Chapter 2 PowerPoint Lecture Notes - Mr. Gleason

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30 Sep 2013 ... Jeff Madura. Introduction to Business 3e ... Some partners have personal liability that is limited to the cash or ... expense. – Financial disclosure.
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Part I: Organization of a Business

Selecting a Form of Business Ownership

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Introduction to Business 3e Jeff Madura Copyright © 2004 South-Western. All rights reserved.

Learning Goals •  Explain

how business owners select a form of ownership.

•  Explain

how the potential return and risk of a business are affected by its form of ownership.

•  Describe

methods of owning existing businesses.

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2–2

Business Ownership Decisions •  Advantages

and disadvantages of each type of business ownership •  Impact of the form of business ownership on return on investment •  Impact of the form of business ownership on risk •  Methods to obtain ownership of existing businesses Copyright © 2004 South-Western. All rights reserved.

2–3

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Impact of Forms of Ownership

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2–4

Forms of Business Ownership •  Sole

Proprietorship

–  Owned by a single owner. •  Partnership

–  Co-owned by two or more people. –  Co-owners must register with the state and may need an occupational license. •  Corporation

–  State chartered entity that pays taxes and is legally distinct from its owners. Copyright © 2004 South-Western. All rights reserved.

2–5

Sole Proprietors •  Must

be willing to accept full responsibility for firm performance •  Business profits are not shared with creditors •  Need strong leadership skills, must be well organized, and communicate well with employees

Copyright © 2004 South-Western. All rights reserved.

2–6

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Sole Proprietorship •  Advantages

•  Disadvantages

–  All earnings go to the sole proprietor –  Easy organization –  Complete control –  Lower taxes

–  Sole proprietor incurs all losses –  Unlimited liability –  Limited funds –  Limited skills

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2–7

Types of Partnerships •  General

Partnerships

–  All partners have unlimited liability. •  Limited

Partnerships

–  Some partners have personal liability that is limited to the cash or property they invested in the firm. –  One or more general partners who actively manage the business, receive a salary, share in profits and losses, have unlimited liability. –  Personal earnings received from the partnership are subject to personal income taxes.

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2–8

Partnerships •  Advantages

–  Additional funding –  Losses are shared –  More specialization

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•  Disadvantages

–  Control is shared –  Unlimited liability for general partners –  Profits are shared

2–9

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Other Business Forms •  S

Corporation

–  Firm has 75 or fewer employees. –  Owners have limited liability, but are taxed as if the firm were a partnership. •  Limited

Liability Corporation (LLC)

–  Has all the favorable features of a general partnership but also offers limited liability for the partners.

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2–10

Your Portion of Earnings (or Losses) on a Proprietorship versus a Partnership

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Exhibit 2.1a

2–11

Your Portion of Earnings (or Losses) on a Proprietorship versus a Partnership

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Exhibit 2.1b

2–12

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Relative Contributions to Business Revenue of Sole Proprietorships, Partnerships, and Corporations

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Exhibit 2.2

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e-business

business online

2–13

2–14

Corporations •  Individual

or group must adopt corporate charter and file it with the state –  Describes name of the firm, stock issued, firm’s operations –  Must also establish bylaws –  Shareholders have limited liability –  Shareholders elect members of board of directors

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2–15

5

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Stockholders •  Elect

members of board of directors who are responsible for establishing general policies of the firm –  Elect president and other key officers who run the business

•  Earn

return on investment in two ways

–  May receive dividends –  Stock may increase in value

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2–16

Corporations •  Advantages

–  Limited liability –  Access to funds –  Transfer of ownership

•  Disadvantages

–  High organizational expense –  Financial disclosure –  Agency problems –  High taxes

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2–17

Illustration of Double Taxation

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Exhibit 2.3

2–18

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Comparison of Tax Effects on Corporations and Sole Proprietorships

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Exhibit 2.4

2–19

Small Business Administration’s Home Page

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Exhibit 2.5

2–20

Exhibit 2.6

2–21

List of SBA Publications on the Internet

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The Company Corporation Home Page

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Exhibit 2.7

2–22

Private Vs. Public •  Ownership

of privately held corporations is restricted to a small group of investors. •  Publicly held shares can be easily purchased or sold by investors. –  Act of initially selling stock is called “going public.” –  Publicly held corporations obtain additional funds by issuing new common stock.

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2–23

Impact of Ownership on Return •  Return

on Investment (ROI)

–  After-tax earnings represent the return in dollars to the business owners. •  Return

on Equity (ROE)

–  Reflects earnings as a proportion of the firm’s equity –  Equity is the total investment by the firm’s stockholders.

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2–24

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Return on Equity for The Children’s Place

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Exhibit 2.8

2–25

Impact of Ownership on Risk •  Risk

represents uncertainty about the firm’s future earnings –  Depends on future revenues and expenses

•  Sole

proprietorships tend to be riskier than larger businesses, such as partnerships and corporations. –  Limited funding restricts ability to diversify and spread business risk

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2–26

Ownership of Existing Business •  Assuming

Ownership of a Family Business •  Purchasing an Existing Business –  Assess expertise –  Compare expected benefits with initial outlay –  Be cautious about basing future earnings expectations on historical data •  Franchising

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2–27

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2–28

Franchising •  Business

owner (franchisor) allows another (the franchisee) to use its trademark, trade name, or copyright, under specified conditions. •  Each franchise operates as an independent business. •  Typically owned by a sole proprietor.

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2–29

Well Known Franchises •  •  •  •  •  •  •  • 

McDonald’s Thrifty Rent-a-Car System Mail Boxes Etc. Dairy Queen Super 8 Motels Inc. TGI Fridays Pearle Vision Inc. Baskin-Robbins

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2–30

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Types of Franchises •  Distributorship

–  Dealer is allowed to sell a product produced by a manufacturer. •  Chain-Style

Business

–  Firm is allowed to use the trade name of a company and follows guidelines related to the pricing and sale of the product. •  Manufacturing

Arrangement

–  Firm is allowed to manufacture a product using the formula provided by the franchisor. Copyright © 2004 South-Western. All rights reserved.

2–31

Franchises •  Advantages

–  Proven management style –  Name recognition –  Financial support

•  Disadvantages

–  Sharing profits –  Less control

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2–32

B2B Franchises •  Franchises

serving other businesses that have grown substantially: –  Hiring services –  Consulting services –  Training services

•  Require

smaller initial investment because they can be operated by computer from a home office.

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2–33

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Ownership of Foreign Businesses •  Purchase

a franchise created by a U.S. firm in a foreign country –  Return may be higher than in U.S. if there is less competition

•  Purchase

a business being sold by the foreign government –  Reputation for inefficiency often leads to low prices –  Can be high risk due to instability of foreign government

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2–34

Summary Entrepreneurs can select a form of ownership: –  Sole proprietorship –  Partnership –  Corporation •  Return and risk depend on form of business ownership. •  Common methods for obtaining ownership of existing businesses: –  Family business –  Purchase existing business –  Franchising • 

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2–35

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