Deck 4: Choosing a Form of Business Ownership

Question 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.donorschoose.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?
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?

Answer 1

Company DC is a virtual charity organization which helps students by funding for their educational projects across America. It provides funds only for educational projects and not for other projects. Their main motive is to help students by supplying study material to the school.
The projects are segmented using different frameworks which are listed below:
Most urgent projects are the projects which are to be completed before a specific time period.
Lowest cost projects are the projects which need minimum cost to execute.
Projects from rural areas are segmented as highest poverty projects.
Company K is a virtual charity organization formed to alleviate poverty through lending. It is an organization which borrows from the public at zero interest and utilizes for projects. When the borrower repays the amount, K Company repays the loan to the lender.
Company K's projects are segmented considering various components, which are listed below:
• Gender : Separate projects are there for male or female.
• Sector: There is a sector wise distribution for the projects. Different projects are available for sectors such as agriculture, arts, construction, education, entertainment, food, retail, services etc.
• Different projects are there for groups or individuals.
These models are very effective because of the following reasons:
• It provides various opportunities for the public to fund on Global issues.
• People can offer their help in the way they wish.
• Help can be offered anytime and from anywhere in the world.
• It encourages public to fund for the causes in which they believe.
b.
The models used by nonprofit corporations are not much effective for profit business as there is the difference in the main motive of the business. Profit organizations' main intention is to generate revenue.
Profit organization can use these models to attract the investors. But, it's more effective for the non-profit organizations as they raise funds from public, whereas, profit organizations sell products and generate revenue.

Question 2

When Warren Buffett started his first partnership more than 50 years ago, he never dreamed he would wind up putting together a wildly diverse collection of businesses under one corporate umbrella. Originally, Buffett set up a series of partnerships with family and friends to pool cash for buying big blocks of stock in companies he had researched. Not all of Buffett's stock picks paid off, but many were so successful that Buffett quickly earned a worldwide reputation for savvy investing.
Always looking for a good investment, Buffett turned his attention to the prospects of Berkshire Hathaway, a struggling textile manufacturer based in New Bedford, Massachusetts. Seeing value in the company's heritage and its plans for making synthetic fibers, Buffett began buying its stock. Once he controlled the mills, Buffett put one of Berkshire Hathaway's executives in charge. This was Buffett's pattern over and over as he built a conglomerate by adding to his company's portfolio of businesses. He provided the financial backing, but he didn't meddle in the dayto- day management decisions of the corporations he purchased.
Berkshire Hathaway became the corporate vehicle through which Buffett acquired a variety of companies. In the early days, he pursued insurance firms, banks, and publishing companies. He continued buying year after year, adding See's Candies to his conglomerate and, later, GEICO insurance, sticking to his tried-and-true formula of investing in companies with long-term profit potential and strong competitive positions.
Living in Omaha, Buffett couldn't help but notice the success of the Nebraska Furniture Mart, a superstore that annually sold $100 million worth of furniture. The family-owned business was a fierce competitor and a major regional power in furniture retailing. Although Buffett had tried, unsuccessfully, to buy the store, he never gave up. During the 1980s, he again approached the retailer. This time he pointed out all the financial benefits of being part of Berkshire Hathaway and emphasized his hands-off approach to ownership. Berkshire Hathaway won the deal.
Today Berkshire Hathaway has more than six dozen companies in its diverse portfolio. Although it still owns some of the companies it acquired decades ago, the portfolio has changed a bit over the years. GEICO , the third-largest U.S. auto insurance firm, has been a member of the conglomerate since 1996. Berkshire Hathaway also owns the General Re insurance firm. Among the retailing businesses it owns are Jordan Furniture, Star Furniture, Helzberg Diamonds, and the Pampered Chef direct-seller of kitchen tools. In addition, it owns the ice-cream franchising company Dairy Queen; Benjamin Moore paint; Johns Manville building products; and Shaw Industries, which makes tufted broadloom carpeting and distributes other flooring products.
Berkshire Hathaway has expanded into transportation, as well. Its NetJets was a pioneer in offering companies and individuals the opportunity to own a fraction of a private jet, so they can enjoy the convenience of flying whenever and wherever they want. In 2010, the conglomerate paid $26 billion for Burlington Northern Santa Fe Corp., a railroad that serves western and southwestern states. This acquisition, labeled "brilliant" by a railway competitor because it was completed just as the industry began to rebound from recession, gave Buffett access to years of details about the size, volume, and destination of train shipments. By analyzing this information, Buffett spotted clues that helped him fine-tune his investments.
The annual meeting held by Berkshire Hathaway is unlike any stockholder gathering on Earth. The more-than-35,000 people in attendance spend hours browsing and buying from exhibits set up by the conglomerate's companies. Stockholders are encouraged to bring the details of their car insurance and let GEICO give them quotes on the spot, including a small ownership discount. Nebraska Furniture Mart promotes a special stockholders' weekend of sales, as do other Berkshire Hathaway-owned retailers in the area. The annual meeting is such a high-profile event that it merits coverage by the New York Times, CN BC, and Fortune magazine, among many other major media outlets. What will Berkshire Hathaway's next acquisition target be?18
Questions
Why would Berkshire Hathaway own a number of furniture retailers? Outline the possible advantages and disadvantages.

