BUSN CHAPTER 6

Advantages of Franchising

less risk, training and support, brand recognition, easier access to funding

Disadvantages of Sole Proprietorship

limited financial resources, unlimited liability, limited ability to attract and maintain talented employees, heavy workload and responsibilities, lack of permanence

Advantages of C Corporations

limited liability, permanence, ease of transfer of ownership, ability to raise large amounts of financial capital, ability to make use of specialized management

corporate bylaws

the basic rules governing how a corporation is organized and how it conducts its business

articles of incorporation

the document filed with a state government to establish the existence of a new corporation

board of directors

the individuals who are elected by stockholders of a corporation to represent their interests

Divestiture

the transfer of total or partial ownership of some of a firm's operations to investors or to another company

Disadvantages of General Partnerships

unlimited liability, potential for disagreements, lack of continuity, difficulty in withdrawing from a partnership

Difficulty withdrawing from a partnership

A partner who withdraws from a partnership remains liable for any debts or obligations the firm had at the time of withdrawal.

Easier to access funding

Bankers and other lenders may be more willing to lend money of the business Is part of an established franchise then if it is a new, unproven business

lack of permanence

Because sole proprietorships are just an extension of their owners, they lack permanence. If the owner dies, retires or withdraws the business, legally the business ceases to exist.

unlimited liability

Because the law views a sole proprietorship as an extension of its owner, the debts of the form become the owners personal debts.

Heavy workload and responsibilities

Being your own boss can be stressful and time consuming. Many times owners have to make decisions in an area they lack expertise.

common stockholders vs preferred stockholders

Common stockholders normally have the right to vote in stockholders meetings, preferred stockholders do not

Ease of formation

Compared to the other forms of ownerships, the paperwork and costs are minimal for a sole proprietorship. No special forms or fees. Entrepreneurs who are eager to get a business up and running quickly can find this a compelling advantage.

More paperwork, more regulation, and less secrecy

Corporation are more closely regulated and are required to file more government paperwork than the others. (Securities and exchange commission paperwork)

Permeanance

Corporation can continue running as long as they remain financially viable and the majority of stockholders want the business to continue.

Forming and Managing an LLC

Created by filing a document and paying filing fees in the state where the business is organized Organizers draft an operating agreement LLCs are neither partnerships nor corporations Hence, owners are known as members Similar to corporation formation

What are the two most popular types of franchise arrangements?

Distributorships and business format franchises

Ability to make use of specialized management

Easy to hire qualified professionals-abikity to give fantastic salaries and benefits

The Role of the Board of Directors

Establishes the corporations goals and objectives Take an active role in day to day management Sets levels of compensation and monitors performance

Annual franchise tax

Even though they may be exempt from corporate income taxes, many states require LLCs to pay annual franchise tax

Disadvantages of c corporation

Expense and complexity of formation and operation, Complications when operating in multiple states, Double taxation of earning and additional taxes, More paperwork and regulation and less secrecy, Possible conflicts of interes

Pride of ownership

Feeling of pride and personal satisfaction you can gain from owning and running your own business

Less risk

Franchises offer access to proven business system and product. The systems and methods offered by franchisors have an established track record.

Limited ability to attract and maintain talented employees

Most sole proprietorships are unable to pay high salaries and substantial perks that highly qualified, experienced employees get when they work for bigger companies.

Limits on types of firms that can form an LLC's

Most states do not permit banks, insurance companies, and nonprofit organizations to operate as LLCs

Carve-out divestiture

Similar to a spin off in that the firm converts a particular unit or division into a separate company an issue stock in the newly created corporation. However, instead of distributing the new stock to its current stockholders, it sells the stock to outside investors, thus raising additional financial capital..

Ease of transfer of ownership

Simply sell shares of stock

Possible conflicts of interest (corporation)

Some top executives pursue policies that further their OWN interests at the expense of stockholders.

C Corporation

The most common type of corporation, which is a legal business entity that offers limited liability to all of its owners, who are called stockholders

limited liability

When owners are not personally liable for claims against their firm. Owners with limited liability may lose their investment in the company, but their other personal assets are protected.

