CH 5 Forms of Business Ownership.pptx business model

Business Ownership
Need to understand the advantages and
disadvantages of various forms of business
ownership so you can choose the most
appropriate form for their business.

Different Forms of Legal Organisation
1. Sole Proprietorship
2. Partnership
3. Corporation
4. Joint Venture

Issues Should Consider
when evaluating the various forms of ownership
should consider following issues :
• Tax considerations
• Liability exposure
• Start-up and future capital requirements
• Managerial ability
• Management succession plans
• Cost of formation

Sole Proprietorships
What are they?

Forms Of Business
1) Sole Proprietorship:
A business owned by a single individual.
Advantages:
• Freedom, independence, secrecy
• Easy To Form
• Low Start-up Costs
• Tax Benefits (The business taxes are paid by the owner through his or her
personal income tax return, single taxation)
• Ease of dissolution
Disadvantages:
• Lack Of Continuity when person die
• Resources of One Person
• Unlimited liability: Owners are responsible for all debts of a business

Basic requirements to register sole
proprietorship
In order to register a basic sole proprietorship all you need to do is:
(1) Think of a name for your business
(2) Make a letterhead and business card with business name, logo, phone number and physical
office address on it.
(3) Take your cnic, letterhead/business card, and a stamp with your new business name to any
bank of your choice.
(4) They will open a bank account for you in the name of your business and give you confirmation
with account details (account maintenance / welcome letter) - NOT MANDATORY.
(5) You can then take this letter along with other docs to FBR in your district/city who will issue
you a NTN and/or GST (if you don’t have it already). Alternatively this can be done online on FBR
website and will require scan copies of all documents. Please note you will require a valid cell
phone number, email address, rent agreement of your office and electricity bill.
(6) Once your NTN is issued then you can apply for your GST Number which usually takes 1
working day.
(7) Congratulations! You are now a registered sole proprietor.
(8) Note there is no official certificate issued by any authority in case of a sole proprietorship. You
will only receive a NTN certificate with your name & details on it.

PARTNERSHIP
An association of two or more individuals
joining together as co –owners to operate a
business.(min 2 and maximum 20). Real state,
insurance company, accounting firm

You Might Need a Partner
Eng. and BBA can be complementary
Due to the type of training (and their respective personalities) of
the Engineer and Business Graduate, a partnership between the
two can be very effective.
The Engineer
o Is technically competent
o Understands design and innovation
o Can organise plant and production
o Knows raw materials and sources
o Quality control is understood
o Has a good understanding of the real world

The Business Graduate
o knows accounting and financial controls
o Is good at making financial projections and proposals
o Understands marketing and sales
o Relates well to management techniques
o Can establish management techniques
o Is a good planner
You Might Need a Partner

Types of Partner
• General Partners: partners who share in owning,
operating, and managing a business and who have
unlimited personal liability for the partnership’s debts.
• Limited Partners: partners who do not take an active
role in managing a business and whose liability for the
partnership’s debts is limited to the amount they have
invested.
• Nominal Partner: A nominal partner is one who does
not have any real interest in the business but lends his
name to the firm, without any capital contributions,
and doesn’t share the profits of the business.

Types of Partnership
• Ordinary Partnership or General: In accordance with
OP, partners are jointly and unlimitedly liable for the
obligations of the partnerships. Each partner must
bring some contribution in form of money other
valuable properties or services and all partners have
unlimited liability.
• Limited Partnership: In this kind of partnership, one or
more partners have limited liability and at least one
among the partners has unlimited liability. The liability
of the limited partner is limited to the extent of his
investment in the business

Partnership Deed / Article of partnership:
A written contract used to formally establish a business
partnership
The standard partnership agreement will likely include
the following:
1. Name of the partnership.
2. Purpose of the business.
3. Duration of the partnership.
4. Names of the partners and their legal addresses.
5. Contributions of each partner.
6. Profit and loss distribution.

Partnership Agreement
7. Procedure for addition of new partners.
8. Distribution of assets on voluntarily dissolve.
9. Salaries, draws, and expense accounts for the partners.
10. Absence or disability of one of the partners.
11. Dissolution of the partnership.
12. Alternations or modifications of the partnership
agreement.

Termination of Partnership
• By Notice
– A partner can terminate partnership by giving
notice to other partners due to any reason.
• Upon Death
– Partnership will automatically be terminated at
the death of any partner.

Rights of the partners
• Every partner has the right to:
– Participate in all the affairs of the business.
– Get his/her share of profit from the business.
– Leave the partnership according to the terms and
conditions of the partnership deed.
– Claim the salary against his/her services.
– Participate in the management of the business.

