Intro to business. How to form a business

Franchise support/coat tail effect

Benefit/disadvantage

Alien Corporation

Does business in the United States but is chartered (incorporated) in another country.

Partnerships

A partnership is a legal form of business with two or more owners. There are several types: General Partnership_ All owners share in operating the business and assuming liability for the business's debts. Limited partnership- Has one or more general partners and one or more limited partners. General Partner- Is an owner (partner) who has unlimited liability and is active in managing the firm. Every partnership must have a least one general partner. Limited partner- is an owner who invests money in the business but does not have any management responsibility or liability for losses beyond his or her investment. Limited liability- Means that the limited partners liability for the debts of the business is limited to the amount they put into the company. their personal assets are not at risk. Master limited partnership (MLP) Looks much like a corporation. in that it acts like a corporation and is traded on the stock exchanges like a corporation, but is taxed like a partnership and thus avoids the corporate income tax. Master limited partnerships are normally found in the oil and gas industry. for example; Sunoco Inc. Formed the MLP Sunoco Logistics Partners. to acquire, own, and operate a group of crude oil and refined-product pipelines and storage facilities. Income received by SXL is not taxed before it is passed on to investors as dividends as it would be if SXL were a corporation.6 Another type of partnership was created to limit the disadvantage of unlimited liability. A Limited liability partnership (LLP) Limits partners risk of losing their personal assests to the outcomes of only their own acts and ommissions and those of people under their supervision. Ig you are limited partner in an LLP, you can operae without fear that on of your partners might commit an act of malpractice resulting in a judgment that takes away you house, car, retirement plan, even your collection of vintage star wars action figures. As would be the case in general partnership. However, in many states this personal protection does not extend to contract liabilities such as bank loans, leases, and business debt the partnership takes on; loss of personal assets is still a risk if these are not paid. In states without additional contract liability protections for LLPs, the LLP is in many ways similar to an LLC (discussed later in the chapter).

Stockholders

Are not liable for the debts or other problems of the corporation beyond the money they invest in it by buying ownership shares, or stock, in the company. They dont have to worry about losing their house, care, or other property because of some business problem. A significant benefit. A corporation not only limits the liability of owners but often enables many people to share in the ownership (and profits) of a business without working there or having other commitments to it. Corporations may choose whether to offer ownership to outside investors or remain privately held.

Partnership Agreement

Can spell out requirements for terminating a partnership.

Using Technology in franchising

Franchisors often use technology, including social media, to extend their brands, to meet the needs of both their customers and their franchisees, and even to expand their businesses. For example, Candy Bouquet International, Inc., of Little Rock, Arkansas, offers franchises that sell candies in flowerlike arrangements. Franchisees have brick-and-mortar locations to serve walk-in customers, but they also are provided leads from Page 142the company's main website. All franchisees are kept up-to-date daily on company news via e-mail, and they use a chat room to discuss issues and product ideas with each other. The company has found the Internet a great way of disseminating information that is revolutionizing franchisor support and franchisee communications. Candy Bouquet International now has 300 locations around the globe.35 Franchising in Global Markets Franchising today is truly a global effort. U.S. franchisors are counting their profits in euros, yuan, pesos, won, krona, baht, yen, and many other currencies. McDonald's has more than 34,000 restaurants in 118 countries serving over 69 million customers each day. 36 Because of its proximity and shared language, Canada is the most popular target for U.S.-based franchises. Franchisors are finding it surprisingly easier now to move into China, South Africa, the Philippines, and the Middle East. Plus it's not just the large franchises like Subway and Marriott Hotels making the move. Newer, smaller franchises are going global as well. Auntie Anne's sells hand-rolled pretzels in 25 different countries including Indonesia, Malaysia, the Philippines, Singapore, Venezuela, and Thailand.37 Build-A-Bear Workshops has 79 franchisees in 12 countries including South Africa and the United Arab Emirates.38 In 2005, 29-year-old Matthew Corrin launched Freshii, a sandwich, salad, and soup restaurant with fresh affordable food in trendy locations. He already has 45 locations in eight countries.39 What makes franchising successful in global markets is what makes it successful in the United States: convenience and a predictable level of service and quality. Page 143Franchisors, though, must be careful and do their homework before entering into global franchise agreements. Three questions to ask before forming a global franchise are: Will your intellectual property be protected? Can you give proper support to global partners? Are you able to adapt to franchise regulations in other countries? If the answer is yes to all three questions, global franchising creates great opportunities. It's also important to remember that adapting products and brand names to different countries creates challenges. In France, people thought a furniture-stripping franchise called Dip 'N' Strip was a bar that featured strippers.