Ability to pool financial resources

With more owners investing in the company, a partnership is likely to have a stronger financial base than a sole proprietorship

Growth challenges

Wound growth and expansion are definitely possible in franchising, strings are attached. Franchise agreements usually limit the franchisees territory and require franchise approval before expanding into other areas

retention of control

You have the ability to manage your own business the way you want

S Corporation

a form of corporation that avoids double taxation by having its income taxed as if it were a partnership

Limited liability partnership (LLP)

a form of partnership in which all partners have the right to participate in management and have limited liability for company debts

Franchise

a licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, business methods, and other property in exchange for monetary payments and other considerations

General Partnership

a partnership in which all partners can take an active role in managing the business and have unlimited liability for any claims against the firm

limited partnership

a partnership that includes at least one general partner who actively manages the company and accepts unlimited liability and one limited partner who gives up the right to actively manage the company in exchange for limited liability

Distributorship

a type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it

Partnership

a voluntary agreement under which two or more people act as co-owners of a business for profit

Advantages of General Partnerships

ability to pool financial resources, ability to share responsibilities and capitalize on complementary skills, ease of formation, possible tax advantages

Institutional investor

an organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and other securities

Stockholder

an owner of a corporation

Disadvantages of LLCs

complexity of formation, annual franchise tax, foreign status in other states, limits on types of firms that can form LLCs, differences in state laws

Disadvantages of Franchising

costs, lack of control, negative halo effect, growth challenges, restrictions on sale, poor execution

Advantages of Sole Proprietorship

ease of formation, retention of control, pride of ownership, retention of profits, possible tax advantage

Limited liability (LLC)

Similar to a corporation, all owners of a LLC have limited liability

Nonprofit corporation disadvantages

- it has members, who may pay dues, but cannot have stockholders - it cannot distribute dividends to members -it cannot contribute funds to a political campaign -it must keep accurate records and file paperwork to document tax exempt status

statuary close (or closed) corporation disadvantages

-The number of stockholders is limited. (The number varies among states but is usually no more than 50) -stockholders normally can't sell their shares to the public without first offering the shares to existing owners -not all states allow formation of this type of corporation

Non profit corporation advantages

-earnings are exempt from federal and state income taxes -members and directors have limited liability -individuals who contribute money or property to the nonprofit can take a tax deduction, making it easier for these organizations to raise funds from donations

statuary close (or closed) corporation advantages

-it can operate under simpler arrangements than conventional corporations. For example, it doesn't have to elect a Board of Directors or hold an annual stockholders meeting -all owners can actively participate in management while still having limited liability

Merger

A corporate restructuring that occurs when two formerly independent business entities combine to form a new organization.

Complications when operating in more than one state

A corporation must register as a foreign corporation in order to do business with any other state other than the one it incorporates

retention of profits

All of the profits go to you, minus taxes

Unlimited liability (partnership)

As a general partner, you're not only responsible for your own mistakes, but your partners mistakes.

Difference between general and limited partners

General partners have the right to participate fully in managing their partnership, but they also assume unlimited personal liability for any of its debts. Limited partners can not actively participate in it's management, but they have the protection of limited liability (as long as they do not actively participate in running the company, their personal wealth is not at risk)

Simplicity and flexibility and management in operation

I like corporations, LLCs aren't required to hold board meetings. Also, LLCs are subject to less paperwork and fewer reporting requirements than corporations.

lack of continuity

If a current partner withdraws from the partnership, the relationships among the participants will clearly change, potentially ending the partnership

Potential for disagreement

If partners can't agree on how to run the business, it can complicate and delay decision making.

Common objective of a horizontal merger

Increase size and market power within the industry Improve efficiency by eliminating duplication of facilities and personnel

S Corporation Disadvantages

It can have no more than 100 stockholders With only rare exceptions, each stockholder must be a US citizen or permanent resident of the US

Ease of formation

It's possible to establish a partnership based on verbal agreement . Working out the details can be tough, though.

Differences in state laws

LLC laws are still evolving, and their specific requirements vary considerably among states

Complexity of formation

LLC's can take more time and effort to form them so proprietorships. Forming an LLC is more difficult than creating a partnership. The formation of a partnership requires a "meeting of the minds" of the partners which is an always easy to achieve.

Foreign status in other states

Like corporations, LLC's must register or qualified to operate as foreign companies when they do business in states other than the state in which they were organized.

Advantages of LLC's

Limited liability, tax pass-through, simplicity and flexibility in management and operation, flexible ownership

Possible tax advantage

No taxes are directly levied on the earnings of sole proprietorships as a business. Instead, the earnings are taxed only as income of the proprietor. This avoids the undesirable possibility of double taxation on earnings.