Duties of Partners
• Partners have to maintain accounts which describe
the true picture of the business.
• Partners should use their powers within limits
specified in the partnership deed.
• Partners are responsible to provide accurate
information to Government bodies.
• Partners are responsible to pay their share in case of
loss to the business.

• It is duty of every partner to obey the decision that
has been made in the partnership.
• Partners should not disclose any secret information
about the business to any other person.
• It is a moral obligation and legal responsibility of the
partners not to use firm’s forum to take any
advantage without intimating to other partners.
Duties of Partners

PARTNERSHIP
• ADVANTAGES
 More Talent & Money
 Easily Created
 Partners Taxed As
Individuals
 Better decision
 Reduced competition
• DISADVANTAGES
Unlimited Liability
Lack Of Continuity
(dissolved on death)
Difficult To Transfer
Ownership or liquidate
Personal Conflicts

Decision Making
• A Bike Shop was created by three people. They considered an
arrangement in which only one of them (Adam) would serve as sole
proprietor. In that case, his two friends would be full-time employees,
rather than owners, and would receive regular salaries. However, his
friends already had other jobs and wanted partial ownership in the
business. Therefore, they decided that a sole proprietorship would
not be an appropriate form of business ownership.
• 1. Explain how the income that Adam’s two friends would earn from
the Bike Shop would differ if they were employees of a sole
proprietorship rather than owners.
• 2. Explain how the amount of funding provided by the owners
would be different if Adam had created a sole proprietorship,
instead of having all three people be owners in the business

1. The income of Adam’s friends would be more
certain if they were employees. It is uncertain if it is
in the form of profits because the profits are
uncertain.
2. The amount of funding provided by the owners
would be smaller if Adam had created a sole
proprietorship; the funding will be larger if Adam’s
friends are owners as well

Corporation
• A state-chartered entity that pays taxes and is
legally distinct from its owners.
• A Corporation is liable for its own debts ,and
the owners liability in a corporation is limited
to their investment.
Corporation

Corporation
– Shareholders—person or organization who has
bought shares of stock in a corporation and is
entitled to some of its profits.
Organizing and Operating a Corporation

5-26
– Stock Ownership and Stockholder Rights
• Preferred stock owners have limited or no voting
rights; receive dividends before others
• Common stock owners have voting rights but only
claims on remaining assets and are the last to
receive dividends

5-27
– Board or Directors—elected governing body of
a corporation.
• Sets policy, authorizes major transactions, and hires
and supervises the CEO
• Elected by, and responsible to, the corporation's
shareholders.
– Corporate Officers and Managers
• Make most major corporate operational decisions

Types of Corporations
• Public Limited Company:
– A corporation that has a large number of shareholders and
whose stock is traded on stock exchanges.
– Public Limited companies are open to everyone.
– Public limited companies add the word “Ltd.” with their
name.
– Companies have to present their data to general public.
• Private Limited Company:
– Owned by group of private individuals. A private limited
company cannot list its shares in the stock exchanges.
– Private limited companies add the word “(Pvt) Ltd.” with
their name.

CORPORATION
• ADVANTAGES
 Limited Liability
(shareholders
investment)
 Can achieve larger size
via sale of ownership
 Access To More
Capital(human)
 Ease Of Ownership
Transfer
DISADVANTAGES
More expensive - Startup
Cost- Legal Requirements
Double Taxation
Lacks of secrecy
Activities limited by the
charter and by various laws
Complex organizational
hierarchy

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

5-31
Levels of Management in a Corporation

5-32
Double Taxation: A disadvantage of the corporate
form of organization

Decision Making
• Recall, the Bike Shop was organized as a partnership. Now the three
partners are considering long-term plans for setting up similar bike
shops around the country. First, their original bike shop will need to
be successful. If it is, they will expand throughout their city, and if
these businesses are successful, they would like to create hundreds of
new bike shops across the country. To support expansion across the
country, however, they will need millions of dollars and will be able
to obtain such a large amount of funds only if they become a
corporation and go public.
• 1. Explain why it may be difficult for the Bike Shop to go public
in the future.
• 2. How will the proportion of the business owned by each of the
three entrepreneurs (now one-third) change if the Bike Shop goes
public?

