CHAPTER 4 Choosing a Form of Business Ownership 4.7 TEXTBOOK ANSWER KEYS 4.7a Return to Inside Business Kimpton Hotel & Restaurant Group 1. Do you think Kimpton should switch from the LLC form of ownership to an open corporation to be able to raise money by selling shares of stock? Explain your answer. Students who believe Kimpton should switch from being an LLC may argue that building hotels and resorts is costly, and becoming an open corporation would allow Kimpton more flexibility in raising a large amount of capital for expansion. Students who take the opposite view may argue that the flexibility of management with LLCs as well as the taxation advantages—which avoid the kind of double taxation common to corporations—outweigh the advantages of raising money by selling stock in an open corporation. Ask students to discuss other issues related to becoming an open corporation, such as the pressure to disclose financial details to stockholders and securities’ analysts. Should such issues be part of Kimpton’s decision about which form of ownership it chooses? Why? 2. Kimpton sometimes buys individual hotels from other companies, renovates them, and reopens them under a new name. Why would Kimpton do this rather than grow through a merger with a larger, more recognized hotel? The case explains that Kimpton works with a number of different partners and sometimes partners with chefs to open and manage specialty restaurants. If Kimpton merges with a larger hotel chain, it will face the major challenge of renovating the other chain’s properties so they fit with Kimpton’s image as an operator of trendy boutique hotels and unique restaurants. Another issue that Kimpton has to consider is whether a horizontal merger would easily gain regulatory approval. Finally, Kimpton would need to have significant financial resources available for a merger. Instead, Kimpton evaluates individual hotels and determines which have the most potential to be updated and redecorated in line with Kimpton’s brand and then retrains personnel to provide highly personalized service. 4.7b Review Questions 1. What is a sole proprietorship? What are the major advantages and disadvantages of this form of business ownership? A sole proprietorship is a business that is owned and usually operated by one person and the simplest form of business to enter, control, and leave. The advantages are (1) ease of start-up, (2) pride of ownership, (3) retention of all profits by the sole proprietor, (4) flexibility, and (5) possible tax advantages. The disadvantages are (1) unlimited liability, (2) lack of continuity, (3) lack of money, (4) limited management skills, and (5) difficulty in hiring employees. 2. How does a partnership differ from a sole proprietorship? Which disadvantages of sole proprietorship does the partnership tend to eliminate or reduce? In a partnership, two or more persons act as co-owners of the business for profit. A sole proprietorship has only one owner. Because partners can pool their funds, a partnership usually has more capital available than does a sole proprietorship. A partnership also tends to limit the disadvantage of limited business skills and knowledge because a partner can add skills and knowledge. 3. What is the difference between a general partner and a limited partner? A general partner is responsible for running the business and for all business debts. A limited partner has no management responsibility and is not responsible for business debts beyond the amount he or she has invested in the business. 4. What issues should be included in a partnership agreement? Why? The partnership agreement should state who will make the final decisions, what each partner’s duties will be, and the investment each partner will make. The partnership agreement should also state how much profit or loss each partner receives. Finally, the partnership agreement should state what happens if a partner wants to dissolve the partnership or dies. It is always wise to try to resolve the above issues before you begin a partnership. In fact, you may want to point out that if partners can’t agree on the main points that should be included in a partnership agreement, they will have a much more difficult time running a partnership business. 5. Explain the difference between (a) an open corporation and a closed corporation and (b) a domestic corporation, a foreign corporation, and an alien corporation. a. An open corporation is a corporation whose stock is bought and sold on security exchanges and can be purchased by any individual. A closed corporation is one whose stock is owned by relatively few people and is not sold to the general public. b. An incorporated business is called a domestic corporation in the state in which it is incorporated. In all other states in which it does business, it is a foreign corporation. An alien corporation is chartered by a foreign government and conducts business in the United States. 6. Outline the incorporation process, and describe the basic corporate structure. a. The incorporation process: A business chooses the state in which to incorporate. The decision is based on its location and the benefits that various states provide. The incorporators submit articles of incorporation to the secretary of state, which include the following information: (1) firm’s name and address; (2) incorporators’ names and addresses; (3) purpose of incorporation; (4) maximum amount of stock and the type of stock to be issued; (5) rights and privileges of stockholders; and (6) length of time corporation is to exist. Once the articles of incorporation are approved, they become the firm’s corporate charter. The incorporators and the original stockholders meet to elect the first board of directors. b. The basic corporate structure is comprised of the board of directors (the top governing body of the corporation) and its corporate officers (chairman of the board, president, executive vice president, corporate secretary, and treasurer), which the board appoints. 