"Spin out" diverstiture

Occurs when a company issue stock in one of its own divisions or operating units sets it up as a separate company, complete with its own Board of Directors and corporate officers

Franchising in today's economy

One of the biggest trends in franchising for the past several years has been the expansion into foreign markets. Another notable trend has been the growth and number of women franchisees Minority participation in franchises, both as franchisees and franchisors, has been relatively low. Two major initiatives have given the efforts to reach minority franchising a boost in recent years. The first, known as the national minority franchising initiative was founded in 2000 and currently maintains a directory of more than 500 franchisors who actively promote minority franchise ownership. The second initiative, called diversityfran was established in early 2006 and this initiative has the cooperation of a variety of organizations interested in promoting minority business ownership.

Brand recognition

Operating a franchise gives the franchisee instant brand-name recognition, which can be a big help and attracting customers.

Ability to share responsibilities and capitalize on complementary skills

Partners can share the burden of running the business, which can ease the workload. Tasks can be divided based on complementary skills, using each partners skills to their best advantage

Common objective of a vertical merger

Provide tighter integration of production and increased control over the supply of crucial inputs

Ability to raise large amounts of capital

Raise large funds by issuing shares of stock by selling formal IOUs called corporate bonds

limited financial resources

Raising money to finance growth may be a struggle. With only one responsible for debts, banks are often reluctant to lend money. Suppliers may be unwilling to provide supplies on credit.

Ownership of C corporations

Represented by shares of stock, owners called "stockholders"

Forming a C Corporation

Requires filing articles of incorporation and laying filing fees Also requires the adoption of corporate bylaws Tends to be more expensive and complex than sole proprietorship and partnerships

limited liability (corporation)

Stockholders are not personally liable for the debts of the company

Expense and complexity of formation and operation

Subject to more formal operating environments

Franchisor

The Business entity in a franchise relationship that allows others to operate its business using resources at supplies in exchange for money and other considerations

double taxation and additional taxes

The IRS considers a C corporation to be a separate legal entity and taxes it's earnings accordingly. And dividends are taxed again as the personal income of the stockholders. Double taxation can take a big bite out of earnings that are distributed to shareholders.

S Corporation Advantages

The IRS does not tax earnings of S corporations seperately. Earnings lass thought he company and are taxed only as income to stockholders, this avoiding the problem of double taxation associated with C corporations Stockholders have limited liability

Possible tax advantage (partnership)

The earnings of a partnership pass through the business and are untouched by the irs and are taxed only as the partners personal income. Again, this avoids the potential for double taxation endemic to corporations.

Lack of control

The franchise agreement usually requires the franchise to follow the franchisors procedures to the letter. No freedom.

Training and support

The franchisor normally provides a franchisee with extensive training and support.

Negative halo effect

The irresponsible or incompetent behavior of a few franchises can create a negative perception that adversely affects not only the franchise as a whole but also the success of other franchisees.

Tax Pass Through

The owners of LL sees may elect to have their companies treated as either a corporation or partnership, or even as a sole proprietor ship is owned by a single person. The default tax classification for LLC is more than one owner, and the one most LLC is choose, is the partnership operation. Under its arrangement, there is no separate tax on the earnings of the company. Instead, earnings pass through the company and are taxed only as income of the owners

Franchisee

The party in a franchise relationship that pays for the right to use resources supplied by the franchisor

Costs

The typical franchise agreement requires a franchisee To pay an initial franchise fee when they enter into the franchise agreement and an ongoing royalty to the franchisor

Flexible ownership

Unlike S corporations, LLC is going to have a number of owners and can include foreign investors and other corporations

business format franchise

a broad franchise agreement in which the franchisee pays for the right to use the name, trademark, and business and production methods of the franchisor

vertical merger

a combination of firms at different stages in the production of a good or service

horizontal merger

a combination of two firms that are in the same industry

aquisition

a corporate restructuring in which one firm buys another. When acquiring the firm buys the target firm despite the opposition of the boards target board and top management, the result is called a "hostile takeover"

nonprofit corporation

a corporation that does not seek to earn a profit and differs in several fundamental respects from C corporations

statuary close (or closed) corporation

a corporation with a limited number of owners that operates under simpler, less formal rules than a C corporation

Corporation

a form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners

Limited Liability Company (LLC)

a form of business ownership that offers both limited liability to its owners and flexible tax treatment

Sole Proprietorship

a form of business ownership with a single owner who usually actively manages the company