Home Based Franchises

Home-based businesses offer many obvious advantages, including relief from the stress of commuting, extra time for family activities, and low overhead expenses. One disadvantage is the feeling of isolation. Compared to home-based entrepreneurs, home-based franchisees feel less isolated. Experienced franchisors often share their knowledge of building a profitable enterprise with other franchisees. Home-based franchises can be started for as little as $5,000. Today you can be a franchisee in areas ranging from cleaning services to tax preparation, child care, pet care, cruise planning, or direct mail services.34 Before investing in a home-based franchise it is helpful to ask yourself the following questions: Are you willing to put in long hours? Can you work in a solitary environment? Are you motivated and well organized? Does your home have the space you need for the business? Can your home also be the place you work? It's also important to check out the franchisor carefully.

Disadvanatages of Corporations

Initial cost. Incorporation may cost thousands of dollars and require expensive lawyers and accountants. There are less expensive ways of incorporating in certain states (see the following subsection), but many people do not have Page 130 the time or confidence to go through this procedure without the help of a potentially expensive lawyer. Extensive paperwork. The paperwork needed to start a corporation is just the beginning. A sole proprietor or partnership may keep rather broad accounting records. A corporation, in contrast, must keep detailed financial records, the minutes of meetings, and more. As noted in Figure 5.4, many firms incorporate in Delaware or Nevada because these states' business-oriented laws make the process easier than it is in other states. Double taxation. Corporate income is taxed twice. First the corporation pays tax on its income before it can distribute any, as dividends, to stockholders. Then the stockholders pay income tax on the dividends they receive. States often tax corporations more heavily than other enterprises, and some special taxes apply only to corporations.12 Two tax returns. An individual who incorporates must file both a corporate tax return and an individual tax return. Depending on the size of the corporation, a corporate return can be quite complex and require the assistance of a certified public accountant (CPA). Size. Size may be one advantage of corporations, but it can be a disadvantage as well. Large corporations sometimes become too inflexible and tied down in red tape to respond quickly to market changes, and their profitability can suffer. Difficulty of termination. Once a corporation has started, it's relatively hard to end. Page 131Possible conflict with stockholders and board of directors. Conflict may brew if the stockholders elect a board of directors who disagree with management.13 Since the board of directors chooses the company's officers, entrepreneurs serving as managers can find themselves forced out of the very company they founded. This happened to Tom Freston, one of the founders of MTV, and Steve Jobs, a founder of Apple Computer (Jobs of course returned to the company later). Many businesspeople are discouraged by the costs, paperwork, and special taxes corporations must pay. However, many others believe the advantages of incorporation outweigh the hassles. See the Seeking Sustainability box for an example of a benefit corporation, a new type of nonprofit corporation.

Disadvantages of sole proprietorships

Not everyone is equipped to own and manage a business. Often it is difficult to save enough money to start a business and keep it going. The costs of inventory, supplies, insurance, advertising, rent, computers, utilities, and so on may be too much to cover alone. There are other disadvantages: Unlimited liability—the risk of personal losses. When you work for others, it is their problem if the business is not profitable. When you own your own business, you and the business are considered one. You have unlimited liability; that is, any debts Page 122or damages incurred by the business are your debts and you must pay them, even if it means selling your home, your car, or whatever else you own. This is a serious risk, and undertaking it requires not only thought but also discussion with a lawyer, an insurance agent, an accountant, and others. Limited financial resources. Funds available to the business are limited to what the one owner can gather. Since there are serious limits to how much money one person can raise, partnerships and corporations have a greater probability of obtaining the financial backing needed to start and equip a business and keep it going. Management difficulties. All businesses need management; someone must keep inventory, accounting, and tax records. Many people skilled at selling things or providing a service are not so skilled at keeping records. Sole proprietors often find it difficult to attract qualified employees to help run the business because often they cannot compete with the salary and benefits offered by larger companies. Overwhelming time commitment. Though sole proprietors say they set their own hours, it's hard to own a business, manage it, train people, and have time for anything else in life when there is no one with whom to share the burden. The owner of a store, for example, may put in 12 hours a day at least six days a week—almost twice the hours worked by a nonsupervisory employee in a large company. Imagine how this time commitment affects the sole proprietor's family life. Many sole proprietors will tell you, "It's not a job, it's not a career, it's a way of life."4 Few fringe benefits. If you are your own boss, you lose the fringe benefits that often come with working for others. You have no paid health insurance, no paid disability insurance, no pension plan, no sick leave, and no vacation pay. These and other benefits may add up to 30 percent or more of a worker's compensation. Limited growth. Expansion is often slow since a sole proprietorship relies on its owner for most of its creativity, business know-how, and funding. Limited life span. If the sole proprietor dies, is incapacitated, or retires, the business no longer exists (unless it is sold or taken over by the sole proprietor's heirs).