7. What rights do stockholders have? Stockholders share in the profit earned by the corporation through the payment of dividends. Other rights include receiving information about the corporation, the right to vote on the corporate charter, and the right to attend the corporation’s annual stockholders’ meeting, where they may exercise their right to vote. Preferred stockholders usually have no voting rights, but their claims on dividends are paid before those of common-stock owners. 8. What are the primary duties of a corporation’s board of directors? How are directors selected? The major responsibilities of the board of directors are to set company goals and to develop general plans for meeting those goals. The board is also responsible for the overall operation of the firm. Board members are elected by the firm’s stockholders. The board of directors may be elected from among the corporation’s top managers. Those elected from outside the corporation are generally experienced managers with proven leadership ability or specific talents. 9. What are the major advantages and disadvantages associated with the corporate form of business ownership? The advantages of a corporation include (1) limited liability, (2) ease of raising capital, (3) ease of transfer of ownership, (4) perpetual life, and (5) specialized management. The disadvantages include (1) difficulty and expense of formation, (2) government regulation, (3) double taxation, and (4) lack of secrecy. 10. How do an S corporation and a limited-liability company differ? Even though both an S corporation and a limited-liability company can provide the benefits of avoiding double taxation and retaining limited-liability protection, a limited-liability company is not restricted to a hundred stockholders as is an S corporation. LLCs are also less restricted and have more flexibility than S corporations in terms of who can become owners and who can make management decisions. 11. Why are not-for-profit corporations and cooperatives formed? Explain how they operate. Not-for-profit organizations are organized by those whose sole purpose is to provide a social service rather than to earn a profit. This type of organization provides the owners with limited liability but also allows them to reinvest their tax-free income back into the business. A not-for-profit corporation can be owned by a local, state, or federal government and is organized to provide a service that the business sector is reluctant or unable to offer. Its main objective is to ensure that a particular service is available; profit is secondary. A cooperative is formed for the purpose of performing some business function for its members. It is owned by its members; it can perform the function more effectively than any member could by acting alone. Cooperatives purchase goods and services at bulk prices letting members pay smaller unit costs. Cooperatives are most prevalent in agriculture. In addition to buying goods and services, farmers use cooperatives to process and market their products. 12. In what ways are joint ventures and syndicates alike? In what ways do they differ? Both joint ventures and syndicates are formed to achieve a specific goal or purpose. Both operate for a limited period of time. Syndicates are typically formed when the specific task requires a large amount of capital. 13. What is a hostile takeover? How is it related to a tender offer and a proxy fight? A hostile takeover is a situation in which the management and board of directors of the firm targeted for acquisition disapprove of the merger, usually because their company will become a subsidiary of the purchasing firm, and they will have to give up control. When a merger or an acquisition becomes hostile, a corporate raider—another company or a wealthy investor—may make a tender offer or start a proxy fight to gain control of the target company. A tender offer is an offer to purchase the stock at a price just high enough to tempt stockholders to sell their shares. A proxy fight is a technique used to gather enough stockholder votes to control a targeted company. 14. Describe the three types of mergers. A horizontal merger is a merger between firms that make and sell similar products or services in similar markets. A vertical merger is one between firms that operate at different but related levels in the production and marketing of a product. A conglomerate merger is one between firms in completely unrelated industries. 4.7c Discussion Questions 1. If you were to start a business, which ownership form would you choose? What factors might affect your choice? The issue of availability of financing versus financial need certainly affects the choice of ownership form. Also, the business in question may require the shield of liability protection afforded the corporate form of ownership, as in the case of mining, commercial drugs, and so on. 2. Why might an investor choose to become a partner in a limited partnership instead of purchasing the stock of an open corporation? An opportunity to purchase a position as a limited partner may afford an investor a greater share of ownership as well as a greater return on the investment. Also, the availability of firsthand or personal knowledge of the smaller partnership business could provide insights that are not readily achievable in the case of larger corporations. 3. Discuss the following statement: “Corporations are not really run by their owners.” Since the owners of many corporations are stockholders, and they transfer their votes by proxy, these corporations are run by boards of directors and corporate officers. The stockholders are not involved in day-to-day decision making or policy formation. 4. What kinds of services do not-for-profit corporations provide? Would a career in a not-for-profit corporation appeal to you? Not-for-profit corporations provide services the business sector is reluctant or unable to offer because the chance of profit is highly unlikely. Examples of government-owned corporations include the U.S. Postal Service, the Tennessee Valley Authority (TVA), the National Aeronautics and Space Administration (NASA), and the Federal Deposit Insurance Corporation (FDIC). In addition, most charitable organizations, foundations, and cultural organizations (i.e., museums, art institutes, etc.) are not-for-profit corporations. A career in a not-for-profit corporation would appeal to those individuals who want to work for a cause they believe in deeply, generalists who want more freedom in the workplace, and/or people who want to make an impact on society and humanity. 