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Intro to Bus chapter 5

Intro to Bus chapter 5

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  • See Learning Goal 1: Compare the advantages and disadvantages of sole proprietorships.
  • See Learning Goal 1: Compare the advantages and disadvantages of sole proprietorships. Although corporations make up only 20 percent of the total number of businesses, they make 81 percent of the total receipts. Sole proprietorships are the most common form (72 percent), but they earn only 6 percent of the receipts.
  • See Learning Goal 1: Compare the advantages and disadvantages of sole proprietorships. This slide helps students understand why sole proprietorships account for the largest number of businesses in the United States.
  • See Learning Goal 1: Compare the advantages and disadvantages of sole proprietorships. Since the main advantage of sole proprietorships is the ease by which they can be started this slide gives students the reason why this form of ownership only accounts for such a small percentage of overall total revenue. Special emphasis should be given to the disadvantage of unlimited liability (personal assets at risk), and to the time commitment (24 hours, 7 days per week, and 365 days per year).
  • See Learning Goal 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships. Each type of partnership has advantages and disadvantages. In a general partnership resources are pooled and liability is spread among all partners. However in this type of partnership there is the possibility for disagreement and/or personality conflicts. A limited partnership is made up of a mixture of general partners and limited partners. Limited partners cannot actively take part in business dealings.
  • See Learning Goal 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships. There are two less common forms of partnerships outlined in this slide: master limited partnership and the limited liability partnership. The master limited partnership is unique because it combines the tax benefits of a more traditional partnership and the liquidity of a publicly traded security. One example of a master limited partnership is Kinder Morgan Energy Partners which is engaged in energy storage and operates 26,000 miles of pipelines.
  • See Learning Goal 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships. The limited partner is not able to exercise any management control over the partnership but maintains limited liability. A limited partner’s liability is limited to the amount invested in the partnership.
  • See Learning Goal 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships. Partnerships have some distinct advantages. The key advantage is that partnerships have access to more resources such as financial, management and knowledge.
  • See Learning Goal 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships. Like the sole proprietorship, a partnership has some serious disadvantages such as unlimited liability and division of profits. One disadvantage that students might not consider is disagreement among partners.
  • See Learning Goal 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships. Successful partnerships start with a shared vision. In order to develop a successful partnership all partners must be honest with each other and bring a variety of different skills to the partnership. Suggestions to discuss with students regarding partnerships: Partnership agreements must be in writing! Each individual’s responsibilities to the company must be in writing and included as part of the contract. Make certain that provisions are in place if one or more partners want to terminate the agreement. (Information outlining the terms and conditions of terminating any agreement, should be outlined in the original contract.)
  • See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
  • See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies. Identify that the major advantage of corporate ownership is the limited liability protection (personal assets are protected). Interesting facts regarding incorporating a business: the cost for a business to Incorporate ranges from about $50 to over $300, plus states fees. Over half of Fortune 500 companies choose to incorporate in Delaware because the state’s laws makes the process easier than it is in other states.
  • See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies. Double taxation is a major disadvantage of corporations. A corporation is taxed on income earned and then shareholders are taxed on any dividends the company may pay.
  • See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies. An S corporation looks like a corporation but is taxed like a sole proprietorship or partnership. The primary advantage of an S corporation is that it avoids the double taxation of a C corporation. Approximately 3 million US companies operate as an S corporation.
  • See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies. Originally to qualify as an S Corporation the number of shareholders was limited to 75; this has now been amended to no more than 100.
  • See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies. Advantages and disadvantages of LLCs are listed in this slide. The biggest advantages that should be pointed out with LLCs are limited liability and flexibility.
  • See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies. Primary disadvantages from entrepreneurs perspectives would be limited life span and paperwork.
  • See Learning Goal 4: Describe three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
  • See Learning Goal 4: Describe three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private. There are three types of mergers. Horizontal mergers take place in the same industry, i.e., one competitor merging with another. An example of this would be Daimler Mercedes Benz merging with Chrysler to create DaimlerChrysler in the 1990s. Vertical merger takes place between companies in a value chain, for example a supplier and a distributor merging. Conglomerate merger has no relationship between companies, both Tyco and General Electric operate as conglomerates.
