Learning Outcomes:
1.
List and Describe the four basic forms of business ownership
2.
Discuss the advantages and disadvantages of each business forms
3.
Identify and explain which form of business that dominate in the U.S. Market
4.
Define Merger, Acquisition, and Franchising and list their advantages and
disadvantages
CHAPTER 6
BUSINESS FORMATION
QUOTE OF THE DAY
“The primary advantage of [a partnership]
business formation is the pooling of talent,
experience, and capital. However, dual or multiple
ownership structures can lead to serious
complications if the relationships between
individuals break down. Quite often, the pool
becomes a drain.”
Peter J. Patsula, Author of Successful Business Planning in 30 Days
Peter J. Patsula, Ph.D founded Patsula Media in 1997, an Internet company dedicated to providing usable, inspirational,
and educational media.
HOW DO I MAKE MY CHOICE OF BUSINESS
OWNERSHIP????
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The initial cost for setting up the business
Ways the profits are distributed
Type of taxes business must pay
Type of regulations
Personal liability on owners (Debt & Resources)
TYPES OF BUSINESS OWNERSHIP
Sole Proprietorship
A business that is owned and managed by a
single individual.
1.
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•
•
•
Most common. (23 Million, 1.32 Trillion in
Revenue, 72% of total business enterprise)
Earnings are income of the owner
Company’s debt is the owner’s personal liability
ADVANTAGES
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Ease of Formation: Less
paperwork & Cost
Retention of Control: “Be
your own boss”
Pride of ownership: Personal
satisfaction from owning and
running own business
Retention of Profits. Tax on
profit
Possible Tax Advantage:
Earnings taxed as income.
No double taxation.
DISADVANTAGES
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Limited Financial Resources:
Depend on own wealth
Unlimited Liability: Any
business debt is considered
personal debt (Personal
possessions at risk!)
Limited Ability to attract and
maintain talented employees
Heavy Workload &
Responsibilities: Many hours
& a lot of stress, lack of
expertise in certain areas
Lack of Permanence: When
owner dies, the company
legally ceases to exist
SOLE PROPRIETORSHIP, CONTINUE
2. PARTNERSHIP
A voluntary agreement under which two or
more people act as co-owners of a business for
profit.
 (Verbal Agreement: YES, but NO)

PARTNERSHIP, CONT.
Types of Partnership:
a. General Partnership:
All partners can take an active role in
managing the business & have unlimited liability for any claims against the
firm.
a.
Limited Partnership:
A partnership agreement that has a general
partner & at least one limited partner:
1.
2.
3.
a.
Both contribute financially to the company & share profit.
General partner has full rights to manage the company & assume full liability for
debts.
Limited partner can’t participate in management, but have the protection of limited
liability.
Limited Liability Partnership: All partners participate in
management and have limited liability.
ADVANTAGES
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Ability to pool financial
resources
Ability to share
responsibilities & skills
Ease of formation
(Partnership Agreement???)
Possible tax advantages:
Earnings are taxed only as
the partners’ personal
income to avoid double
taxation
PARTNERSHIP, CONT.
DISADVANTAGES
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Unlimited liability: All partners are
responsible for mistakes, liabilities,
and loans. Personal assets are at
risk if business assets aren't’
enough
Potential for disagreements:
Partnership agreements should
specify how to resolve disputes
(Result in friction and hard feeling)
Lack of continuity: If one leaves,
the relationship among partners
changes & may end the
partnership
Difficulty withdrawing from the
partnership: debts, personal
liabilities, etc…
3. CORPORATION
A business entity created by filing a form called the ‘Articles of Incorporation’
with the appropriate state agency. Includes fees and meeting requirements.
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A legal entity that is separate from its owners (Artificial Person)
Can enter into binding contracts, own property, pay taxes, and initiate legal
actions (lawsuits) in its own name
Owners have limited liability. No personal responsibility for debts and
obligations
More expensive and more complex for form
Vary from state to state
Can be publically traded
FORMS OF CORPORATIONS
C Corporation: Most common type. A legal business
entity that offers limited liability to all of its owners,
who are called Stockholders.
1.
2.
3.
Stockholders: An owner of a corporation (Stocks owners: Common
with rights to vote, and Preferred with no rights to vote.
Corporate Bylaws: Detailed rules that govern the way the corporation is
organized and managed.
Board of Directors: Individuals who are elcted by stockholders of a
corporation to represent their interests: Establish the Corp. Mission &
Objectives, and have role in day-to-day management, such as the CEO.
FORMS OF CORPORATIONS, CONT.
S Corporation: A form of Corporation that avoids
double taxation by having its income taxed as if it
were a partnership.
ADVANTAGES
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DISADVANTAGES
Limited liability: No personal
liability for debt
Permanence: continuous
operation
Ease of transfer of ownership:
sell shares of stocks
Ability to raise large amount of
financial capital by issuing shares
& selling corporation funds
Ability to make use of specialized
management: hiring highly
qualified professional managers
(Better salaries, benefits, growth
opportunities, and career
advancement)
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CORPORATIONS, CONT.
Expense & complexity of
formation and operation.
(Regular meetings, keeping
minutes, etc.)
Complications when
operating in more than one
state: Domestic vs. Foreign
corporations, and may include
more fees and taxes in other
states
Double taxation
More paperwork, more
regulations, and less secrecy
Possible conflict of interest
4. LIMITED LIABILITY COMPANY (LLC)

A form of business (legal entity) ownership that offers both limited
liability to its owners and flexible tax treatment.