Answer 2

Berkshire Hathaway Inc. is a holding company owning subsidiaries involved in a number of diversified business activities.
As a part of its diversified strategy the group has acquired the following furniture retailers: Nebraska Furniture Mart, R.C. Willey, Star Furniture and Jordan's.
The group gains the advantage by earning huge margins generated by the aggressive furniture retailing business.
Since the furniture business is part of a greater conglomerate, due attention required to expand it might not be feasible.
These furniture shops operate in their own brand names and might not have the advantage of being recognized as part of Berkshire Hathaway Inc.

Question 3

If you were to start a business, which ownership form would you choose? What factors might affect your choice?

Answer 3

If one were to start a business, one would start a sole proprietorship form of business, as it is the most favorable form of business in the present day situation.
The factors that affect an entrepreneur's decision to open such a business include its ease of opening and closure on the basis of his/her needs and capital. It also brings with it a sense of ownership, pride and ultimate power for decision making. It also makes one feel good as one gets to keep their hard earned money. The entrepreneur gets paid off for his/her work and no one else can take the credit for it. He/she also has a better control and the entrepreneur's own idea and plans are used. Even the government has a more favorable stance towards the sole proprietorship form of business, which enjoys minimal tax liability. A small business owner has to pay taxes from his/her personal income which also simplifies calculations.

Question 4

While Kimpton's chef partners use their culinary talents to build the restaurant side of the business, its hotel experts focus on delivering personalized customer service, which requires a knowledgeable, dedicated workforce. Kimpton grooms future managers through a formal training program and matches promising employees with experienced mentors to further develop their skills. Based on its many employee development and motivation programs, it has twice been named to the Fortune magazine list of "Best Companies to Work For."
The company has also made environmental protection one of its top priorities. Following its Kimpton EarthCare plan, it has installed water-conservation systems in its hotels, expanded its recycling programs, and invested in energy-efficient equipment to save power. Going further, Kimpton works with the Nature Conservancy and the Trust for Public Land to raise money for environmental projects. The company isn't finished growing-watch for more boutique hotels and restaurants to open in the coming years.
Questions
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.

Question 5

What is a sole proprietorship? What are the major advantages and disadvantages of this form of business ownership?

Question 6

JOURNALING FOR SUCCESS
Today, many people work for a sole proprietorship, partnership, or corporation. Still others decide to become entrepreneurs and start their own business.
Assignment
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.
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.)
Now describe where and how you could obtain the skills and experience you need to be successful. What type of business ownership would you choose for your business? Record your ideas and responses to the preceding questions.