5. Is growth a good thing for all firms? How does management know when a firm is ready to grow? Growth is not always good if the business lacks the additional resources that must be available and must be used effectively. Management can tell when a firm is ready for new growth by both the amount of capital available and the demand for its products or services. 4.7d Comments on Video Case 4.1 Suggestions for using this video case are provided in the Pride/Hughes/Kapoor Video Guide. AT&T and T-Mobile: What Went Wrong with Their Merger? 1. Did the Department of Justice make the right decision when it blocked the merger of T-Mobile and AT&T? Why or why not? On one hand, both the Department of Justice and the Federal Communications Commission (FCC) would have needed to approve the deal. The fact that both independently (and quickly) came to the same conclusion lends strength to the argument that the decision was the right one. In many cases, government regulatory bodies will accept a merger if the companies agree to certain conditions, such as agreeing to keep prices low for a period of time, divest themselves of some of their assets so other firms can compete more effectively against the newly merged firm, and so forth. In the case of AT&T and T-Mobile, however, neither the Department of Justice nor the FCC expressed interest in compromising with the two companies. This would also suggest that the regulatory bodies felt strongly that the merger would have a negative impact on the market. On the other hand, companies within the telecommunications industry have expressed concern that mergers are necessary for them to acquire spectrum (airwave) rights to keep up with the growing demand by consumers for more bandwidth. 2. What do you think the pros and cons of acquiring a competing company are? Create a list of each. The following are some of the pros of mergers and acquisitions: • Greater market share and sales revenues for the merged firm. • Greater pricing power and purchasing power for the merged firm. • The potential appreciation of the share price of one or both the firms if investors believe the merger will be successful. • The ability to lower expenses (and thereby improve profits) by combining duplicate functions and departments following the merger. • The ability to expand to new markets and global markets quickly. • The ability to acquire new technology, products, and expertise quickly. The following are some of the cons of mergers and acquisitions: • Culture clashes between the two companies that affect the merged firm’s effectiveness. • Lengthy proxy fights that are costly. • The potential loss of the identity/brand images of the companies following the merger. • The potential depreciation of the share price of one or both of the firms if investors believe the merger won’t be successful. • The loss of talent and expertise when employees concerned about their job security take positions with other companies to avoid the possibility of being downsized. • Disruptions in the operation of the two businesses as they combine, resulting in lost customers, lower revenues, and less profits. 3. Name some other examples of horizontal, vertical, and conglomerate mergers you’re aware of. Considering the impact of mergers on competition, what are the advantages and disadvantages of each type of merger? Students answers’ will vary. The following are some examples of recent mergers: • Microsoft’s purchase of Skype (vertical merger) • Southwest Airlines’ purchase of AirTran (horizontal merger) • United Airlines’ purchase of Continental Airlines (horizontal merger) • Berkshire Hathaway’s acquisition of BNSF Railway (conglomerate merger) In a horizontal merger, the acquiring firm achieves economies of scale and greater market share while essentially eliminating one of its competitors. This can provide it with a significant advantage relative to its competition. However, if the merger is a large one, the firms face regulatory hurdles. A vertical merger can offer an acquiring firm a competitive advantage in the form of lower costs. For example, if an acquiring company merges with a supplier, it no longer has to pay the supplier a markup for the supplies and can purchase them at cost. Acquiring a supplier or a downstream partner, such as a distributor, can also ensure that the merged company’s supply chain remains stable. This can be especially important, for instance, when the supplier provides an item that is rare or the market for it is prone to disruptions. DeBeers, the diamond conglomerate, is an example of a company that has acquired many upstream and downstream supply-chain partners as a result of vertical mergers. Like horizontal mergers, vertical mergers can lessen the competition. Unchecked, they can lead to monopolies. As a result, large companies attempting vertical mergers also face regulatory hurdles. Conglomerate mergers can help make a company that lacks resources better compete if it is taken over by a better-financed firm or one that is better managed. Conglomerate mergers also help companies diversify their businesses. If one of the firms within a conglomerate fails—perhaps because of a downturn in the market for its products—the conglomerate has a chance of surviving because it operates in other markets. Vertical and horizontal mergers are generally viewed as having a greater negative impact on the competition than conglomerate mergers do. 4.7e Comments on Case 4.2 The Conglomerate Success of Berkshire Hathaway 1. Why would Berkshire Hathaway own a number of furniture retailers? Outline the possible advantages and disadvantages. Berkshire Hathaway is always interested in buying businesses that are good long-term investments. Once Berkshire Hathaway identifies a furniture retailer as a potentially lucrative investment, it researches that company’s situation and follows through by making an offer, if appropriate. Although Berkshire Hathaway owns more than one furniture retailer, it has not merged them. Instead, it wants each retailer to operate in its own way. The possible advantage is that the retailers, already successful, can continue to apply their special knowledge of the local market to satisfy customers’ needs. Another is that each retailer can learn from others that are also owned by Berkshire Hathaway. One possible disadvantage is that the retailers are likely to duplicate operations and services, instead of benefiting from the efficiency of standardized systems provided by the parent company. Another possible disadvantage is that customers will perceive the stores as being part of a corporate giant, not as locally based businesses focused on meeting local customers’ needs. 