Chapter 05                     How to                     Form a                    BusinessMcGraw-Hill/Irwin             ...
Chapter Five                  LEARNING GOALS     1. Compare the advantages and disadvantages of        sole proprietorship...
Chapter Five                   LEARNING GOALS     4. Define and give examples of three types of        corporate mergers, ...
Profile                MARY ELLEN SHEETS                      Two Men and a Truck      • Bought an old truck and        pl...
Chapter Five                NAME that COMPANY     Around April 15th every year, we are a very sought        out company. W...
Basic Forms ofBusinessOwnership        MAJOR FORMS of OWNERSHIP     • Sole Proprietorship -- A business owned, and        ...
Basic Forms ofBusinessOwnership                      FORMS of                 BUSINESS OWNERSHIP                          ...
Basic Forms ofBusinessOwnership          ETHNIC BUSINESS CENTERS                                       Cities with the Mos...
Advantages ofSoleProprietorships                  MAJOR BENEFITS of SOLE     LG1             PROPRIETORSHIP     1) Ease of...
Disadvantagesof SoleProprietorships                  DISADVANTAGES of SOLE     LG1             PROPRIETORSHIPS     1) Unli...
ProgressAssessment   PROGRESS ASSESSMENT   • Most people who start businesses in the U.S. are     sole proprietors. What a...
Partnerships           MAJOR TYPES of PARTNERSHIPS     LG2     • General Partnership -- All owners share in        operati...
Partnerships                TYPES OF PARTNERS     LG2     • General Partner -- An owner (partner) who has        unlimited...
Partnerships                  OTHER FORMS of     LG2           PARTNERSHIPS     • Master Limited Partnership -- A partners...
Advantages &Disadvantagesof Partnerships   ADVANTAGES of     LG2          PARTNERSHIPS    • More financial      resources ...
Advantages &Disadvantagesof Partnerships   DISADVANTAGES of     LG2            PARTNERSHIPS     • Unlimited liability     ...
The TIES that BIND                   (Spotlight on Small Business)There is no such thing as a perfect partner but  ask the...
ProgressAssessment   PROGRESS ASSESSMENT    • What’s the difference between a limited partner      and a general partner? ...
Corporations                  CONVENTIONAL     LG3          CORPORATIONS     • Conventional (C)       Corporation -- A sta...
Advantages ofCorporations                   ADVANTAGES of    LG3            CORPORATIONS     • Limited liability     • Abi...
Advantages ofCorporations                HOW OWNERS AFFECT    LG3            MANAGEMENT                                   ...
Advantages ofCorporations                The BIG BOYS of BUSINESS    LG3                                America’s Largest ...
Advantages ofCorporations                                    PRIVACY PLEASE    LG3              The Ten Largest Private Co...
Disadvantagesof Corporations   DISADVANTAGES of     LG3            CORPORATIONS     • Initial cost     • Extensive paperwo...
Disadvantagesof Corporations               EVEN the BIG GUYS     LG3                       MAKE MISTAKES        Source: Bl...
Individuals CanIncorporate       WHO CAN INCORPORATE?     LG3     • Anyone - truckers, doctors, plumbers, athletes        ...
Individuals CanIncorporate                  OLDIES BUT GOODIES     LG3            America’s Oldest Corporations           ...
S Corporations                   S CORPORATIONS     LG3     • S Corporation -- A unique government creation        that lo...
S Corporations                       WHO CAN FORM     LG3              S CORPORATIONS?     • Qualifications for S Corporat...
Limited LiabilityCompanies      LIMITED LIABILITY COMPANIES     LG3      • Limited Liability Company (LLC) -- Similar     ...
Limited LiabilityCompanies           DISADVANTAGES of LLCs     LG3      • No stock, therefore        ownership is        n...
VIRTUAL COMPANIES                        (Legal Briefcase)• Vermont allows a new kind of LLC that exists only  online.• Re...
ProgressAssessment   PROGRESS ASSESSMENT   • What are the major advantages and     disadvantages of incorporating a busine...
CorporateExpansion:Mergers and    MERGERS and ACQUISITIONSAcquisitions    LG4    • Merger -- The result of two firms joini...
CorporateExpansion:Mergers andAcquisitions                                      KEEP GROWING…    LG4                      ...
CorporateExpansion:Mergers and       TYPES of MERGERSAcquisitions    LG4    • Vertical Merger -- Joins two firms in differ...
CorporateExpansion:Mergers and    LEVERAGED BUYOUTSAcquisitions    LG4    • Leveraged Buyout (LBO) -- An attempt by       ...
Franchises                     FRANCHISING    LG5     • Franchise Agreement -- An arrangement        whereby someone with ...