Question 7

When Warren Buffett started his first partnership more than 50 years ago, he never dreamed he would wind up putting together a wildly diverse collection of businesses under one corporate umbrella. Originally, Buffett set up a series of partnerships with family and friends to pool cash for buying big blocks of stock in companies he had researched. Not all of Buffett's stock picks paid off, but many were so successful that Buffett quickly earned a worldwide reputation for savvy investing.
Always looking for a good investment, Buffett turned his attention to the prospects of Berkshire Hathaway, a struggling textile manufacturer based in New Bedford, Massachusetts. Seeing value in the company's heritage and its plans for making synthetic fibers, Buffett began buying its stock. Once he controlled the mills, Buffett put one of Berkshire Hathaway's executives in charge. This was Buffett's pattern over and over as he built a conglomerate by adding to his company's portfolio of businesses. He provided the financial backing, but he didn't meddle in the dayto- day management decisions of the corporations he purchased.
Berkshire Hathaway became the corporate vehicle through which Buffett acquired a variety of companies. In the early days, he pursued insurance firms, banks, and publishing companies. He continued buying year after year, adding See's Candies to his conglomerate and, later, GEICO insurance, sticking to his tried-and-true formula of investing in companies with long-term profit potential and strong competitive positions.
Living in Omaha, Buffett couldn't help but notice the success of the Nebraska Furniture Mart, a superstore that annually sold $100 million worth of furniture. The family-owned business was a fierce competitor and a major regional power in furniture retailing. Although Buffett had tried, unsuccessfully, to buy the store, he never gave up. During the 1980s, he again approached the retailer. This time he pointed out all the financial benefits of being part of Berkshire Hathaway and emphasized his hands-off approach to ownership. Berkshire Hathaway won the deal.
Today Berkshire Hathaway has more than six dozen companies in its diverse portfolio. Although it still owns some of the companies it acquired decades ago, the portfolio has changed a bit over the years. GEICO , the third-largest U.S. auto insurance firm, has been a member of the conglomerate since 1996. Berkshire Hathaway also owns the General Re insurance firm. Among the retailing businesses it owns are Jordan Furniture, Star Furniture, Helzberg Diamonds, and the Pampered Chef direct-seller of kitchen tools. In addition, it owns the ice-cream franchising company Dairy Queen; Benjamin Moore paint; Johns Manville building products; and Shaw Industries, which makes tufted broadloom carpeting and distributes other flooring products.
Berkshire Hathaway has expanded into transportation, as well. Its NetJets was a pioneer in offering companies and individuals the opportunity to own a fraction of a private jet, so they can enjoy the convenience of flying whenever and wherever they want. In 2010, the conglomerate paid $26 billion for Burlington Northern Santa Fe Corp., a railroad that serves western and southwestern states. This acquisition, labeled "brilliant" by a railway competitor because it was completed just as the industry began to rebound from recession, gave Buffett access to years of details about the size, volume, and destination of train shipments. By analyzing this information, Buffett spotted clues that helped him fine-tune his investments.
The annual meeting held by Berkshire Hathaway is unlike any stockholder gathering on Earth. The more-than-35,000 people in attendance spend hours browsing and buying from exhibits set up by the conglomerate's companies. Stockholders are encouraged to bring the details of their car insurance and let GEICO give them quotes on the spot, including a small ownership discount. Nebraska Furniture Mart promotes a special stockholders' weekend of sales, as do other Berkshire Hathaway-owned retailers in the area. The annual meeting is such a high-profile event that it merits coverage by the New York Times, CN BC, and Fortune magazine, among many other major media outlets. What will Berkshire Hathaway's next acquisition target be?18
Questions
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?

Question 8

Why might an investor choose to become a partner in a limited partnership instead of purchasing the stock of an open corporation?

Question 9

While Kimpton's chef partners use their culinary talents to build the restaurant side of the business, its hotel experts focus on delivering personalized customer service, which requires a knowledgeable, dedicated workforce. Kimpton grooms future managers through a formal training program and matches promising employees with experienced mentors to further develop their skills. Based on its many employee development and motivation programs, it has twice been named to the Fortune magazine list of "Best Companies to Work For."
The company has also made environmental protection one of its top priorities. Following its Kimpton EarthCare plan, it has installed water-conservation systems in its hotels, expanded its recycling programs, and invested in energy-efficient equipment to save power. Going further, Kimpton works with the Nature Conservancy and the Trust for Public Land to raise money for environmental projects. The company isn't finished growing-watch for more boutique hotels and restaurants to open in the coming years.
Questions
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?