2. Do you think Berkshire Hathaway should allow stockholders to suggest or vote on potential acquisitions via proxy or at the annual meeting? Why or why not? Students who think that stockholders should suggest or vote on potential acquisitions may say that management could receive some good suggestions from stockholders. They may also argue that stockholders are part-owners and therefore should be involved in major decisions such as making an acquisition. Students who take the opposite view may say that having stockholders involved in suggesting or voting on acquisitions would slow down the process, complicating management’s decisions when fast action would help clinch a deal. It could also affect the final price of an acquired business, especially if other corporations hear of the deal and decide to make a competing offer. 3. How much influence are Berkshire Hathaway’s stockholders likely to have (or want) over the management of the conglomerate or one of the conglomerate’s companies? Explain. Berkshire Hathaway’s stockholders, like the stockholders of other public corporations, have relatively little influence over the day-to-day management of the conglomerate and its companies. They can vote for or against corporate directors, but not vote for or against specific management decisions at any level or in any one of the companies. Typically, stockholders invest in a corporation like Berkshire Hathaway because they believe in the management and are confident in the decisions that directors and managers make. Therefore, they don’t want to be involved in management decisions. 4.7f Building Skills for Career Success 1. Social Media Exercise Not-for-profit organizations have used social media to redefine how they can get funding for their missions. There are even a few that exist totally online. Check out www.donors choose.org and www.kiva.org. Both of these depend on crowds (called crowdfunding) to either fund educational projects (Donors Choose) or lend money to support projects all over the world (Kiva) using the microfinancing model. a. Take a minute to explore these sites and view some of the projects up for funding. How are these projects organized? Do you think these models are effective? Why or why not? Students answers will vary depending upon the projects they view. Instructors might suggest they sort Donors Choose for a large city and a small city to see the differences. Or sort for different categories to compare projects. This model can be an effective way for individuals to obtain funding for a project; however, unless one communicates the need to a wide group, it is unlikely that random giving will happen. Kiva allows the visitor to read about cases of people that were helped out of poverty through the microlending program. Additionally, the format for the lending program is laid out in simple terms making it easy to understand. b. Both Donors Choose and Kiva are for not-for-profits; do you think these models are useful for “for-profit” businesses? Why or why not? Students should read about the microfinancing model on the Kiva site—how small businesses and entrepreneurs might obtain financing in ways other than at a traditional bank. Students might suggest that if not-for-profits are formed to improve communities and change lives as the text states, then for-profit corporations certainly should examine these models and understand their successes. One can always learn something from another business. However, a for-profit business is expected to earn profits so the goals are different. For-profit businesses might benefit from learning on both sites that a small amount of money from many individuals (or businesses) can make a difference. 2. Journaling for Success Assume that you are now age 25 and have graduated from college. Would you prefer to work in someone else’s business or one that you would start? Explain your answer. This is a very personal question for which answers will vary. Some students will see working for themselves as a more desirable option, especially at a young age when they do not have family considerations. Yet others will want to get experience first or wish to explore other options. The more insightful students will consider whether they have the ability to shoulder that kind of responsibility and handle risk. Assuming that you have decided to start your own small business, what type of business will you start? What special skills and experience will you need to be successful? (Note: You may want to talk with someone who owns a business before answering this question.) Students may discuss ways that they have made money in the past that could be considered entrepreneurial. This might include lawn care, computer care, baby sitting, etc. Some students may belong to families with a small business or farm background and thus have a great deal of experience. Others might have interned with professionals such as lawyers or veterinarians who in effect run their own businesses. Now describe where and how you could obtain the skills and experience you need to be successful. This will be the most difficult question for students to answer, especially first-year freshmen right out of high school. Some of the likely answers include taking classes in functional areas such as accounting and marketing. Others may mention going on to graduate or law school, while yet others will focus on working in businesses in which they have an interest. Someone who wishes to have their own retail operation someday may want to work for both large and small retailers to gain first-hand knowledge. What type of business ownership would you choose for your business? Record your ideas and responses to the preceding questions. Answers will vary depending on the kind of business the student plans to start. If, for example, the student planned to start a small accounting firm or a one-person law firm, they might choose to form an LLC to limit their liability. If the student planned to start a lawn care or computer repair firm, they might choose a sole proprietorship or a partership if they had a partner. As the business grew, they might consider forming an S-corporation to avoid double taxation while retaining the corporation’s legal benefit of limited liability. 