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©2013 Cengage Learning. All Rights Reserved.
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6
Business
Formation:
Choosing The Form
That Fits
LO1
What are the characteristics of the four
basic forms of business ownership?
LO2 What are the advantages and
disadvantages of a sole proprietorship?
LO3 What are the pros and cons of
partnerships?
LO4 Why have corporations become the
dominant form of business ownership?
LO5 Why are limited liability companies
becoming an increasingly popular form of
ownership?
LO6 What are the advantages and
disadvantages of franchising?
2
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Business Ownership Options:
The Big Four
Sole Proprietorship – the business is owned by a
single individual
Partnership – two or more people serve as co-owners
of the business
Corporation – the business is a separate legal entity
Limited Liability Company – a hybrid with
characteristics of both a corporation and partnership
3
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Net Income by Form of Ownership
Source: U.S. Census Bureau. The 2011Statistical Abstract of the United States Tables 743 and 744: http://www.census.gov/compendia/statab/2011/tables/11s0744.pdf, accessed January 23, 2011.
©2013 Cengage Learning. All Rights Reserved. May not
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be scanned,
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4
or
Advantages and Disadvantages of Sole
Proprietorships
Advantages:
Disadvantages:
 Ease of Formation
 Limited Financial
Resources
 Retention of Control
 Unlimited Liability
 Pride of Ownership
 Retention of Profits
 Limited ability to attract
and maintain talented
employees
 Possible Tax Advantages
 Heavy workload and
responsibilities
 Lack of Permanence
5
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General Partnerships:
Two Heads Can Be Better Than One
Advantages:
Disadvantages:
 Pooled Financial Resources
 Unlimited Liability
 Shared Responsibilities
 Disagreements
 Ease of Formation
 Lack of Continuity
 Tax Advantages
 Difficulty in
withdrawing from
agreement
6
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Limited Partnerships
Limited Partnership –
includes at least one
general partner and at
least one limited partner
Limited Liability Partnership –
All partners are actively
involved but they have some
form of limited liability. The
amount of liability differs
per state.
Limited partners have limited liability.
7
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Corporations:
The Role of Board of Directors
• Elected by stockholders to oversee the operation of their
company and protect their interests
• Oversee the operation of corporation and protect
investors’ interest
• Establish mission and set objectives
• Rarely get involved in day-to-day management
• Responsible for monitoring the performance of the
corporate officers
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8
or
Advantages and Disadvantages of
Corporations
Advantages:
Disadvantages:
• Limited Liability
• Permanence
• Easy to Transfer Ownership
• Ability to Raise Capital
• Specialized Management
• Expense/complexity of
formation and operation
• Double Taxation
• Paperwork and Regulation
• Complications when
operating in more than
one state
• Conflicts of Interest
9
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Other Types of Corporations:
Same but Different
TYPE
S Corp.
KEY ADVANTAGE
LIMITATIONS
•IRS does not tax earnings separately
•Stockholders have limited liability
•No more than 100 stockholders
•Stockholders must be U.S. citizens or
permanent residents
Statutory
Close
Corp.
•Not require to have a board or hold
annual meetings
•Owners can participate in management
while maintaining limited liability
•Limited number of stockholders
•Stockholders must offer shares to
owner first before selling publicly
•Not all states allow this corporation
type
Nonprofit
Corp.
•Earnings are exempt from federal and
state income taxes
•Members/directors have limited liability
•Contributions made by individuals are taxdeductible
•May have dues paying members but
no stockholders
•Can’t distribute dividends
•Can’t make political donations
•Must keep accurate records to
document tax-exemption
10
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Corporate Restructuring:
Mergers & Acquisitions
Mergers – two companies
agree to a combination of
equals
Acquisitions – when one
firm buys another
Large corporations constantly
look for ways to grow and
achieve competitive
advantage.