Can combine Corp. with Partnership
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Owners select tax treatment (Corp or Partnership)
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May require filling “Certificate of Organization or Article of
Organization” & pay filling fees
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Draft operating agreement
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Owners called members or partners who manage the LLC
ADVANTAGES
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Limited liability
Tax Pass-Through: Either as
Corp., Partnership, or Sole
Proprietorship (Owned by one).
Taxed once as income of the
owners
Simplicity and flexibility in
management and operation:
No meetings required.
Flexible ownership: Can have
many owners. Can include
foreign investors and other
corporations (different in some
states)
DISADVANTAGES
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Complexity of formation: Takes
time and effort
Annual franchise tax: many
states require LLC to pay an
annual franchise tax
Foreign status in other states:
more paperwork, fees and
taxes
Limits on types of firms that
can form LLC. (Ex. Banks,
Insurance Companies &
Nonprofit Corporations)
Differences in state laws
LIMITED LIABILITY COMPANY, CONT.
MERGERS

A corporate
restructuring that
occurs when two
formerly independent
business entities
combine to form a new
business. Ex: United
Airlines & Continental
Airlines, Google &
Motorola Mobile
ACQUISITIONS
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Occurs when one firm
buys another firm
Acquiring firm
Acquired firm
“Hostile Take-over”: When
the acquiring firm buys the
target firm despite the
opposition of the target
firm’s board and
management
MERGERS & ACQUISITIONS
FRANCHISING
A licensing agreement under which one party (Franchisor)
allows another party (Franchisee) to use its name,
trademark, patents, copyrights, business methods, and other
property in exchange for monetary payments and other
considerations.
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Very popular
Important source of employment and income
Dominates certain markets: food, auto dealerships, convenience stores
TYPES OF FRANCHISE ARRANGEMENTS
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Distributorships:
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Business Format Franchise:
a type of franchising arrangement in
which the franchisor makes a product and licenses the
franchisee to sell it. Ex: New Umbrella
A broad franchise
agreement in which the franchisee pays for the right to use the
name, trademark, and business and production methods of the
franchisor.
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Ex: Automakers and Dealerships.
Franchise Agreements Provide services such as, site selection, training,
obtaining financing, follow industry guidelines. Ex: Wendy’s, Burger
King, etc.
ADVANTAGES
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Less risk
Training & support
Brand recognition
Easier access to funding
DISADVANTAGES
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FRANCHISING, CONT.
Cost
Lack of control
Negative Halo Effect: The
effect of irresponsible and
incompetent behavior of a
few franchisees create
negative perception
Growth challenges
Restrictions on sale
Poor execution
FRANCHISE AGREEMENT
The contractual arrangement between a franchisor
and franchisee that sells out the duties and
responsibilities of both parties.
Key items covered in the agreement:
1.
2.
3.
4.
5.
6.
Terms and conditions
Fees and other payments
Training and support
Specific operational requirements
Conflict resolution
Assigned territory
RECOLLECTION OF KNOWLEDGE
In groups of four: Answer the following:
 List three different types of business ownership.
Sole Proprietorship, Partnership, Corporation , Limited Liability Corporation

Describe advantages and disadvantages of a sole proprietorship
Advantages: 1. Ease of formation. 2. Retention of Control. 3. Pride of Ownership. 4. Retention of Profits. 5.
Possible Tax Advantage.
Disadvantages: 1. Limited Financial Resources. 2. Unlimited Liability. 3. Limited Ability to Attract and Maintain
Talented Employees. 4. Heavy Workload and Responsibilities. Lack of Permanence.

Describe advantages and disadvantages of a partnership
Advantages: 1. Ability to Pool Financial Resources. 2. Ability to Share Responsibilities and Skills. 3. Ease of
Formation. 4. Possible Tax Advantage.
Disadvantages: 1. Unlimited Liability. 2. Potential for Disagreements. 3. Lack of Continuity. 4. Difficulty in
Withdrawing from a Partnership.
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Describe advantages and disadvantages of a corporation
Advantages: 1. Limited Liability. 2. Permanence. 3. Ease of Transfer of Ownership. 4. Ability to Raise Large
Amounts of Financial Capital. 5. Ability to Make Use of Specialized Management.
Disadvantages: 1. Expense and Complexity of Formation and Operation. 2. Complications when Operating in
more than one State. 3. Double Taxation of Earnings. 4. More Paperwork, More Regulation, and Less Secrecy. 5.
Possible Conflicts of Interest.
 Describe advantages and disadvantages of a Limited Liability
Advantages: 1. Limited Liability. 2. Tax Pass-Through. 3. Simplicity and Flexibility in Management. 4. Flexible Ownership.
Disadvantages: 1. Complexity of Formation. 2. Annual Franchise Tax. 3. Foreign Status in Other States. 4. Limits on types of Firms
that can Form LLCs. 5. Differences in State Laws.

Define and give examples of franchises : A licensing arrangement under which one party allows
another party to use its name, trademark, patents, copyrights, business methods, and other property in
exchange for monetary payments. Ex: Subway, Wendy’s, etc…