How to Form a Business
Chapter-5
1
LEARNING OBJECTIVES
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.
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LEARNING OBJECTIVES
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.
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Video
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vDWzPvDA0w
4
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.
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Sole
Proprietor
ship
A business that is owned, and
usually managed, by one person.
6
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
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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
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Partnership
A legal form of business with two or more
owners.
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MAJOR TYPES of PARTNERSHIPS
• 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.
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TYPES OF PARTNERS
• 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.
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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.
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LO 4-2
ADVANTAGES of
PARTNERSHIPS
• More financial resources
• Shared management and
pooled/complementary skills and
knowledge
• Longer survival
• No special taxes
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DISADVANTAGES of
PARTNERSHIPS
• Unlimited liability
• Division of profits
• Disagreements among partners
• Difficult to terminate
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PICKING YOUR PARTNER
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?
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GOOD BUSINESS,
BAD KARMA?
Imagine you and your partner own a construction company.
You receive a subcontractor’s bid you know is 20% too low.
This could potentially put the subcontractor out of business.
Accepting the bid will improve your chances of getting a big
job. Your partner wants to take the bid:
• What do you think you should do?
• What will be the consequences of your decision?
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CORPORATIONS
https://www.youtube.com/watch?v=aZ5GiF9RQLA
17
CONVENTIONAL
CORPORATIONS
• Conventional (C) Corporation -- A
state-chartered legal entity with authority
to act and have liability separate from its
owners (its stockholders).
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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
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HOW OWNERS AFFECT
MANAGEMENT
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DISADVANTAGES of
CORPORATIONS
• Initial cost
• Extensive paperwork
• Double taxation
• Two tax returns
• Size
• Difficulty of termination
• Possible conflict with
stockholders and board of
directors
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S CORPORATIONS
• 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.
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WHO CAN FORM
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.
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24
LIMITED LIABILITY COMPANIES
• Limited Liability Company (LLC) -- Like an S corporation, but
without the eligibility requirements.
• Advantages of LLCs:
1. Limited liability
2. Choice of taxation
3. Flexible ownership rules
4. Flexible distribution of profits and losses
5. Operating flexibility
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DISADVANTAGES of LLCs
1. No stock, therefore, ownership is
nontransferable
2. Limited life span
3. Fewer incentives
4. Taxes
5. Paperwork
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Merger Vs Acquisition
27
https://www.youtube.com/watch?v=gup4KmPirLQ
28
TYPES of MERGERS
• Vertical Merger -- The joining of two firms in different stages of
related businesses.
• Horizontal Merger -- The joining of two firms in the same.
• Conglomerate Merger -- The joining of firms in completely
unrelated industries.
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CORPORATE EXPANSION:
MERGERS AND ACQUISITIONS
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LEVERAGED BUYOUTS
• 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 $34 billion and
have involved everything from small businesses to giant
corporations.
• In 2012, foreign investors poured $166 billion into U.S.
companies.
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Leveraged
Buyouts
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FRANCHISING
• 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 770,000 franchised businesses operate in the U.S.,
employing approximately 8.5 million people.
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ADVANTAGES of FRANCHISING
1. Management and
marketing assistance
2. Personal ownership
3. Nationally recognized
name
4. Financial advice and
assistance
5. Lower failure rate
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DISADVANTAGES of
FRANCHISING
1. Large start-up costs
2. Shared profit
3. Management regulation
4. Coattail effects
5. Restrictions on selling
6. Fraudulent franchisors
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HOME-BASED FRANCHISES
Advantages:
• Relief from
commuting stress
• Extra family time
• Low overhead
expenses
Main Disadvantages:
• Isolation
• Long hours
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E-COMMERCE
in FRANCHISHING
• Most brick-and-mortar franchises have expanded online.
• 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.
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LO 4-6
COOPERATIVES
• 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, co-ops serve one billion members!
• Members democratically control the business by
electing a board of directors that hires
professional management.
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Thank You
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