Chapter 05
How to
Form a
Business
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
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.
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.
5-2
Basic Forms of
Business
Ownership
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.
5-3
Basic Forms of
Business
Ownership
FORMS of
BUSINESS OWNERSHIP
5-4
Advantages of
Sole
Proprietorships
LG1
MAJOR BENEFITS of SOLE
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
5-5
Disadvantages
of Sole
Proprietorships
LG1
DISADVANTAGES of SOLE
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
5-6
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.
5-7
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.
5-8
Partnerships
LG2
OTHER FORMS of
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.
5-9
Advantages &
Disadvantages
of Partnerships
LG2
ADVANTAGES of
PARTNERSHIPS
• More financial
resources
• Shared management
and
pooled/complementary
skills and knowledge
• Longer survival
• No special taxes
5-10
Advantages &
Disadvantages
of Partnerships
LG2
DISADVANTAGES of
PARTNERSHIPS
• Unlimited liability
• Division of profits
• Disagreements among
partners
• Difficult to terminate
5-11
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?
5-12
Corporations
LG3
CONVENTIONAL
CORPORATIONS
• Conventional (C)
Corporation -- A statechartered legal entity with
authority to act and have
liability separate from its
owners (its stockholders).
5-13
Advantages of
Corporations
LG3
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
• Anyone can incorporte
5-14
Advantages of
Corporations
LG3
HOW OWNERS AFFECT
MANAGEMENT
5-15
Advantages of
Corporations
The BIG BOYS of BUSINESS
America’s Largest Corporations
LG3
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.
5-16
Disadvantages
of Corporations
LG3
DISADVANTAGES of
CORPORATIONS
• Initial cost
• Extensive paperwork
• Double taxation
• Two tax returns
• Size
• Difficulty of termination
• Possible conflict with
stockholders and board
of directors
5-17
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.
• Special qualifications for S Corporations
5-18
Limited Liability
Companies
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
5-19
Limited Liability
Companies
DISADVANTAGES of LLCs
LG3
• No stock, therefore
ownership is
nontransferable
• Limited life span
• Fewer incentives
• Taxes
• Paperwork
5-20
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.
5-21
Corporate
Expansion:
Mergers and
Acquisitions
MERGERS and ACQUISITIONS
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.
5-22
Corporate
Expansion:
Mergers and
Acquisitions
TYPES of MERGERS
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.
5-23
Corporate
Expansion:
Mergers and
Acquisitions
LEVERAGED BUYOUTS
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.
5-24
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.
5-25
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 lowflow toilets save millions of gallons of water.
• New York stadiums
for the Mets, Giants
and Jets have also
earned green
certifications.
5-26
Advantages of
Franchises
ADVANTAGES of FRANCHISING
LG5
• Management and
marketing assistance
• Personal ownership
• Nationally recognized
name
• Financial advice and
assistance
• Lower failure rate
5-27
Diversity in
Franchising
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.
5-28
Disadvantages
of Franchises
LG5
DISADVANTAGES of
FRANCHISING
• Large start-up costs
• Shared profit
• Management regulation
• Coattail effects
• Restrictions on selling
• Fraudulent franchisors
5-29
Disadvantages
of Franchises
TRENDS IN FRANCHISING
LG5
• Minority-Owned Franchises
• Home-Based Franchises
• eCommerce Franchising
• Online Franchising
• Global Franchising
5-30
FRANCHISE EXPANSION
on FACEBOOK
(Social Media in Business)
• Many businesses use social media
to communicate with potential
investors and franchisees.
• Häagen-Dazs launched a
simulation game called Ice Cream
Boss on Facebook.
• The company hopes that players
may move on to become
franchisees of real Häagen-Dazs
stores.
5-31
Franchising in
International
Markets
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.
5-32
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.
5-33