11
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Types of Mergers & Acquisitions
12
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Divestitures: When Less is More
Divestitures allow the firm to streamline their
operations and focus
• Spin-off – setting up the division or part of the
business as a separate company
Sell stock to existing stockholders
• Carve-out – setting up a separate business from
an operation
Sell stock to outside investors
13
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The Limited Liability Company:
The New Kid on the Block
Advantages:
Disadvantages:
• Limited Liability
• Complexity of Formation
• Tax Pass-Through
• Franchise Taxes
• Simplified Management and
Operation
• Foreign Status in other States
• Flexible Ownership
• Limited to Select Industries
• State Law Differences
14
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Franchising: Proven
Methods for a Price
• The franchisee uses the brand name, trademark and
practices of the franchisor
• Growth in women franchises
• Minority participation has increased under new
initiatives
• A well-established method for operating a business
Source: Fit for Franchising, by Taylor Mallory, Pink Magazine June/July 2007, pinkmagazine.com website: http://www.pinkmagazine.com/franchise/women/2007/burzynski.html; Franchising Attracts More Women, Minorities by Julie Bennett, Startup Journal, accessed through Entrepreneur.com website:
http://www.entrepreneur.com/franchises/franchisezone/startupjournal/article61324.html; Female Franchisors Few and Far Between by Julie M. Young, e-magnify.com website: https://www.e-magnify.com/resources_articlearchiveresults.asp?categoryID=18; Fit to Be a Franchisee: Many Businesswomen Choose Franchises that Connect With Personal Interests by Nancy Lacewell,
June 7, 2006 Business First of Louisville website: http://www.bizjournals.com/louisville/stories/2006/05/22/story2.html.. Boosting Diversity in Franchising by Joan Szabo, December 5, 2006, Franchise Update website: http://www.franchise-update.com/article/188/. Bridging the Gap Between the Minority Community and the Franchising Industry, Minority Franchising website:
http://www.minorityfranchising.com/, accessed January 20, 2011; MinorityFran, International Franchise Association website: http://www.franchise.org/files/MinorityFran%20Broch%20by%20page.pdf, accessed January 20, 2011.
©2013 Cengage Learning. All Rights Reserved. May not
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15
or
Franchising in Foreign Markets
• Franchising in foreign markets have shown great
opportunities for growth
• Markets are less intense and less saturated
 McDonald’s 12,693
 Subway 7,235
 Curves 2,868
• McDonald’s has slightly more franchises in foreign
countries than the U.S.
16
Source: Entrepreneur.com website pages for individual franchisors: http://www.entrepreneur.com/franchises/mcdonalds/282570-0.html; http://www.entrepreneur.com/franchises/subway/282839-0.html; http://www.entrepreneur.com/franchises/curves/2822650.html, accessed January 22, 2011.
©2013 Cengage Learning. All Rights Reserved. May not
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Advantages and Disadvantages
of Franchising
Advantages:
 Less Risk
 Training and Support
 Brand Recognition
 Access to Funding
Disadvantages:
 Costs
 Lack of Control
 Negative Halo Effect
 Growth Challenges
 Restriction on Sale
 Poor Execution
17
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Franchising Costs
Source: Entrepreneur.com website pages for individual franchisors: http://www.entrepreneur.com/franchises/mcdonalds/282570-0.html; http://www.entrepreneur.com/franchises/subway/282839-0.html;
http://www.entrepreneur.com/franchises/curves/282265-0.html, accessed January 22, 2011.
©2013 Cengage Learning. All Rights Reserved. May not
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18
or
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Entering Into A Franchise Agreement
• Know all the facts before signing the dotted line:
Terms and Conditions
 Fees and Other Payments
 Training and Support
 Specific Operational Requirements
 Conflict Resolution
 Assigned Territory
• Franchisors must provide a Franchise Disclosure Document (FDD)

• The Federal Trace Commission (FTC) require:



The FDD must be written in plain English
The franchisor must be given 14 days to review the FDD
The Franchisee should have a lawyer review the document
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19
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6
Looking Back
• What are the characteristics of the four basic forms of business ownership?
• What are the advantages and disadvantages of a sole proprietorship?
• What are the pros and cons of partnerships?
• Why have corporations become the dominant form of business ownership?
• Why are limited liability companies becoming an increasingly popular form
of ownership?
• What are the advantages and disadvantages of franchising?
20
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