Forms of

Business Ownership

INTRODUCTION TO BUSINESS (BUS 20)

JON WROTEN

ADJUNCT PROFESSOR

SIERRA COLLEGE

(Copyright – All Rights Reserved)

WHAT IS THE RIGHT FORM OF OWNERSHIP ?

There really is not one right form of ownership.

The correct form depends of the type of company, the

goals of the owners, and the plans of what the

company may become.

Factors such as tax considerations, liability exposure,

capital requirements and structure and ownership

control all play a role is determining which form is

correct for a business.

World’s Largest Companies by Revenue

RANK COMPANY INDUSTRY REVENUE

(USD billions)

CAPITALIZATION

(USD billions) EMPLOYEES HEADQUARTERS

1 Wal-mart Retail $476 $257 2,200,000 Arkansas, USA

2 Royal Dutch Shell Oil and gas $451 $243 90,000 London, England

3 Exxon Mobil Corporation Oil and gas $420 $438 76,900 Texas, USA

4 China National Petroleum

Corporation Oil and gas $425 1,668,072 Beijing, China

5 Sinopec Group Oil and gas $411 $81 401,000 Beijing, China

6 BP Oil and gas $379 $89 83,900 London, England

7 Saudi Aramco Oil and gas $311 54,041 Dhahran, Saudi Arabia

8 Vitol Commodities $303 2,800 Geneva, Switzerland

9 State Grid Corporation of

China Electric utility $290 1,564,000 Beijing, China

10 Total Oil and gas $240 $120 111,000 Courbevoie, France

World’s Largest Companies by Revenue

RANKING COMPANY INDUSTRY REVENUE

(USD billions)

CAPITALIZATION

(USD billions) EMPLOYEES HEADQUARTERS

11 Volkswagen Group Automotive $254 $77 502,000 Wolfsburg, Germany

12 Samsung Conglomerate $327 427,000 Seoul, Korea

13 Toyota Automotive $222 $149 326,000 Toyota, Japan

18 Apple Electronics $170 $510 80,300 California, USA

22 Berkshire Hathaway Conglomerate $162 $201 217,000 Nebraska, USA

23 General Motors Automotive $156 $40 284,000 Michigan, USA

24 Daimler Automotive $150 $64 275,087 Stuttgart, Germany

25 LG Corp Conglomerate $148 226,400 Seoul, Korea

26 General Electric Conglomerate $145 $212 287,000 Connecticut, USA

29 Allianz Financial services $140 $54 142,000 Munich, Germany

32 Cargill Food processing $136 158,000 Minnesota, USA

33 Ford Motor Company Automotive $134 $47 164,000 Michigan, USA

RANK EMPLOYER COUNTRY EMPLOYEES

1 Wal-Mart United States 2,200,000

2 China National Petroleum Corporation China 1,668,072

3 State Grid Corporation of China China 1,583,000

4 Sinopec China 1,021,979

5 Hon Hai Precision Industry Taiwan 961,000

6 China Post Group China 889,307

7 U.S. Postal Service United States 601,601

8 Volkswagen Germany 501,956

9 China Telecommunications China 491,447

10 Aviation Industry Corp. of China China 480,147

WORLD'S LARGEST PRIVATE EMPLOYERS, 2011

BASIC FORMS OF OWNERSHIP

Sole Proprietorship

Partnership

Corporation

Number Sales

72% 5%

4% 5%

24% 90%

Source: IRS, Tax year 2008

SOLE PROPRIETORSHIP

Ease of start/end

Be your own boss

Pride of ownership

Retain profit

No special taxes

Unlimited liability

Limited financial resources

Difficulty in mgmt.

Time commitment

Few fringe benefits

Limited growth

Limited life span

Advantages Disadvantages

PARTNERSHIPS

PARTNERSHIP

More financial resources

Shared mgmt.