3. Developing Critical-Thinking Skills Options include: • Investing your inherited money in stocks and bonds and continuing to work for the same company. • Investing your inherited money in mutual funds and finding another job that would allow time to start a business on a part-time basis. • Quitting your job and investing your inherited money in a bakery shop. Before investing money in opening a bakery shop that you would operate full time, you need to consider the following questions. Is there a market for your product, and how big is the market? Can you operate the shop alone, or will you need to hire someone to help? Will you need to find a partner to run the management and marketing end of the operation? How long will it take for the business to earn enough money for you to live on? If you choose to open as a sole proprietorship, you can make all the decisions, but you are liable for all the debts. Do you have the skills to manage the business as well as make the products? If you take on a partner, you will share making decisions, doing the work, and splitting the profits. As a partner, you are still liable for all the debts created in the business, even those of your partner. Or do you want to incorporate? This is a more lengthy process, depending on the regulations in the state where you live. 4. Building Team Skills If you would choose a general partner to share the work and responsibility, he or she would typically take a greater interest in the day-to-day operations of your business to protect his or her investment than would an employee. However, choosing a general partner increases the chance of disputes over daily operations and financial issues. The partnership agreement should state who will make the final decisions, what each partner’s duties will be, the contribution each partner will make, and what will happen if a partner wants to dissolve the partnership or dies. Follow the example provided in Figure 4.3. Criteria used for finding a partner will be based on what the student feels is important to bring to the business. A partner can bring capital, time available to work, expertise in catering services, or other business skills such as marketing and accounting. 5. Researching Different Careers The answers will vary depending on the individual’s likes and dislikes. 4.8 QUIZZES I AND II Quiz I True-False Questions Select the correct answer. 1. T F Today, there are more corporations than there are sole proprietorships and partnerships in the United States. 2. T F For a sole proprietorship and partnership, unlimited liability is a legal concept that holds a business owner personally responsible for all the debts of the business. 3. T F Limited partners in a limited partnership can lose no more than the money they invest in the business. 4. T F Before a corporation can receive a corporate charter, it must submit charter information to the county clerk where the business is located. 5. T F The corporate officers of a corporation are elected by the stockholders. Multiple-Choice Questions Circle the letter before the most accurate answer. 6. A corporation whose stock is bought and sold on security exchanges and can be purchased by any individual is referred to as a(n) __________ corporation. a. closed b. domestic c. open d. foreign e. exchange 7. Corporate stock that has voting rights is referred to as __________ stock. a. charter b. preferred c. treasury d. domestic e. common 8. Ease of raising capital is a characteristic of which type of ownership? a. Cooperatives b. Corporations c. Sole proprietorships d. Not-for-profit corporations e. Foreign corporations 9. A form of corporation that has no more than 100 stockholders and eliminates the problem of double taxation is a(n) a. limited-liability company. b. limited-liability partnership. c. domestic corporation. d. S corporation. e. joint-venture corporation. 10. Which of the following is not a tactic that management can use to fend off a hostile takeover? a. Golden parachute provision for management b. Leveraged recapitalization c. Friendly white knight d. Ask the U.S. Department of Commerce to grant an injunction e. Adopt a supermajority provision to ratify a corporate takeover Quiz II True-False Questions Select the correct answer. 1. T F There are more sole proprietorships in the United States than there are partnerships or corporations. 2. T F The term limited partnership is used to describe a business where all partners have general partnership status. 3. T F The people who start a corporation are called incorporators. 4. T F Preferred stockholders are paid dividends before common stockholders. 5. T F A vertical merger takes place between firms in completely different industries. Multiple-Choice Questions Circle the letter before the most accurate answer. 6. The type of business that is the easiest to form is the a. joint venture. b. syndicate. c. sole partnership. d. corporation. e. cooperative. 7. The state of __________ offers the lowest organizational costs for a corporation. a. New York b. Delaware c. Utah d. Alaska e. Florida 8. Which of the following is an advantage of a corporation? a. Limited liability b. Double taxation c. Government regulations d. Lack of continuity e. Unlimited liability 9. The type of business ownership that combines the benefits of a corporation and a partnership while avoiding some of the restrictions and disadvantages of those forms of ownership is a/an a. pseudo corporation. b. open corporation. c. limited-liability company. d. quasi-government corporation. e. not-for-profit corporation. 