  • See Learning Goal 4: Describe three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
  • See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
  • See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising. Franchising has a lower failure rate because the franchisee has support from the franchisor. This support can range from marketing to financial.
  • See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
  • See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising. Benefits of a Home-Based Franchise Home-based businesses are growing at an enormous rate. This slide helps clarify some of the reasons why. Share with the class some tips on getting started: Decide on business idea Set goals for the business How many hours do you want to work? How many employees do you want? How much money will you need to get started? Visit www.e-myth.com for more online information regarding startups.
  • See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
  • See Learning Goal 6: Explain the role of cooperatives.

Chap005 Chap005 Presentation Transcript

  • * * Chapter Five How to Form a Business Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
  • MAJOR FORMS of OWNERSHIP * * Basic Forms of Business Ownership
      • Sole Proprietorship -- A business owned, and usually managed, by one person.
      • Partnership -- Two or more people legally agree to become co-owners of a business.
      • Corporation -- A legal entity with authority to act and have liability apart from its owners.
    LG1 5-
  • FORMS of BUSINESS OWNERSHIP * * Basic Forms of Business Ownership LG1 5-
  • MAJOR BENEFITS of SOLE PROPRIETORSHIP * * Advantages of Sole Proprietorships
      • Ease of starting and ending the business
      • Being your own boss
      • Pride of ownership
      • Leaving a legacy
      • Retention of company profit
      • No special taxes
    LG1 5-
  • DISADVANTAGES of SOLE PROPRIETORSHIPS * * Disadvantages of Sole Proprietorships
      • Unlimited Liability -- Any debts or damages incurred by the business are your debts, even if it means selling your home, car or anything else.
      • Limited financial resources
      • Management difficulties
      • Overwhelming time commitment
      • Few fringe benefits
      • Limited growth
      • Limited life span
    LG1 5-
  • MAJOR TYPES of PARTNERSHIPS * * Partnerships
      • General Partnership -- All owners share in operating the business and in assuming liability for the business’s debts.
      • Limited Partnership -- A partnership with one or more general partners and one or more limited partners.
    LG2 5-
  • OTHER FORMS of PARTNERSHIPS * * Partnerships
      • Master Limited Partnership -- A partnership that looks much like a corporation but is taxed like a partnership and thus avoids the corporate income tax.
      • Limited Liability Partnership -- Limits partners’ risk of losing their personal assets to the outcomes of only their own acts and omissions and those of people under their supervision.
    LG2 5-
  • TYPES OF PARTNERS * * Partnerships
      • General Partner -- An owner (partner) who has unlimited liability and is active in managing the firm.
      • Limited Partner -- An owner who invests money in the business but enjoys limited liability. Limited Liability means that liability for the debts of the business is limited to the amount the limited partner puts into the company; personal assets are not at risk.
    LG2 5-
  • ADVANTAGES of PARTNERSHIPS * * Advantages & Disadvantages of Partnerships
      • More financial resources
      • Shared management and pooled skills and knowledge
      • Longer survival
      • No special taxes
    LG2 5-
  • DISADVANTAGES of PARTNERSHIPS * * Advantages & Disadvantages of Partnerships
      • Unlimited liability
      • Division of profits
      • Difficult to terminate
      • Disagreements among partners
    LG2 5-
  • PICK YOUR PARTNER WISELY (Spotlight on Small Business) * * There is no such thing as a perfect partner but ask these questions when you try to find your best match:
    • Do you share the same goals?
    • Do you share the same vision for the company?
    • What skills does he/she have? Are yours the same?
    • What can he/she bring to the business?
    • What type of decision maker is he/she?
    • Do you trust each other?
    • How does he/she problem solve?
    5-
  • CONVENTIONAL CORPORATIONS * * Corporations
      • Conventional (C) Corporation -- A state-chartered legal entity with authority to act and have liability separate from its owners (its stockholders).
    LG3 5-
  • ADVANTAGES of CORPORATIONS * * Advantages of Corporations
      • Limited liability
      • Ability to raise more money for investment
      • Size
      • Perpetual life
      • Ease of ownership change
      • Ease of attracting talented employees
      • Separation of ownership from management
    LG3 5-
  • DISADVANTAGES of CORPORATIONS * * Disadvantages of Corporations
      • Initial cost
      • Extensive paperwork
      • Double taxation
      • Two tax returns
      • Size
      • Difficulty of termination
      • Possible conflict with stockholders and board of directors
    LG3 5-
  • S CORPORATIONS * * S Corporations
      • S Corporation -- A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships.