Question 10

How does a partnership differ from a sole proprietorship? Which disadvantages of sole proprietorship does the partnership tend to eliminate or reduce?

Question 11

DEVELOPING CRITICAL-THINKING SKILLS
Suppose that you are a person who has always dreamed of owning a business but never had the money to open one. Since you were old enough to read a recipe, your mother allowed you to help in the kitchen. Most of all, you enjoyed baking and decorating cakes. You liked using your imagination to create cakes for special occasions. By the time you were in high school, you were baking and decorating wedding cakes for a fee. Also assume that after high school you started working full time as an adjuster for an insurance company. Your schedule now allows little time for baking and decorating cakes. Finally, assume that you inherited $250,000 and that changes at your job have created undue stress in your life. What should you do?
Assignment
Discuss the following points:
a.What career options are available to you?
b. If you decide to open your own business, what form of ownership would be best for your business?
c. What advantages and disadvantages apply to your preferred form of business ownership? Prepare a two-page report summarizing your findings.

Question 12

When Warren Buffett started his first partnership more than 50 years ago, he never dreamed he would wind up putting together a wildly diverse collection of businesses under one corporate umbrella. Originally, Buffett set up a series of partnerships with family and friends to pool cash for buying big blocks of stock in companies he had researched. Not all of Buffett's stock picks paid off, but many were so successful that Buffett quickly earned a worldwide reputation for savvy investing.
Always looking for a good investment, Buffett turned his attention to the prospects of Berkshire Hathaway, a struggling textile manufacturer based in New Bedford, Massachusetts. Seeing value in the company's heritage and its plans for making synthetic fibers, Buffett began buying its stock. Once he controlled the mills, Buffett put one of Berkshire Hathaway's executives in charge. This was Buffett's pattern over and over as he built a conglomerate by adding to his company's portfolio of businesses. He provided the financial backing, but he didn't meddle in the dayto- day management decisions of the corporations he purchased.
Berkshire Hathaway became the corporate vehicle through which Buffett acquired a variety of companies. In the early days, he pursued insurance firms, banks, and publishing companies. He continued buying year after year, adding See's Candies to his conglomerate and, later, GEICO insurance, sticking to his tried-and-true formula of investing in companies with long-term profit potential and strong competitive positions.
Living in Omaha, Buffett couldn't help but notice the success of the Nebraska Furniture Mart, a superstore that annually sold $100 million worth of furniture. The family-owned business was a fierce competitor and a major regional power in furniture retailing. Although Buffett had tried, unsuccessfully, to buy the store, he never gave up. During the 1980s, he again approached the retailer. This time he pointed out all the financial benefits of being part of Berkshire Hathaway and emphasized his hands-off approach to ownership. Berkshire Hathaway won the deal.
Today Berkshire Hathaway has more than six dozen companies in its diverse portfolio. Although it still owns some of the companies it acquired decades ago, the portfolio has changed a bit over the years. GEICO , the third-largest U.S. auto insurance firm, has been a member of the conglomerate since 1996. Berkshire Hathaway also owns the General Re insurance firm. Among the retailing businesses it owns are Jordan Furniture, Star Furniture, Helzberg Diamonds, and the Pampered Chef direct-seller of kitchen tools. In addition, it owns the ice-cream franchising company Dairy Queen; Benjamin Moore paint; Johns Manville building products; and Shaw Industries, which makes tufted broadloom carpeting and distributes other flooring products.
Berkshire Hathaway has expanded into transportation, as well. Its NetJets was a pioneer in offering companies and individuals the opportunity to own a fraction of a private jet, so they can enjoy the convenience of flying whenever and wherever they want. In 2010, the conglomerate paid $26 billion for Burlington Northern Santa Fe Corp., a railroad that serves western and southwestern states. This acquisition, labeled "brilliant" by a railway competitor because it was completed just as the industry began to rebound from recession, gave Buffett access to years of details about the size, volume, and destination of train shipments. By analyzing this information, Buffett spotted clues that helped him fine-tune his investments.
The annual meeting held by Berkshire Hathaway is unlike any stockholder gathering on Earth. The more-than-35,000 people in attendance spend hours browsing and buying from exhibits set up by the conglomerate's companies. Stockholders are encouraged to bring the details of their car insurance and let GEICO give them quotes on the spot, including a small ownership discount. Nebraska Furniture Mart promotes a special stockholders' weekend of sales, as do other Berkshire Hathaway-owned retailers in the area. The annual meeting is such a high-profile event that it merits coverage by the New York Times, CN BC, and Fortune magazine, among many other major media outlets. What will Berkshire Hathaway's next acquisition target be?18
Questions
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.