10. A technique used to gather enough stockholder votes to control a targeted company is referred to as a a. golden parachute. b. proxy fight. c. hostile takeover. d. leveraged buyout. e. supermajority provision. 4.9 ANSWER KEY FOR QUIZZES I AND II Quiz I True-False Multiple-Choice 1. F 6. c 2. T 7. e 3. T 8. b 4. F 9. d 5. F 10. d Quiz II True-False Multiple-Choice 1. T 6. c 2. F 7. b 3. T 8. a 4. T 9. c 5. F 10. b 4.10 CLASSROOM EXERCISES 4.10a Homework Activities • Article Report. Have students bring in an article that shows an example of a current merger (or divestiture). Ask them to identify any issues involved with the merger as well as whether it is a horizontal, vertical, or conglomerate merger. • Researching and Following a Company Throughout the Course (continuing assignment). Have students describe their company’s form of business ownership. With each continuing assignment, students should document their sources of information, as they would with any research project. • How Does a Board of Directors Function? Assign each student a different Fortune 500 company and have them identify the members who serve on its board of directors. Are the members likely to provide an effective oversight in protecting stockholders’ interests? Why or why not? This should be no more than a one-page word-processed paper. • Which Client? Exercise. On the following pages of this manual are handouts of this exercise. In preparation for the classroom activity (below), make copies of the handout for each student in the class (or post it on your class Web site). The homework assignment requires each student to write a short (one- to two-paragraph) paper examining four different categories on eBay in preparation for the group activity in the next class. (Note: Instructors can choose to tell students that if they do not do the homework they will not be able to work with prepared students in the forthcoming group activity.) 4.10b Classroom Activities • Boxed Insert: Do We Need More Women in the Board Room? Students should review, from the chapter, the Ethical Success or Failure? boxed insert. Have students form groups of three or four, log into The Board Connection at www.theboardconnection .org, and consider the following questions for discussion: • What are some thoughts and observations about this site? • Does an organization similar to this one help women? Explain. • How might having women serve on the boards of public, private, or nonprofit organizations change the decisions that are made by a board? After discussing these questions for five to ten minutes, have a representative from each group share their group’s ideas with the class. • Which Client? Exercise. Divide students into groups of four or five. Each student should have their text as well as their homework assignment. (Note: The instructor can choose to place students who have not done the homework into separate groups.) Laptops are also acceptable. The task is to evaluate four potential sole proprietorships for eBay. Each group will have 20 minutes to rank the four business ventures along with rationale. Students may use the handout provided. After 20 minutes, ask each group to report their results. • Brain Food, Anyone? Exercise. This is a 20- to 30-minute group activity that requires students to draft a basic partnership agreement for a food cart business called “Brain Food.” The purpose of the activity is to help students understand the need for planning prior to entering into a partnership. Students should be placed into groups of four to five and given a copy of the handout. After 30 minutes, students should report about their plans. The instructor may also choose to collect the plans for grading. • Choices, Choices! Exercise. This is a short (10-minute) exercise designed to let students look at the advantages and disadvantages of the corporate model versus a limited-liability company. Place students into groups of three to four and provide them with the handout. They will have 10 minutes to come to a point of view. • We Need to Merge! Exercise. This is a very simple and fun exercise that asks students to identify the types of mergers that would be created from the hypothetical mergers of several well-known companies. 4.10c Exercise Handouts Follow on Next Pages Which Client? You and your classmates are part of a consulting team that helps individuals start their own businesses on eBay. At this time, you have four potential clients who have asked for your help. All four believe they have a potentially profitable business for eBay. These clients include: 1. Kate Katamaranski. Kate loves anything to do with cats. She has noticed that cat items appear to be very popular at craft shows and that cat-themed clothing seems to sell well in her local department store. Kate’s plan is to recruit local artisans who create “cat” crafts and sell these items on eBay. The prices would be comparable to what an individual would pay at a fair. For example, a porcelain cat toothbrush holder would sell for $7.99 plus shipping. Fortunately, Kate is an excellent photographer and believes that she can present her items well. 2. Fred Fantastic. Fred is a genius at taking old computers, cell phones, and other digital dinosaurs and refurbishing them at almost no cost to himself. He believes he can sell enough through eBay to indulge his electronic hobbies. Fred does not want to take too much time away from his day job as a financial analyst, but he just loves electronics. He believes this would be fun and that his enthusiasm would communicate itself to customers. 