BUS 101 Chapter 8

franchise disadvantages

Initial and ongoing fees Rules/regulations Limited control/flexibility Multiple disconnected franchisees

conglomerates

are mergers or acquisitions where the companies are not in the same industry or do not provide access to customers or supplies.

limited liability

means that the limited partner is only liable up to the amount that was invested directly into the business's formation or expansion. The limited partner's personal assets are not at risk.

franchise advantages

Established brand name Support from franchisor Access to capital National advertising

unlimited liability

a two-fold potential disadvantage. First, because all debt is treated as personal debt, failure of repayment opens the sole proprietor up to the possible seizure of his or her personal assets, even if the assets are not directly related to the business. Examples may be personal savings accounts, automobiles and even his or her house. Second, lawsuits directed at the business can also be directed toward personal assets. This is the heart of unlimited liability: Personal assets are considered the same as business assets.

corporation

is a legal entity created and recognized by state law with assets and liabilities separate from those of its owners. A corporation operates under a name distinct from the names of its owners. This type of business organization can have one or more owners, which are called shareholders.

Dividend

is a percentage of the profits that is distributed to each shareholder. Once shareholders receive their dividend, they too must pay an income tax on the amount of the dividend received.

shareholder

is an owner of a corporation. The corporation—not the shareholders—is liable for the debts or other problems of the corporation. Shareholders of the corporation do not face unlimited liability.

limited partnership

maintains the rights to a share of the company's profits and joint ownership for those who are partners, but gives up the rights to management decisions of the business or liability for losses beyond his or her investment. Limited partnerships have limited liability.

major disadvantage of a corporation

An important disadvantage of a corporation is the double taxation of corporate profits. All corporations must pay taxes on their profits at the federal, state and local level before they distribute a dividend to their shareholders. Double taxation Difficult/expensive to form Additional government regulations

A franchise is an arrangement in which the franchisor—the owner of a trademark, a trade name, business operation or a copyright—licenses franchisees to use the trademark, trade name or copyright in the selling of goods and services in a given territory for a monetary payment

The franchisor is the party that allows the franchisee the right to run and operate the business. Franchises can be formed as a sole proprietorship, partnership or corporation.

general partnership

has three essential elements: A sharing of profits or losses A joint ownership of the business An equal right to be involved in the management of the business

partnership

is an association of two or more persons to carry on as co-owners of a business for profit. One can only form or join a partnership if and only if all other persons consent to the relationship. Every partnership must have at least one general partner, who is responsible for the management, profits and debts of the business. A partnership is either general or limited.

Limited Liability Corporation

is under the larger umbrella of the S corporation. As such, an LLC combines the limited liability aspects of the corporation and avoids double taxation. Unlike S corporations generally, LLCs do not have a shareholder restriction. Limited liability No double taxation

merger

occurs when two companies enter into an agreement to operate as a new company. The new company might operate under the name of one of the former companies, or it might choose to be known by a different name

acquisition

one company acquires another company, usually by purchasing it from its owners. In some cases, one company acquires a company within its industry

Double Taxation

refers to the fact that all corporate profits are taxed twice.

major advantage of the sole proprietorship

A major advantage of the sole proprietorship is that the owner has complete decision-making control of the business operations. The business owner is the leader of the company and this contributes to a feeling of pride of ownership if the business is successful. The sole proprietor keeps all of the profits if the business is successful. Because all earnings are treated as personal income, the only taxes that need to be paid are the individual national, state and local income taxes. Sole proprietorships do not have to pay any additional corporate taxes. Sole proprietorships are the simplest method of forming and dissolving a business. Be your own boss No sharing of profits Avoid double taxation Ease of formation Ease of dissolution

major advantage of a corporation

Perhaps the most important advantage of a corporation is limited liability. As mentioned above, limited liability means that shareholders of the corporation are only liable up to the amount that they invested in the business. The ability to raise capital is perhaps easiest when organized as a corporation. Sole proprietorships, partnerships and corporations have access to capital (i.e., loans) from financial institutions such a bank. But, in addition, a corporation has the ability to create and sell shares of stock to anyone who is interested. In exchange for a share of stock, an individual provides capital (i.e., money) to the corporation. After the exchange, the shareholder is an owner of the business. The corporation uses the additional capital it acquires to pay down business debts or to fund an expansion of the business. Limited liability Ability to raise funds Transfer of ownership Longevity Attracting human capital

S corporation

Restrictions on status S corporations are taxed like a partnership. Thus, S corporations avoid paying corporate income taxes while maintaining the other advantages of a corporation. Approximately 70 percent of corporations in the U.S. are classified as S Corporations. The most important restriction is that no more than 100 shareholders are allowed.

major disadvantage of the sole proprietorship

The major disadvantage of the sole proprietorship is that the owner alone bears the burden of any losses or liabilities incurred by the business. In addition, all the resources needed to start up the business are the responsibility of the individual owner. It typically is a challenge to raise financial resources, including loans or credit lines from other individuals, businesses or banks due to the potential volatility in earnings facing the sole proprietorship. Sole proprietorships can transfer ownership to another businessperson with a moderate amount of legal paperwork. Unlimited liability Difficult to raise funds Difficult to attract human capital Lack of permanence

major disadvantage of a partnership

Unlimited liability Risk of disagreement Difficult to end

negative halo effect

When a franchisee fails to abide by the rules and regulations established in the franchise agreement, the demand at another franchisee's business may be negatively impacted—even though they did nothing wrong.which refers to the potential of a different owner hurting the overall image and brand.

Entrepreneurs

are people who take risks to start a new business. They risk both their money and time to produce a good or provide a service.

Sole proprietorships

are the most common form of business. The sole proprietorship is the simplest form of business. In sole proprietorship, the owner is the business. Anyone who does business without creating a separate business organization has a sole proprietorship. Seventy-two percent of all U.S. businesses are sole proprietorships, yet they account for 4 percent of all sales receipts earned by businesses. Sole proprietorships are typically small enterprises that are owned and managed by a single individual.

franchise agreement

consists of the terms and conditions associated with purchasing the franchise. Terms and conditions will include the franchise fee and royalty, the level of support and oversight between the franchiser and franchisee and the growth potential or assigned territory

C corporation

double taxation The Internal Revenue Service assumes that a corporation is filing as a C corporation unless the business explicitly elects S corporation status.

major advantage of a partnership

combined skills and competencies of two or more persons many times exceed the skills and competencies of a single person. Partners share ideas and bring different points of view to business decisions. Sole proprietors are responsible for all aspects of a business ranging from accounting and marketing to human resources and production techniques. Rather than doing it all, partners are able to trade responsibilities and focus on the activities that suit each of them best. For example, one partner might handle all financial matters and the other partner might handle all matters related to marketing. By trading responsibilities in this way, both partners and the business are better off. Before starting the partnership, partners agree to a contract that details each partner's responsibilities, financial investment and right to a share of the profit. Partners are also able to pool financial resources to fund the start-up expenses and to expand the business when needed. Partnerships are taxed the same way as sole proprietorships. All earnings are treated as personal income. The only taxes that the partners need to pay are the individual national, state and local income taxes. Combined skills Relative ease of formation No double taxation