Franchises                   MAKE WAY for the NEWBIES                                                 Top New Franchises  ...
PLAY BALL but PLAY GREEN                     (Thinking Green)• The Nationals in D.C. have the first sports  stadium to ear...
Advantages ofFranchises            ADVANTAGES of FRANCHISING    LG5     • Management and       marketing assistance     • ...
Disadvantagesof Franchises   DISADVANTAGES of    LG5            FRANCHISING    • Large start-up costs    • Shared profit  ...
Diversity inFranchising    WOMEN in FRANCHISING     LG5     • Women own about half of U.S. companies, yet       ownership ...
Diversity inFranchising        MINORITY-OWNED     LG5             FRANCHISES     • MinorityFran is an initiative to       ...
Home-BasedFranchises   HOME-BASED FRANCHISES    LG5    Advantages:      • Relief from        commuting stress      • Extra...
Home-BasedFranchises                                HOME SWEET HOME    LG5                                      Top Home-B...
E-Commerce inFranchising       E-COMMERCE    LG5                in FRANCHISHING    • Most brick-and-mortar franchises have...
FRANCHISE EXPANSION            on FACEBOOK                 (Social Media in Business)• Many businesses use social media  t...
Franchising inInternationalMarkets                 GLOBAL FRANCHISING     LG5     • Canada is the most popular target for ...
Franchising inInternationalMarkets                              WHAT to CHOOSE?     LG5                 Picking Franchises...
Franchising inInternationalMarkets                                    HIGH FLYERS     LG5                             Ten ...
Cooperatives                   COOPERATIVES    LG6     • Cooperatives -- Businesses owned and        controlled by the peo...
ProgressAssessment   PROGRESS ASSESSMENT   • What are some of the factors to consider before     buying a franchise?   • W...
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Chap005

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Chap005

  1. 1. Chapter 05 How to Form a BusinessMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
  2. 2. Chapter Five LEARNING GOALS 1. Compare the advantages and disadvantages of sole proprietorships. 2. Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships. 3. Compare the advantages and disadvantages of corporations and summarize the differences between C corporations, S corporations and limited liability companies. 5-2
  3. 3. Chapter Five LEARNING GOALS 4. Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private. 5. Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising. 6. Explain the role of cooperatives. 5-3
  4. 4. Profile MARY ELLEN SHEETS Two Men and a Truck • Bought an old truck and placed an ad in the local paper stating, “Two Men and a Truck.” • Wanted her sons to have work during summer vacation. Now they earn $193.3 million annually. • Expanded through franchising and are branching out to the UK. 5-4
  5. 5. Chapter Five NAME that COMPANY Around April 15th every year, we are a very sought out company. With thousands of locations in the U.S. we make tax filing much easier. Most people are unaware that we are actually a Canadian franchise even though we have our headquarters in the U.S. Name that company! 5-5
  6. 6. Basic Forms ofBusinessOwnership MAJOR FORMS of 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. 5-6
  7. 7. Basic Forms ofBusinessOwnership FORMS of BUSINESS OWNERSHIP 5-7
  8. 8. Basic Forms ofBusinessOwnership ETHNIC BUSINESS CENTERS Cities with the Most Minority-Run Firms 1. Atlanta, GA 2. Baltimore, MD 3. Nashville, TN 4. Houston, TX 5. Miami - Ft. Lauderdale, FL Photo Courtesy of: James Rintamaki Source: Forbes, April 11, 2011. 5-8
  9. 9. Advantages ofSoleProprietorships MAJOR BENEFITS of SOLE LG1 PROPRIETORSHIP 1) Ease of starting and ending the business 2) Being your own boss 3) Pride of ownership 4) Leaving a legacy 5) Retention of company profit 6) No special taxes 5-9
  10. 10. Disadvantagesof SoleProprietorships DISADVANTAGES of SOLE LG1 PROPRIETORSHIPS 1) Unlimited Liability -- Any debts or damages incurred by the business are your debts, even if it means selling your home, car or anything else. 2) Limited financial resources 3) Management difficulties 4) Overwhelming time commitment 5) Few fringe benefits 6) Limited growth 7) Limited life span 5-10
  11. 11. ProgressAssessment PROGRESS ASSESSMENT • Most people who start businesses in the U.S. are sole proprietors. What are the advantages and disadvantages of sole proprietorships? • Why would unlimited liability be considered a major drawback to sole proprietorships? 5-11