Longer survival

Advantages

Unlimited liability

Division of profits

Disagreements among partners

Difficult to terminate

Disadvantages

GENERAL

GP

GP

GP

GP

LIMITED

GP

TYPES OF PARTNERSHIPS

Passive Investor

Passive Investor

Passive Investor

CORPORATIONS

TYPES OF CORPORATIONS

Regular ‘C’

Subchapter ‘S’

Limited Liability Corporation

CORPORATION

More money for investment

Limited liability

Separation of ownership/mgmt.

Ease of ownership change

Perpetual life

Size

Initial cost

Paperwork

Two tax returns

Termination difficult

Double taxation

Advantages Disadvantages

S CORPORATIONS

No more than 75 shareholders

Shareholders

Individuals

Estates

U.S. citizens or residents

1 class of stock

<25% of income can be passive

Tax rate = +5%

Slower-growing companies

Benefits change with new tax rules

HOW OWNERS AFFECT MANAGEMENT

MAKE-UP OF CORPORATE BOARDS

Retired officer of another firm 89%

CEO at another company 87%

Major company shareholder 73%

Ex-government official 53%

Academicians 50%

Corporate boards average 11 Directors. Most Directors by percentage are:

RANK FRANCHISE STARTUP COSTS

1 Subway Subs, salads $85.69K - 262.85K

2 Jan-Pro Franchising Int'l. Inc. Commercial cleaning $3.15K - 50.9K

3 7-Eleven Inc. Convenience Stores $30.79K - 1.63M

4 Vanguard Cleaning Systems Commercial cleaning $9.85K - 35.83K

5 Liberty Tax Service Tax preparation $56.79K - 69.9K

6 Chester's Chicken $4.63K - 321.32K

7 Jazzercise Inc. Dance-fitness classes, apparel and accessories $4.28K - 76.5K

8 Jimmy John's Gourmet Sandwiches Gourmet sandwiches $300.5K - 489.5K

9 Dunkin' Donuts Coffee, doughnuts, baked goods $294K - 1.51M

10 Anago Cleaning Systems Commercial cleaning $11.18K - 66.84K

TOP GROWTH FRANCHISES, 2013

RANK FRANCHISE STARTUP COSTS

11 Cellairis Franchise Inc. Cell-phone and accessories $33.4K - 439.01K

12 Cruise Planners-American Express Travel Cruise & travel agency $2.09K - 21.98K

13 Great Clips Hair salon $109.15K - 208.3K

14 H&R Block Tax preparation, electronic filing $31.5K - 148.69K

15 Anytime Fitness Fitness center $56.29K - 353.89K

16 Sport Clips Men's sports-theme hair salon $158.3K - 306.5K

17 Menchie's Self-serve frozen yogurt $218.32K - 385.16K

18 Mac Tools Automotive tools and equipment $86.19K - 240.3K

19 Papa John's Int'l. Inc. Pizza $129.91K - 644.21K

TOP GROWTH FRANCHISES, 2013

SURVIVAL AFTER STARTUP FRANCHISE VS. INDEPENDENT

0

10

20

30

40

50

60

70

80

90

100

1st Year 5th Year 10th Year

Independent

Franchise

FRANCHISES

Management & marketing ass’t

Personal ownership

Recognized name

Financial advice & ass’t

Lower failure rate

High start-up costs

Shared Profit

Management regulation

Coattail effects

Restrictions on selling

Fraudulent franchisors

Advantages Disadvantages

FRANCHISE SYSTEM

Franchiser

Franchisee

Franchise Agreement

FRANCHISE CONTRACT

Franchisor, Inc.

Franchisee

Branded Product/Service

Performance

Monitoring

$$$$$

FRANCHISOR

Assigns Territory

Provides 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

1) Research officers & their business experience

2) Talk to current Franchisees

3) Get summary of any bankruptcy & litigation

4) Estimate all costs to set up franchise

5) Review franchise contract & three most recent financial statements

How to Avoid a Franchise Lemon

Benefits of a Home-Based Business

Flexible work hours

Quality lifestyle

Doing the work of your choice

Opportunity to expand using technology

Self-motivation

.