3. Jane Jewel. Jane is an empty nester who spends her weekends and free evenings going to flea markets and estate sales looking for antique costume jewelry. She is extremely knowledgeable and in her job as a librarian has read every book on the subject. It is not unusual for Jane to find a piece worth hundreds of dollars for two or three dollars. She would like to sell her finds on eBay. She is willing to work very hard. Fortunately, she is a good writer and can describe her items well. She is also willing to invest in a digital camera and learn how to use it. 4. Peter Pine. Peter has come up with a great formula for growing moss. He became interested in this when he found that grass would not grow under his conifer trees but moss would. Unfortunately, there were no nurseries in his area that sold moss, and the limited number of online companies that did so were prohibitively expensive. Peter uses a mix of buttermilk and beer to grow his moss and would love to get into the moss business. He is wondering if eBay might be a way to start. Peter does have a full-time job but also has a lot of energy and would prefer to work for himself. Your homework prior to the next class is to spend approximately 20 to 30 minutes on eBay (www.ebay.com) reviewing the four business categories above and corresponding sales. Hint: Look under several categories for each of the four possibilities. For example, for Kate’s business, look under cats, crafts, art, household items, etc. Write a short (one- to two-paragraph) paper explaining each of these categories. In class, you will discuss in groups which of the four potential clients has the most chance of success based on your research. Bring your paper to the next class. Which Client? In your teams, discuss the findings from each member’s homework. After reviewing each other’s papers, rank the projects in order of probable success. Provide a rationale for your ranking. Consider size of potential market, competitors, inventory and shipping costs, etc., as well as the skills and commitment each sole proprietor is likely to bring to the operation. Use the sheet below for your ranking and rationale. The most likely to succeed should be rated No. 1 and the least likely as No. 4. Ranking with Rationale Kate Katamaranski: 1. 2. 3. Fred Fantastic: 1. 2. 3. Jane Jewel: 1. 2. 3. Peter Pine: 1. 2. 3. Which Client? Instructor Notes Most students should place Fred Fantastic as the least likely to succeed. Factors will include shipping issues as well as personal issues. Fred is playing at a business. He is not likely to persevere if problems arise. Peter Pine may be number three, as the market for moss is probably small. Some students, however, may find information indicating that it could be very profitable. It is likely that either Kate Katamaranski or Jane Jewel will be No. 1. Kate has a clear picture of what she wants to do as well as photography skills. Students will find that photographs are very important on eBay. Jane has the advantage of knowledge and skill. She is also willing to learn. Brain Food, Anyone? You and your classmates are about to go into the food business. Having spent many hours in the library without food or drink, you have received permission to operate a food cart in the lobby outside the library as long as you take responsibility for keeping the area clean. You plan to provide bottled water, juices, and milk, as well as fruit, muffins, and trail mix. You will also offer granola that can be purchased with milk, as well as hard-boiled eggs and yogurt. Your business will be called “Brain Food,” and everything you offer will be healthy. The cart will have a cooler for the perishable items, but no stove. No electricity will be needed. Your plan is to operate the cart all hours that the library is open. You and your partners will form a general partnership. In the next 30 minutes, please draft a basic partnership agreement, which will include the following: 1. Business vision 2. How initial equity investment will be divided and ownership 3. How profit and loss will be shared 4. Definition of business roles—How can you capitalize on each other’s strengths? 5. Pay and compensation 6. Provisions for dissolution of partnership 7. Distribution of assets upon dissolution 8. Length of partnership 9. How disputes will be handled 10. What is the decision-making process? Brain Food, Anyone? Instructor Notes Students should be encouraged to use their textbooks during this exercise. Answers will vary depending on individual student perspectives. Answers will also differ depending on whether or not students see this business surviving their tenure at the school. If this is a short-term business, the answers will be different than if they see this as continuing after they graduate. Choices, Choices! The Smith family has a very successful family tea shop that also provides wireless Internet access and live entertainment. They believe that there is a great deal of growth opportunity in such tea shops and plan to eventually expand. After meeting with their lawyers and accountants, they realize they need to change their business structure to either a corporation or a limited-liability company. They understand that both have limited personal liability. Using the information in your text regarding the advantages and disadvantages of each, make a recommendation as to which you would recommend to the Smiths. You have 10 minutes to develop a point of view. Provide at least three reasons for your recommendation. Be prepared to defend your point of view. We recommend that the Smiths form a _____________________________ a. corporation b. limited-liability company The rationale for our recommendation is as follows: 1. 2. 