  12. 12. Partnerships MAJOR TYPES of PARTNERSHIPS LG2 • 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. 5-12
  13. 13. Partnerships TYPES OF PARTNERS LG2 • 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. 5-13
  14. 14. Partnerships OTHER FORMS of LG2 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. 5-14
  15. 15. Advantages &Disadvantagesof Partnerships ADVANTAGES of LG2 PARTNERSHIPS • More financial resources • Shared management and pooled/complementary skills and knowledge • Longer survival • No special taxes 5-15
  16. 16. Advantages &Disadvantagesof Partnerships DISADVANTAGES of LG2 PARTNERSHIPS • Unlimited liability • Division of profits • Disagreements among partners • Difficult to terminate 5-16
  17. 17. The TIES that BIND (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? 5-17
  18. 18. ProgressAssessment PROGRESS ASSESSMENT • What’s the difference between a limited partner and a general partner? • What are some of the advantages and disadvantages of partnerships? 5-18
  19. 19. Corporations CONVENTIONAL LG3 CORPORATIONS • Conventional (C) Corporation -- A state- chartered legal entity with authority to act and have liability separate from its owners (its stockholders). 5-19
  20. 20. Advantages ofCorporations ADVANTAGES of LG3 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 5-20
  21. 21. Advantages ofCorporations HOW OWNERS AFFECT LG3 MANAGEMENT 5-21
  22. 22. Advantages ofCorporations The BIG BOYS of BUSINESS LG3 America’s Largest Corporations 1. Walmart 2. Exxon Mobil 3. Chevron 4. ConocoPhillips 5. Fannie Mae Photo Courtesy of: Walmart Stores Source: Fortune, www.fortune.com, accessed June 2011. 5-22
  23. 23. Advantages ofCorporations PRIVACY PLEASE LG3 The Ten Largest Private Corporations in the U.S. Source: Forbes, www.forbes.com, accessed June 2011. 5-23
  24. 24. Disadvantagesof Corporations DISADVANTAGES of LG3 CORPORATIONS • Initial cost • Extensive paperwork • Double taxation • Two tax returns • Size • Difficulty of termination • Possible conflict with stockholders and board of directors 5-24
  25. 25. Disadvantagesof Corporations EVEN the BIG GUYS LG3 MAKE MISTAKES Source: Bloomberg Businessweek, May 16, 2011. 5-25
  26. 26. Individuals CanIncorporate WHO CAN INCORPORATE? LG3 • Anyone - truckers, doctors, plumbers, athletes and small business owners can incorporate. • Normally stock is not issued to outsiders when individuals incorporate, so the advantages and disadvantages are not exactly the same as for large corporations. • Major advantages are limited liability and possible tax benefits. 5-26
  27. 27. Individuals CanIncorporate OLDIES BUT GOODIES LG3 America’s Oldest Corporations 5-27
  28. 28. S Corporations S CORPORATIONS LG3 • 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. 5-28
  29. 29. S Corporations WHO CAN FORM LG3 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. 5-29
  30. 30. Limited LiabilityCompanies LIMITED LIABILITY COMPANIES LG3 • Limited Liability Company (LLC) -- Similar to an S corporation, but without the eligibility requirements. • Advantages of LLCs: - Limited liability - Choice of taxation - Flexible ownership rules - Flexible distribution of profits and losses - Operating flexibility 5-30
  31. 31. Limited LiabilityCompanies DISADVANTAGES of LLCs LG3 • No stock, therefore ownership is nontransferable • Limited life span • Fewer incentives • Taxes • Paperwork 5-31
  32. 32. VIRTUAL COMPANIES (Legal Briefcase)• Vermont allows a new kind of LLC that exists only online.• Registration documents can be filed online, meetings can be held through online communication, and relationships can be established electronically.• Virtual companies allow online contributors with different skills, availability and interest to interact and be successful. 5-32
  33. 33. ProgressAssessment PROGRESS ASSESSMENT • What are the major advantages and disadvantages of incorporating a business? • What’s the role of owners (stockholders) in the corporate hierarchy? • If you buy stock in a corporation and someone gets injured by one of the corporation’s products, can you be sued? Why or why not? • Why are so many new businesses choosing a limited liability company (LLC) form of ownership? 5-33
  34. 34. CorporateExpansion:Mergers and MERGERS and ACQUISITIONSAcquisitions LG4 • Merger -- The result of two firms joining to form one company. • Acquisition -- One company’s purchase of the property and obligations of another company. 5-34
  35. 35. CorporateExpansion:Mergers andAcquisitions KEEP GROWING… LG4 Big Business‘ Acquisitions Spending Source: Bloomberg Businessweek, October 18, 2010. 5-35