• 1. It would have to demonstrate to potential
investors that it could successfully expand
across the country and show that hundreds of
new bike shops are needed.
• 2. The proportion would be reduced because
other owners would own much of the
business if it goes public someday

Additional Concepts
• Merger
• Combining two firms to form one company.
Example:
Types Of Mergers:
• Horizontal Merger: the joining of two firms in the same industry .
Disney merging with Fox, KASB Bank with Bank Islami, Metro and
Macro Habib now called as Metro Habib
• Vertical Merger: the joining of two firms involved in different stages
of related business. The Time Warner (Content Producer with AT&T
(Content Distributor), Savor and Milk processing plant in Kot Momin
• Conglomerate merger: the joining of two firms in completely
unrelated industries. Lucky Cement and ICI

ACQUSITION
• One company purchase another company.
Example: Jazz and Warid
ISLAMABAD: Mobilink officially confirmed on Monday that it has given up its brand
name and will now be called as Jazz after its merger with Warid in late 2015.
The parent companies of Mobilink and Warid Telecom announced on Thursday that
they had reached a merger agreement at a price tag of $500 million, Mobilink will
acquire 100 per cent shares of Warid under the agreement while the shareholders of
Warid Telecom will get 15 per cent shares of Mobilink.Nov 27, 2015

ACQUSITION
• In 2000, Pfizer acquired Warner-Lambert for $90
billion. Both companies operated in the
pharmaceutical drug industry
• Google acquired Android for an estimated $50
million back in 2005.
• Disney really knows what it’s doing when it comes to
acquiring other profitable companies, first acquired
Pixar in 2006. Three years after acquiring Pixar,
Disney completed the same process with Marvel
Entertainment.

Franchise
• Franchise: A contractual agreement in which a
buyer gains the right to use a specific business
name and sell its product or services.
• Franchisee: A buyer of a franchise.
• Franchisor: A business firm that grants the
rights to franchise to a franchisee.
• Franchise agreement

Franchise
• Franchises in the United States number over
500,000, and they generate more than $800
billion in annual revenue. Some well-known
franchises include McDonald’s, Thrifty Rent-a-
Car System, Dairy Queen, Super 8 Motels, Inc.,
TGI Fridays, Pearle Vision, Inc., and Baskin-
Robbins.

Types of Franchises
• Most franchises can be classified as
• In a distributorship, a dealer is allowed to sell a
product produced by a manufacturer. For example,
Chrysler and Ford dealers are distributorships.
• In a chain-style business, a firm is allowed to use
the trade name of a company and follows
guidelines related to the pricing and sale of the
product. Some examples are McDonald’s, CD
Warehouse, Holiday Inn, Subway, and Pizza Hut.

Types of Franchises
• In a manufacturing arrangement, a firm is
allowed to manufacture a product using the
formula provided by another company. For
example, Microsoft might allow a foreign
company to produce its software, as long as
the software is sold only in that country.
Microsoft would receive a portion of the
revenue generated by that firm.

Franchise Contract
Franchisor, Inc.
Franchisee
Branded
Product/Service
Performance
Monitoring
$$$$$

Advantages & Disadvantages
ADVANTAGES
• Financial support
• Professional Assistance
• Brand Recognition
• Name Recognition
DISADVANTAGES
• High Start Up costs
• Share Profit with the
franchisor.(Royalty)
• Less control than in the
business you create on your
own.
• Management rules and
restrictions on the
franchisee

Decision Making
• A well-known bicycle company in town has asked the three
partners of the Bike Shop if they want to convert their new bike
shop business into a chain-style franchise. The franchisor would
provide them with guidance in running the bike shop business,
but they would have to allocate a portion of their profits to the
franchisor. The partners believe that they can manage the bike
shop business on their own and do not want to share the profits
of their business. Therefore, they decline the franchisor’s offer.
• 1. Do you think the partners of the Bike Shop should have
accepted the franchisor’s offer?
• 2. Do you think the Bike Shop can serve as a franchisor for other
investors who want to run a bike shop business

Decision Making
• 1. The answer depends on whether the franchisor would
truly offer some name recognition or better guidance for
the Bike Shop. The partners would have to weigh these
benefits against the cost of being a franchisee, which is
the portion of profits paid by the franchisee to the
franchisor.
• 2. The Bike Shop cannot serve as a franchisor at this point
because it does not have any name recognition and has
not yet proved that its management style is successful. No
other bike shop owners would believe that they would
benefit from having the Bike Shop as a franchisor.

Assignment 2
• EXPANDING AROUND THE GLOBE
• Setting Up (Sandwich) Shop in China (153-154)
chapter 4 in OP
• Ethics Activity (165)

CH 5 Forms of Business Ownership.pptx business model

More Related Content

Similar to CH 5 Forms of Business Ownership.pptx business model

More from HamzaGhani10

Recently uploaded

CH 5 Forms of Business Ownership.pptx business model

Editor's Notes