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BUSN
Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation:
Choosing the Form that
Fits
• What are the four basic forms of business and their
characteristics?
• 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 increasingly
popular?
• What are the advantages and disadvantages of franchising?
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
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Business Formation: Choosing the Form that Fits
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
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Business Ownership Options: The Big Four
Source: U.S. Census Bureau, The 2009 Statistical Abstract, Table 722: Number of Tax Returns, Receipts, and Net Income by Type of Business: 1990-2005:
http://www.census.gov/prod/2008pubs/09statab/business.pdf
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Advantages and Disadvantages of Sole
Proprietorships
Advantages:
 Ease of Formation
 Retention of Control
 Pride of Ownership
 Retention of Profits
 Possible Tax
Advantages
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Disadvantages:
 Limited Financial
Resources
 Unlimited Liability
 Limited ability to
attract and maintain
talented employees
 Lack of Permanence
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Partnerships:
Two Heads (and Bankrolls) Can Be Better Than One
Advantages:
 Pooled Financial
Resources
 Shared
Responsibilities
Disadvantages:
 Unlimited Liability
 Disagreements
 Ease of Formation
 Difficulty in
withdrawing from
agreement
 Tax Advantages
 Lack of Continuity
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Partnerships: General vs. Limited
General Partnerships
All partners have the right to participate in the
management of the firm and share in any
profits/losses.
Limited Partnerships
All partners contribute financially and share in
the profits but the limited partner(s) cannot
actively participate in management.
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Partnerships:
Two Heads (and Bankrolls) Can Be Better Than One
Limited Partnership –
includes at least one
general partner and at
least one limited partner
Limited partners have
limited liability.
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Limited Liability Partnership –
all partners are actively
involved but they have some
form of limited liability. The
amount of liability differs
per state.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Keeping It All in The Family:
Family Limited Partnerships (FLIPS)
• Parents transfer assets to limited partners while still
maintaining control, this strategy:
• Reduces gift and inheritance taxes
• Protects family assets from creditors
and lawsuits
• Parents as general partners
• Children as limited partners
• Watch out for the IRS – Family Limited Partnerships can
attract tax auditors!
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Corporations: The Advantages and
Disadvantages of Being an Artificial Person
• A corporation is a legal entity, separate and distinct
from its owners.
• Corporations are owned by stockholders.
• The Board of Directors establishes the mission and
objectives.
• The Board is elected by the stockholders to represent
their interests.
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Corporations: The Advantages and
Disadvantages of Being an Artificial Person
Advantages:
• Limited Liability
• Permanence
• Easy to Transfer Ownership
• Ability to Raise Capital
• Specialized Management
BUSN
Disadvantages:
• Expense/complexity of
formation and operation
• Double Taxation
• Paperwork and Regulation
• Conflicts of Interest
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Corporations: The Role of Board of Directors
• 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
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Other Types of Corporations: Same but Different
• S Corporation
• Closed Corporation
• Nonprofit Corporation
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
This TARP Has Executive Pay Covered
• CEO pay of 12 major corporations totaled $1.26 billion
while the firms lost $330 billion in shareholder value
• Executive pay issues have been amplified as the economy
spirals into recession
• Government bailout (TARP) limits CEO compensation
• Board of Directors are supposed to protect the interest of
stockholders
• But many of the CEOs have clauses that provide lucrative
severance pay regardless of performance
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Corporations: Characteristics
TYPE
KEY ADVANTAGE
S Corp.
Statutory
Close
Corp.
• IRS does not tax earnings
separately
• Stockholders have limited liability
• No more than 100 stockholders
• Stockholders must be U.S.
citizens or permanent residents
• 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
• Earnings are exempt from federal
and state income taxes
• Members/directors have limited
liability
• Contributions made by individuals
© 2009 South-Western,
a division of Cengage Learning
are tax-deductible
Nonprofit
Corp.
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LIMITATIONS
• May have dues paying members
but no stockholders
• Can’t distribute dividends
• Can’t make political donations
• Must keep accurate records to
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document tax-exemption
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Corporate Restructuring: Mergers & Acquisitions
Mergers – two
companies agree to a
combination of equals
Acquisitions – when
one firm buys another
Corporations look for:
• Growth opportunities
• Operational efficiencies
• Competitive advantages
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Types of Mergers & Acquisitions
Type of
Merger
Definition
Objective
Example
Horizontal
Combine firms in
same industry
• Increase size
• Increase market
power
• Gain efficiency
AT&T and
SBC
Vertical
Combine
companies with
buyer-seller
relationship
• Provide tighter
integration and
increase control
Time Warner
and Turner
Broadcasting
Conglomerate
Combination of
unrelated
companies
• Increase company’s
diversity
GE acquiring
RCA
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
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
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Breakin’ Up Is Hard to Do—Even in the Corporate
World
• The 1998 Daimler acquisition of Chrysler ended in 2007
• The strategy was to build a global automobile brand
• But, the corporate cultures were not compatible and the product mix
was not focused
• Daimler had huge expenses
• Daimler sold Chrysler and many analyst believe they paid to get rid
of the company
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
The Limited Liability Company:
The New Kid on the Block
Advantages:
Disadvantages:
• Limited Liability
• Franchise Taxes
• Tax Pass-Through
• Foreign Status in other
States
• Flexible Ownership
• Simplified Management
and Operation
BUSN
• State Law Differences
• Limited to Select
Industries
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Franchising: Proven Methods for a Price
• Not a form of ownership but an
operation option
•
•
•
•
Build-a-Bear
Subway
Jiffy Lube
McDonald’s
• The franchisee uses the brand
name, trademark and practices of
the franchisor.
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Franchising: Proven Methods for a Price
Advantages:
Disadvantages:
 Less Risk
 Costs
 Training and Support
 Lack of Control
 Brand Recognition
 Negative Halo Effect
 Access to Funding
 Growth Challenges
 Restriction on Sale
 Poor Execution
Ben & Jerry franchises its
PartnerShops to nonprofit
corporations.
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Some Franchisees Are Quite Happy When They
Don’t Earn Profit
 Many customers like doing
business with nonprofit
franchisees.
 Nonprofit franchising is a good
way for companies to be socially
responsible and build goodwill.
 Nonprofits can boost their
fundraising efforts.
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Franchising in Today’s Economy
• Franchising has been expanding into foreign
markets.
• McDonald’s has slightly more franchises abroad
than in the U.S.
• The number of women franchisees and franchisors
is growing.
• Minority participation in franchising is low.
The International Franchising Association has
launched an initiative to recruit minority
franchisees.
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Franchising in Today’s Economy
Source: Individual franchise opportunity pages for each listed franchise on the Entrepreneur.com website, http://www.entrepreneur.com/franchiseopportunities/index.html, accessed
February 1, 2009
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Business Formation: Choosing the Form that Fits
Entering Into A Franchise Agreement
• Know all the facts before signing the dotted line
• 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 give 14 days to review the FDD
 The Franchisee should have a lawyer review the
document
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Looking Back
• What are the four basic forms of business and their
characteristics?
• 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 increasingly
popular?
• What are the advantages and disadvantages of franchising?
BUSN
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
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