  36. 36. CorporateExpansion:Mergers and TYPES of MERGERSAcquisitions LG4 • Vertical Merger -- Joins two firms in different stages of related businesses. • 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. 5-36
  37. 37. CorporateExpansion:Mergers and LEVERAGED BUYOUTSAcquisitions LG4 • 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 2010, foreign investors poured $300 billion into U.S. companies. 5-37
  38. 38. Franchises FRANCHISING LG5 • 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 825,000 franchised businesses operate in the U.S., employing approximately 17.5 million people. 5-38
  39. 39. Franchises MAKE WAY for the NEWBIES Top New Franchises LG5 Source: Entrepreneur, March 2010. 5-39
  40. 40. PLAY BALL but PLAY GREEN (Thinking Green)• The Nationals in D.C. have the first sports stadium to earn the Leadership in Energy and Environmental Design (LEED) Rating.• 95% of the stadium’s steel was recycled and low- flow toilets save millions of gallons of water.• New York stadiums for the Mets, Giants and Jets have also earned green certifications. 5-40
  41. 41. Advantages ofFranchises ADVANTAGES of FRANCHISING LG5 • Management and marketing assistance • Personal ownership • Nationally recognized name • Financial advice and assistance • Lower failure rate 5-41
  42. 42. Disadvantagesof Franchises DISADVANTAGES of LG5 FRANCHISING • Large start-up costs • Shared profit • Management regulation • Coattail effects • Restrictions on selling • Fraudulent franchisors 5-42
  43. 43. Diversity inFranchising WOMEN in FRANCHISING LG5 • Women own about half of U.S. companies, yet ownership of franchises is about 25%. • Firms owned by women have grown at twice the rate of all companies. • More women are becoming franchisors. Auntie Anne’s and Jazzercise and are owned by women. 5-43
  44. 44. Diversity inFranchising MINORITY-OWNED LG5 FRANCHISES • MinorityFran is an initiative to build awareness of franchising opportunities within minority communities. • Domino’s Pizza launched a minority franchise recruitment program called Delivering the Dream. Photo Courtesy of: Tom Magliery • Over 20% of franchises are minority-owned. 5-44
  45. 45. Home-BasedFranchises HOME-BASED FRANCHISES LG5 Advantages: • Relief from commuting stress • Extra family time • Low overhead expenses Main Disadvantages: • Isolation • Long hours 5-45
  46. 46. Home-BasedFranchises HOME SWEET HOME LG5 Top Home-Based Franchises Source: Neema P. Roshania, Kiplinger, January 2011. 5-46
  47. 47. E-Commerce inFranchising E-COMMERCE LG5 in FRANCHISHING • Most brick-and-mortar franchises have expanded to the Internet. • Many franchisors prohibit franchisee-sponsored sites because conflicts can erupt. • Sometimes “reverse royalties” are sent to franchisees who believe their sales were hurt by the franchisor’s site. • Other franchises are solely based online. 5-47
  48. 48. FRANCHISE EXPANSION on FACEBOOK (Social Media in Business)• Many businesses use social media to communicate with potential investors and franchisees.• Hä agen-Dazs launched a simulation game called Ice Cream Boss on Facebook.• The company hopes that players may move on to become franchisees of real Hä agen-Dazs stores. 5-48
  49. 49. Franchising inInternationalMarkets GLOBAL FRANCHISING LG5 • Canada is the most popular target for U.S.-based franchises. China, South Africa, the Philippines and the Middle East 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. 5-49
  50. 50. Franchising inInternationalMarkets WHAT to CHOOSE? LG5 Picking Franchises that May Survive a Recession • Focus on tried-and-true name brands. • Stick to core goods and services. • Be choosy about the site. • Don’t pinch pennies. • Have a fallback choice. • Don’t assume the franchise will pay off. Source: Richard Gibson, Wall Street Journal, www.wsj.com, accessed June 2011. 5-50
  51. 51. Franchising inInternationalMarkets HIGH FLYERS LG5 Ten High-Performing Franchises 1. Hampton Hotels 2. AMPM 3. McDonald’s 4. 7-Eleven 5. Supercuts 6. Days Inn 7. Vanguard Cleaning Systems 8. Servpro Photo Courtesy of: Innisfree Hotels 9. Subway 10. Denny’s Source: Entrepreneur, January 2011. 5-51
  52. 52. Cooperatives COOPERATIVES LG6 • Cooperatives -- Businesses owned and controlled by the people who use them– producers, consumers, or workers with similar needs who pool their resources for mutual gain. • Worldwide, 750,000 co-ops 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. 5-52
  53. 53. ProgressAssessment PROGRESS ASSESSMENT • What are some of the factors to consider before buying a franchise? • What opportunities are available for starting a global franchise? • What’s a cooperative? 5-53

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