Forms of Business Ownership and Organization

Chapter

5

Distinguish between small and large businesses.

Discuss the contributions of small businesses to the economy.

Discuss the survival rate of small businesses.

Describe the features of an effective business plan.

Describe funding opportunities for small businesses, including the role of the Small Business Administration.

Explain how franchising can provide opportunities for both franchisors and franchisees.

1

Learning Goals

Outline the three main legal forms of business ownership and summarize the features of businesses owned by employees and families, as well as not-for-profit organizations.

Describe public and collective (cooperative) business ownership.

Identify types of corporations and the levels of corporate management.

Describe mergers, acquisitions, and joint ventures.

2

3

4

5

6

7

8

9

10

90% of firms with employees have fewer than 20 people on staff. 98% have fewer than 100 employees

More than 20 million people in the United States earn business income without employees. Almost ½ the sales in the United States are made

by small businesses. Small businesses generated 60%--80% of new

jobs over the last decade. Small businesses are a launching pad for

entrepreneurs and encourage the prevalence of minorities.

Most Businesses are Small Businesses

The Small Business Administration defines a small business to be a firm that is independently owned and operated and is not dominant in the field.

Manufacturing business: fewer than 500 workers Wholesalers: fewer than 100 workers Retailers: less than $6 million in annual sales Agricultural business: less than $750,000

Small businesses’ sizes range from $500,000 to $25 million in sales and from 100 to 1,500 employees.

What is Small Business?

Typical Small-Business Ventures

Major Industries Dominated by Small Businesses

52% of small businesses 16 million

Allows for more control of business Allows for more control of personal time Keeps start-up and operating expenses

low Owner can feel isolated and business has

less visibility to customers

Home-Based Businesses

Create New Jobs Account for 30% of U.S. Exports Offer Customized Services Create New Industries Encourage Innovation

Contributions of Small Business

3 in 10 businesses close permanently within two years.

50% of businesses fail within five years.

By the 10-year mark, 82% of all small businesses have closed permanently.

Small Business Failure

Management Shortcomings

Inadequate Financing

Government Regulation

Reasons Why Small Business Fail

Creating a Business Plan Written documentation that provides

orderly statement of goals, methods, and purpose

Discusses the company’s mission and vision Analyzes unique advantage, customers, and

competition

Increasing the Likelihood of Small Business Success

Sources of Small Business Financing

Government agency concerned with helping small business firms

Financial Assistance Loan Guarantees Microloans Small Business Investment

Companies (SBICs) Active Capital: SBA Loans

Small Business Administration

Set-Aside Programs Government Contracts (over 23%)

5% for women and minorities Assistance in Financing Government

Procurement Business Incubators

Local community initiatives to share resources for small start-ups

SCORE: Counselors to America’s Small Business

Small Business Development Centers (SBDC)

Other Specialized Assistance

More than 40% of U.S. businesses are owned by women (10 million businesses)

The number of businesses owned by minorities outpaced the growth in the number of U.S. businesses overall.

Women and minorities still face challenges: Smaller-scale operations Challenges finding investors Access to capital

Opportunities for Women & Minorities

Minority-Owned Businesses

A contractual business agreement between a manufacturer or another supplier and a dealer to produce and market the supplier’s good or service. Links to franchising opportunities:

Subway Entrepreneur

The Franchising Alternative

Franchising agreements exist between franchisee and franchisor.

50% of all retail sales 760,000 businesses 18 million jobs $500 billion in payroll Near $2 trillion in sales New franchise opens

every 8 minutes Franchising overseas is

a growing trend

The Franchising Agreement

ADVANTAGES Prior Performance

Record Recognizable

Company Name (Brand)

Proven Business Model

Tested Management Program

Savings through Volume Purchases

Benefits and Problems of Franchising

DISADVANTAGES Franchise Fees Future Payments

(Royalties) Linked to Reputation

and Management Franchise Agreement

Restrictions Tight Control

Alternatives for Organizing a Business

Forms of Private Ownership

Financial Situation Management Skills and Limitations Management Styles and Capabilities Exposure to Liability

Legal Structures to Meet Changing Needs

Domestic, foreign, alien

S Corporation Limited Liability

Companies Employee-Owned

Corporations Not-for-Profit

Corporations

Types of Corporations

Public ownership – a unit or agency of government owns and operates an organization. Parking structures, water systems, turnpike authority.

Customer-Owned Businesses – collective ownership of a production, storage, transportation or marketing organization is a cooperative.

Public and Collective Ownership

Stockholders – acquire stocks in exchange for ownership

Preferred Stock Common Stock

Board of Directors – elected by stockholders to oversee corporation

Corporate Officers & Management – make major corporate decisions and handle ongoing operations

Corporate Management

Mergers and Acquisitions (M&A) Merger – combination of two or more firms to form

one company Vertical Horizontal Conglomerate

Acquisition – procedure in which one firm purchases the property and assumes the obligations of another

Joint Venture – partnership between companies for a specific purpose

When Businesses Join Forces