Risk and Return Concept Video
In this lesson, students research the three basic types of business organization: sole proprietorships, partnerships, and corporations. Considering the advantages and disadvantages of each, they function as consultants offering advice on which form of business is best suited for different business scenarios. The case studies all feature real- life entrepreneurs who started businesses producing chocolate candy and cookies—they all result ultimately in “sweet” success stories. Once students have made their recommendations, they are provided the identities of their clients and asked to prepare reports that tell the rest of the story—what happened to each founder and business. Products featured in this lesson that almost every student will recognize are the Hershey chocolate bar, Mars M&Ms and Famous Amos chocolate cookies.
Hold up a small bag of M&Ms or Hershey’s kisses. Tell students the chocolate candy is a hint as to what they will be studying next. Provide a few minutes for students to write down on a slip of paper what they think the topic will be. Instruct them to include their names on their predictions.
Collect their predictions then announce that students are going to be studying the “sweets” industry—more specifically, people and businesses that produce chocolate and chocolate-related products. Give the bag of candy as a reward to the student who has the closest correct answer or the one closest to being correct. If there is a tie, you can divide the bag.
Activity 1: Three Types of Business Organization
Additional information is provided below on several issues you may want to raise with your students during this activity or later in the lesson as the opportunity arises.
Students may not be familiar with the term “liability.” To help them grasp its importance, discuss specific circumstances in which liability could be an issue for sole proprietorships and partnerships. The most common situation is debts owed when a business experiences financial difficulties or fails. If a business is not fully insured, there is also the possibility of loss due to disaster (e.g., fire, flood) or lawsuits. Unlimited liability means that the owner’s personal assets can be used to pay for any debts of the business.
A point to stress regarding corporations beyond the limits on liability is the fact that corporations have more options when they need to obtain additional financing. For sole proprietorships and partnerships, the only source of money is often personal assets. On rare occasions, they may be able to borrow money from family members, friends or a bank. Corporations have the option to issue more stock. Also corporations typically find it easier to borrow money – through loans from the financial markets (commercial banks, credit unions, insurance companies). And corporations can issue corporate bonds.
If students are not familiar with tax law, you may need to provide information about the tax implications of different forms of business.
Tax law permits corporations to deduct the full cost of employee benefits, such as medical insurance, thus reducing corporate tax liabilities. But sole proprietorships and partnerships are not permitted to deduct these costs directly from their business income (the costs may be partially deductible as an adjustment to income). For some business owners, this is a major disadvantage of the sole proprietorship and partnership forms of ownership.
Sole proprietors and partners pay individual income tax on their companies’ earnings. In contrast, a corporation is taxed as a separate entity that pays tax on its income. The stockholders also pay personal income tax on any dividends they receive. The effect is referred to as “double taxation” and in this case, it is the corporate owners that have a tax disadvantage.
Life of the Business:
There are probably examples of sole proprietorships and partnerships in your community that dissolved when a key person became ill or died – a medical practice, a law firm, a neighborhood store, or a mechanic’s shop. News reports occasionally tell of acrimonious splits among business partners (and even families) who are unable to agree on the management or sale of these forms of business. Real-life examples from Mars, Inc. are provided as an extension activity in this lesson.
Read more, at this Small Business Planner website, about each type including their advantages and disadvantages.
Activity 2: Sweet Opportunities
Divide students into small groups to prepare their recommendations. If time is limited, you may want to assign each group just one or two clients. After the groups finish reading the client stories in the file, Sweet Opportunities, have them prepare written recommendations as to which business organization they believe to be best. Make sure the groups provide reasons for their recommendations as well as listen at least one negative with suggestions on how to minimize that negative effect.
When students have completed their recommendations, compare and discuss their decisions as a class. Here are some sample recommendations, Sweet Success-Recommendations, to assist you in this discussion. Obviously, there will be variations in their advice given. Here are some questions for the discussion:
If students need additional information to help them make their recommendations, they can click on the titles below:
Activity 3: Sweet Success
Divide students into four groups. Have each group research what has happened to the founders and businesses featured in the case studies. PowerPoint slide presentations are an ideal way for students to share with classmates what they discover. If this is not possible, have them use word processing or desktop publishing software to create their report. Encourage them to use images as well as text.
Client 1: Elise MacMillan and her brother Evan co-founded The Chocolate Farm in Englewood, Colorado, in the late 1990s.
Client 2: Milton Hershey broke ground for his chocolate factory near Lancaster, PA in 1903. It was the beginning of what would become Hershey Foods Corporation .
Client 3: Forest Mars invited Bruce Murrie, an investment banker and son of the Hershey company president, to be his partner in M&M Ltd. The M&Ms we still eat today were first sold to the public in 1941. The letters in "M&M" stand for Mars & Murrie. Eventually, Murrie left the business but Forest Mars became the owner of Mars, Inc.
Client 4: Wally Amos launched the Famous Amos Cookie Company in a Hollywood, CA storefront on Sunset Boulevard in 1975.
Have the students read about one of these persons and the business he or she created. Then report their findings about what happened to the entrepreneur and the business. Be sure to have them include answers to the following questions.
TIP: If a company has incorporated and is publicly traded, another source of information will be Hoover’s Online Directory .
Private vs. Public Corporations
A look at Mars, Inc. offers an excellent opportunity to discuss public vs. private corporations. In the 1960s, Forrest Mars, Sr. purchased his stepsister’s interests in Mars, Inc. Owning 80 percent of the company, Forrest then had little problem convincing the rest of the board members to sell their shares to him. Since his death in 1999, his three children have owned and managed the company: Forrest Mars Jr. (President), John Mars (CEO), and Jacqueline Badger Mars (Vice President). As a privately-held (closed) company, Mars, Inc. is not required to report information about its business to the public.
In contrast, public (open) corporations are required by federal law to disclose information about their finances and operations to anyone interested in reading about them. The purpose of this legislation is to give people information about companies in which they might invest. The Securities and Exchange Commission (SEC) is the federal agency that monitors whether public corporations are abiding by the law—providing prospectuses and regular financial reports. Ask students:
Privately-held companies are very much a tradition within the candy industry—unusual in today’s business world. Most of these companies can trace their roots back several generations to an immigrant with a recipe and an affinity for sweets.
Risk Management through Diversification
The students' research reports also provide an opportunity to discuss how companies try to reduce risk through product diversification. Both Hershey Foods and Mars have purchased manufacturers of other chocolate candy bar brands and non-chocolate candies. Hershey Foods also used to sell cocoa mulch, a byproduct of the chocolate making process, to gardeners, but no longer does. Mars has a long history in the pet food and care business that can be traced back to the first company Forrest Mars, Sr. established in Europe. During the period Forrest partnered with Bruce Murrie, Uncle Ben’s rice was introduced. Other Mars ventures include hot and cold drink vending machines and electronic automated payment systems.
Ownership of Famous Amos Cookies changed hands several times between 1985 and 1998, eventually being purchased by Keebler Foods Company . Keebler was acquired by Kellogg Company in 2001, helping expand what is viewed as a cereal company into the snack foods market as well.
Ask students to vote on what they view as the top three factors to consider when choosing the form for a new business. Remind them to take account of what they have learned as they vote on these factors. (The bulleted list of factors provided below is also presented in the Conclusion section of the student version’s of this lesson.) Discuss the reasons for their choices. Were there any other important factors that they think are missing from the list?
National Confectioners Association will help you do your research.
Evaluation is built into Activities 1 and 2. Assessment Rubrics should be adjusted and weighted to fit the needs of the teacher.