3. Choices, Choices! Instructor Notes The students who recommend that the Smiths incorporate should focus on the easy transferability of ownership, perpetual existence, and ability to be owned by a single individual that a corporation offers. If the Smiths wish to expand, the corporation provides the easiest way of raising capital. Those who recommend an LLC will focus on both the positive aspects of an LLC (management flexibility, avoidance of double taxation, etc.) as well as the negatives involved with corporations. Those negatives include double taxation, expense and paperwork, and a lack of secrecy. We Need to Merge! Step 1: Review the defining characteristics of the three different types of mergers: horizontal, vertical, and conglomerate. Step 2: Examine the list of five possible mergers below. Indicate whether each is horizontal, vertical, or conglomerate. Be prepared to defend your answers. Nike Corporation and Reebok: P&G and Eastman Kodak: Sealy Mattress Company and Viking Furniture: State Farm and Geico: Dow Chemical and Revlon: Step 3: Develop your own example for each type of merger: Conglomerate Horizontal Vertical We Need to Merge! Instructor Notes This exercise can be done individually or in groups in class. In either case, it should take only a few minutes. Since the “mergers” are all hypothetical, the students can have fun coming up with their own suggestions. It is up to the individual instructor whether to have students develop the answers to Steps 2 and 3 together, or do Step 2 first and discuss the answers prior to Step 3. One set of answers to Step 2 is listed below (there may be different interpretations): Nike Corporation and Reebok: Horizontal merger, as both companies make and sell similar products and operate in similar markets. P&G and Eastman Kodak: Conglomerate merger, as both firms operate in completely different industries. Sealy Mattress Company and Viking Furniture: Vertical merger, as Sealy could sell its mattress through Viking. Normally, furniture stores would be customers. State Farm and Geico: Horizontal merger, as both companies sell insurance to individuals. Dow Chemical and Revlon: Vertical merger, as Revlon could use Dow-produced chemicals in its products. Students should be given five minutes to develop the answers to Step 3 if they are being done separately from Step 2. If they have their laptops in class, encourage them to look online for likely candidates. Chapter 4 Video Case: AT&T and T-Mobile: What Went Wrong with Their Merger? RUNNING TIME: 3:10 Chapter 4 discusses forms of business ownership. In a sole proprietorship, all business profits become the property of the owner, but the owner is also personally responsible for all business debts. General partners are responsible for running the business and for all business debts, whereas limited partners are not responsible for business debts beyond the amount they have invested. Although partnership eliminates some of the disadvantages of sole proprietorship, it is the least popular of the major forms of business ownership. A corporation is an artificial person created by law, with most of the legal rights of a real person. Perhaps the major advantage of the corporate form is limited liability. Three additional forms of business ownership—the cooperative, joint venture, and syndicate—are used by their owners to meet special needs. A corporation may grow by expanding its present operations or through a merger or an acquisition. Concepts Illustrated in the Video • Merger • Acquisition • Corporation • Stock • Stockholder • Corporate Officers VIDEO CASE SUMMARY The Justice Department filed a lawsuit to stop the merger of AT&T and T-Mobile based on the concern that the second and fourth largest wireless carriers would create a super power with 132 million connections and over $72 billion in revenue. The government felt that the merger would result in price increases and a reduction in service as well as taking out competition. New entrants into the market would have difficulty competing against such a powerful company. AT&T argued that the opposite would happen—service would be better and be available to more people. AT&T had additional an incentive to fight the lawsuit since it had promised T-Mobile $3 billion if the deal didn’t work out. Critical-Thinking Questions Using information from the case and the video, answer the following questions: 1. Why would AT&T promise to pay T-Mobile billions of dollars as a “breakup fee” if the merger fell through? A breakup fee is common in takeover agreements. A breakup, or termination fee, is required to compensate for the time and resources used to facilitate the deal. Such a fee is used to discourage other companies from attempting to outbid. Breakup fees are normally 1 to 3 percent of the deal’s value; AT&T’s breakup fee was over 10 percent of the value. 2. In a free market economy, what is the reasoning behind limiting monopolies or companies having significant market share over competitors? A monopoly occurs when one single supplier has discretion in setting prices and therefore can set a higher price unless prohibited by government regulation. A monopoly does not face the discipline of competition which means that the monopoly may operate inefficiently without being corrected by the marketplace. If competition is eliminated, then prices may go up regardless of demand. 3. Name a service that benefits you because there is competition in that service industry. Why does competition benefit consumers? Students will come up with many possible answers such as grocery stores, automobile service centers, cable providers (Dish, Comcast, U-Verse, Direct-TV), computer repair services, plumbers, or other trades. Consumers benefit from competition because they have information about the prices of products and services and can make choices among competing firms or seek a substitution. Chapter 4 Lecture Launcher: Just Like Before, But Now with Tax Breaks! VIDEO SUMMARY Sylvie sits down with Jake. The good news is that Urban Farmz is making money. However, Sylvie now thinks the business needs to be restructured. Currently it’s a limited liability company, but an S corporation would be better. The question is whether Caleb will be on board with the change. Sylvie and Jake know he is reluctant to let Urban Farmz get “too corporate.” Surprisingly, they discover that Caleb supports the plan. He has been researching corporate ownership structures and agrees that an S corporation would be better than a C corporation. “[We can] avoid all that double taxation stuff with the C corp. No personal liability, just like before, but now with tax breaks,” he exclaims. “Cool!” Solution Manual for Business William M. Pride, Robert J. Hughes, Jack R. Kapoor 9781133595854, 9780538478083, 9781285095158, 9781285555485, 9781133936671, 9781305037083
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