Financial advice &
assistance
+ Lower failure rate
-
Disadvantages
-
High start-up costs
Shared Profit
Management
regulation
Coattail effects
Restrictions on selling
Fraudulent
franchisors
Cost of Fast-Food Franchise
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 Franchise
.
Flexible work hours
Quality lifestyle
Doing the work of your
choice
Opportunity to expand
using technology
Self-motivation
Franchising & E-Commerce
Technology- Faster
Customer Service
Access to International
Markets
Cooperatives
Farm Cooperative
Owned &
Controlled by
People Who Use It
Pool of Resources
Economic Power
Count off by 3s…
1. Why did Demos decide to start White
Wave? What did he think he could do
differently/better?
2. Why did Engles want to acquire White
Wave? In other words, why was WW
growing and Dean foods not growing?
3. Why did Engles keep Demos and his team
around? Couldn’t he just run the operation
with his own people?
Break…
Small Business Revival
 Shift to Services
 CAD/CAM Lessening
Advantages of Big
Manufacturing
 Maturation of Baby
Boomers
 More Women in
Workforce
1970 1980 1990
2000
Entrepreneurship
Definition
Characteristics of
Successful
Entrepreneurs
Intrapreneur
Micropreneur vs.
Home-Based
Corporation
Entrepreneur
Small Business- Advantages
Personalized Service/
Personal Contact
Flexibility
Lower Costs
Innovation Opportunities
Small Business-Disadvantages
- Limited Experience
- Long Hours
- Insufficient Capital
- High Failure Rate
Why People Start
Their Own Businesses
Live Where/How I Like
Like The Challenge
Build For Family
Control My Life
Use My Abilities
0
Source: BFIB/VISA Card Primer
10
20
30
40
50
60
Reasons Women Leave Jobs in Big
Companies to Start Business
e
ec
og
ni
tio
n
Le
ss
Po
Pa
rt
lit
ne
ic
s
rs
/C
ol
le
ag
In
ue
flu
s
en
ce
St
ra
te
gy
M
or
e
M
on
ey
R
is
kTa
ki
ng
Source: FSB, March 2001
R
Ti
m
ily
Fa
m
M
or
e
B
et
te
rB
en
ef
its
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Self- Perception of
Small Business Owners
Mavericks
Artists
Rainmakers
Heroes
Managers
0%
Source: USA Today, 5/20/03
5%
10%
15%
20%
25%
30%
35%
Who Starts
New Businesses?
AGE AT START-UP
18 - 24
25 - 34
35 - 44
45 - 54
55+
8%
71%
13%
6%
2%
Entrepreneurial Attributes
A. Self-Directed & SelfDisciplined
B. Self-Nurturing
C. Action-Oriented
D. Highly Energetic
E. Tolerant of Uncertainty
Hours per Week
Entrepreneurs Worked 1st Year
1 - 39 hours
8%
40 - 49 hours
15%
50 - 59 hours
23%
60 - 69 hours
28%
70 - 79 hours
13%
80 + hours
12%
Reasons for Growth of
Home-Based Businesses
Technology
Downsizing
Attitudes
Tax Advantages
Most Common Types of
Home-Based Businesses
Sales &
Distribution
10%
Arts/Design
Creative
13%
Personal
Svcs.
14%
Source: Independent Insurance Agents of America
Financial &
Real Estate
5%
Bldg. Trades
31%
Bus.
Services
27%
Home Office Owners
Challenges
 New Customers
 Time Management
 Work vs. Family
 City Ordinances
 Risk
Focus
 Find Opportunity
 Results vs. Routine
 Profit vs. Paycheck
 New Ideas
 Long Term vs. Short
Term
Government Efforts

Immigration Act of 1990Investor Visa
 Enterprise Zones
 Incubators
What is Small Business?
Independent
Not Dominant
< 500 Employees
U.S. Small Businesses
 20 Million Full/Part-Time Businesses
 75% of New Jobs
 45% of Gross Domestic Product
 Jobs
 80% of Americans = 1st Job in Small Business
 75% of New Jobs = Small Business
 Women-Owned Growing Rapidly
Small Business Success
Learn from Others
Get Experience
Take Over Successful Firm
Successful Business
Management Requirements
 Business Plan
 Adequate Funding
 Lenders/Investors
 “Angels”
 Venture Capitalists
 Professional Advice/Help
 Know Your Customer
 Manage Human Resources
 Keep Good Records
Small Business Strategies
 Examine Marketing & ID Areas for Growth
 Profile Best Customers & Market to Similar
Prospects
 Invest in Sales Training & Technology
 Refresh Business Perspective With Outside
Views
 Streamline Business & Eliminate Waste
Saving A Business In Trouble
React/Not
Overreact
Understand
Financial Situation
Find Professional
Help
Develop “Recovery
Plan”
Be Visible
Confident Leader
Remind Employees
of Stake in
Business
Don’t Get Stung By
Killer “Bankruptcy”
Capital Sources of
Successful Entrepreneurs
By Company Age
100%
80%
60%
40%
20%
0%
SOURCE: FSB, March 2001
Venture
Capital
Family
Bank
Loan
< 3 Years
6+ Years
Credit
Cards
Personal
Funds
Reasons for a
Banker To Say “No”
$ I don’t know
$ Your numbers don’t
enough about
support the loan
request.
you or your
business.
$ Your collateral is
lacking.
$ You haven’t
clearly stated
$ Your business does
not support the loan
why you need the
on its own merits.
money.
Small Business Collaborators
 Small Business Administration (SBA)
 Microloan program
 SBICs
 SBDCs
 Service Corps of Retired Executives
(SCORE)
 Active Corps of Executives (ACE)
Ways to Improve
Banking Relationships
1) Provide Bank With Business Plan,
Brochures, Business Cards, etc.
2) Describe Business, Financial Situation,
Plans
3) Ask About Scope of Bank Services
4) Express Interest In Banker’s
Background- Family, Hobbies, etc.
5) Follow Up With Phone Calls, Visits
Source: St. Louis Business Monthly, August 2002
Small Business & International
Prospects
Positives
1. World Market
2. Absorb Excess
Inventory
3. Soften U.S.
Downturns
4. Extend Product Life
Negatives
1. Financing Difficult
2. How to Get
Started?
3. Lack of Cultural
Understanding
4. Paperwork
International Small Business
Advantages
 Deal With Individuals
 Faster Shipping
 Variety of Suppliers
 Professional Service
Information
 Dept. of Commercewww.bxa.doc.gov
 SBA- Internationalwww.sba.gov/hotlist/int
ernat.html
Week 5 Lead-in
 Production and Distribution
 Chapters 9, 15
 Weekly assignment… the usual
 If you are not yet on a group, get into one!