        • S corporations have shareholders, directors and employees, plus the benefit of limited liability.
        • Profits are taxed only as the personal income of the shareholder.
    LG3 5-
  • WHO CAN FORM S CORPORATIONS? * * S Corporations
      • Qualifications for S Corporations:
        • Have no more than 100 shareholders.
        • Have shareholders that are individuals or estates and are citizens or permanent residents of the U.S.
        • Have only one class of stock.
        • Derive no more than 25% of income from passive sources.
        • If an S corporation loses its S status, it may not operate under it again for at least 5 years.
    LG3 5-
  • LIMITED LIABILITY COMPANIES * * Limited Liability Companies
      • Limited Liability Company (LLC) -- Similar to a S corporation but without the eligibility requirements.
        • Advantages of LLCs:
          • Limited liability
          • Choice of taxation
          • Flexible ownership rules
          • Flexible distribution of profit and losses
          • Operating flexibility
    LG3 5-
  • DISADVANTAGES of LLCs * * Limited Liability Companies
          • No stock, therefore ownership is nontransferable
          • Limited life span
          • Fewer incentives
          • Taxes
          • Paperwork
    LG3 5-
  • MERGERS and AQUISITIONS * * Corporate Expansion: Mergers and Acquisitions
        • Merger -- The result of two firms joining to form one company.
          • Acquisition -- One company’s purchase of the property and obligations of another company.
    LG4 5-
  • TYPES of MERGERS * * Corporate Expansion: Mergers and Acquisitions
        • Vertical Merger -- Joins two firms in different stages of related business.
          • Horizontal Merger -- Joins two firms in the same industry and allows them to diversify or expand their products.
          • Conglomerate Merger -- Unites firms in completely unrelated industries in order to diversify business operations and investments.
    LG4 5-
  • LEVERAGED BUYOUTS * * Corporate Expansion: Mergers and Acquisitions
        • Leveraged Buyout (LBO) -- An attempt by employees, management or a group of investors to buy out the stockholders in a company.
          • LBOs have ranged in size from $50 million to $31 billion and have involved everything from small businesses to giant corporations.
          • In 2007, foreign investors poured $414 billion into U.S. companies.
    LG4 5-
  • FRANCHISING * * Franchises
        • Franchise Agreement -- An arrangement whereby someone with a good idea for a business ( franchisor ) sells the rights to use the business name and sell a product or service ( franchise ) to others ( franchisees ) in a given territory.
          • More than 900,000 franchised businesses operate in the U.S., employing approximately 10 million people.
    LG5 5-
  • ADVANTAGES of FRANCHISING * * Advantages & Disadvantages of Franchises
          • Management and marketing assistance
          • Personal ownership
          • Nationally recognized name
          • Financial advice and assistance
          • Lower failure rate
    LG5 5-
  • DISADVANTAGES of FRANCHISING * * Advantages & Disadvantages of Franchises
          • Large start-up costs
          • Shared profit
          • Management regulation
          • Coattail effects
          • Restrictions on selling
          • Fraudulent franchisors
    LG5 5-
  • HOME-BASED FRANCHISES * * Home-Based Franchises
          • Advantages:
            • Relief from commuting stress
            • Extra family time
            • Low overhead expenses
          • Main Disadvantage:
            • Isolation
    LG5 5-
  • GLOBAL FRANCHISING * * Franchising in International Markets
          • Canada is the most popular target for U.S. based franchises; South Africa and the Philippines are becoming popular despite high cost.
          • Franchising is successful when the product is convenient, high quality, great service is included and the franchisee adapts to the region.
          • International franchising goes both ways – some foreign franchises have come to the U.S.
    LG5 5-
  • COOPERATIVES * * Cooperatives
          • Cooperatives -- Businesses owned and controlled by the people who use it – producers, consumers, or workers with similar needs who pool their resources for mutual gain.
          • Worldwide, 750,000 cooperatives serve 730 million members – 120 million in the U.S.
          • Members democratically control the business by electing a board of directors that hires professional management.
    LG6 5-