Question 13

Discuss the following statement: "Corporations are not really run by their owners."

Question 14

What is the difference between a general partner and a limited partner?

Question 15

BUILDING TEAM SKILLS
Using the scenario in Exercise 3, suppose that you have decided to quit your job as an insurance adjuster and open a bakery. Your business is now growing, and you have decided to add a full line of catering services. This means more work and responsibility. You will need someone to help you, but you are undecided about what to do. Should you hire an employee or find a partner? If you add a partner, what type of decisions should be made to create a partnership agreement?
Assignment
In a group, discuss the following questions:
a. What are the advantages and disadvantages of adding a partner versus hiring an employee?
b. Assume that you have decided to form a partnership. What articles should be included in a partnership agreement?
c. H ow would you go about finding a partner? Summarize your group's answers to these questions, and present them to your class. As a group, prepare an articles-of-partnership agreement. Be prepared to discuss the pros and cons of your group's agreement with other groups from your class, as well as to examine their agreements.

Question 16

What kinds of services do not-for-profit corporations provide? Would a career in a not-for-profit corporation appeal to you?

Question 17

What issues should be included in a partnership agreement? Why?

Question 18

RESEARCHING DIFFERENT CAREERS
Many people spend their entire lives working in jobs that they do not enjoy. Why is this so? Often, it is because they have taken the first job they were offered without giving it much thought. How can you avoid having this happen to you? First, you should determine your "personal profile" by identifying and analyzing your own strengths, weaknesses, things you enjoy, and things you dislike. Second, you should identify the types of jobs that fit your profile. Third, you should identify and research the companies that offer those jobs.
Assignment
a. Take two sheets of paper and draw a line down the middle of each sheet, forming two columns on each page. Label column 1 "Things I Enjoy or Like to Do," column 2 "Things I Do Not Like Doing," column 3 "My Strengths," and column 4 "My Weaknesses."
b. Record data in each column over a period of at least one week. You may find it helpful to have a relative or friend give you input.
c. Summarize the data, and write a profile of yourself.
d. Take your profile to a career counselor at your college or to the public library and ask for help in identifying jobs that fit your profile. Your college may offer testing to assess your skills and personality. The Internet is another resource.
e. Research the companies that offer the types of jobs that fit your profile.
f. Write a report on your findings.

Question 19

Is growth a good thing for all firms? How does management know when a firm is ready to grow?

Question 20

Explain the difference between
a. an open corporation and a closed corporation.
b. a domestic corporation, a foreign corporation, and an alien corporation.

Question 21

Outline the incorporation process, and describe the basic corporate structure.

Question 22

What rights do stockholders have?

Question 23

What are the primary duties of a corporation's board of directors? How are directors selected?

Question 24

What are the major advantages and disadvantages associated with the corporate form of business ownership?

Question 25

How do an S-corporation and a limited-liability company differ?

Question 26

Why are not-for-profit corporations and cooperatives formed? Explain how they operate.

Question 27

In what ways are joint ventures and syndicates alike? In what ways do they differ?

Question 28

What is a hostile takeover? How is it related to a tender offer and a proxy fight?

Question 29

Describe the three types of mergers.