Advantages of Partnerships

Often, it is much easier to own and manage a business with one or more partners. Your partner may be skilled at inventory control and accounting, while you do the selling or servicing. A partner can also provide additional money, support, and expertise as well as cover for you when you are sick or on vacation. Figure 5.2 suggests several questions to ask yourself when choosing a partner More financial resources. When two or more people pool their money and credit, it is easier to pay the rent, utilities, and other bills incurred by a business. A limited partnership is specially designed to help raise money. As mentioned earlier, a limited partner invests money in the business but cannot legally have management responsibility and has limited liability. Shared management and pooled/complementary skills and knowledge. It is simply much easier to manage the day-to-day activities of a business with carefully chosen partners. Partners give each other free time from the business and provide different skills and perspectives. Some people find that the best Page 125partner is a spouse. Many husband-and-wife teams manage restaurants, service shops, and other businesses.7 Longer survival. Partnerships are more likely to succeed than sole proprietorships because being watched by a partner can help a businessperson become more disciplined.8 No special taxes. As with sole proprietorships, all profits of partnerships are taxed as the personal income of the owners, who pay the normal income tax on that money. Similarly, partners must estimate their taxes and make quarterly payments or suffer penalties for nonpayment.

Advantages of Sole Propretorships

Sole propretorships are the easiest kind of business to explore. Every town has a sole propreetos yoiu can visit and talk with about the joys and frustrations of being in business on their own. Most will mention the benefits of being their own boss and setting their own hours. Ease of starting and ending the business. All you have to do to start a sole proprietorship is buy or lease the needed equipment (a saw, a laptop, a tractor, a lawn mower) and put up some announcements saying you are in business. You may have to get a permit or license from the local government, but often that is no problem. It is just as easy to get out of business; you simply stop. There is no one to consult or disagree with about such decisions. Being your own boss. Working for others simply does not have the same excitement as working for yourself—at least, that's the way sole proprietors feel. You may make mistakes, but they are your mistakes—and so are the many small victories each day. Pride of ownership. People who own and manage their own businesses are rightfully proud of their work. They deserve all the credit for taking the risks and providing needed goods or services. Leaving a legacy. Owners can leave an ongoing business for future generations. Retention of company profits. Owners not only keep the profits earned but also benefit from the increasing value as the business grows. No special taxes. All the profits of a sole proprietorship are taxed as the personal income of the owner, and the owner pays the normal income tax on that money. However, owners do have to pay the self-employment tax (for Social Security and Medicare). They also have to estimate their taxes and make quarterly payments to the government or suffer penalties for nonpayment.

E Commerce Franchising

The Internet has changed franchising in many ways. Most brick-and-mortar franchises have expanded their businesses online and created virtual storefronts to deliver increased value to customers. Franchisees like Carole Shutts, a Rocky Mountain Chocolate Factory franchisee in Galena, Illinois, increased her sales by setting up her own website. Many franchisors, however, prohibit franchisee-sponsored websites because conflicts can erupt if the franchisor creates its own website. Sometimes franchisors send "reverse royalties" to franchisees who believe their sales were hurt by the franchisor's online sales, but that doesn't always bring about peace. Before buying a franchise, read the small print regarding online sales. Today potential franchisees can make a choice between starting an online business or a business requiring an office or storefront outside the home. Quite often the decision comes down to financing. Traditional brick-and-mortar franchises require finding real estate and often require a high franchise fee. Online franchises like Printinginabox.com charge no up-front franchise fee and require little training to start a business. Franchisees pay only a set monthly fee. Online franchises also do not set exclusive territories limiting where the franchisee can compete. An online franchisee can literally compete against the world. See the Adapting to Change box for an example of a company using the power of the Internet to start a new digital franchise.

Franchise Agreement

The right to use a specific business name and sell its products or services in a given territory A franchise agreement is an arrangement whereby someone with a good idea for a business (the franchisor) sells the rights to use the business name and sell a product or service (the franchise) to others (the franchisees) in a given territory. Some people, uncomfortable with the idea of starting their own business from scratch, would rather join a business with a proven track record through a franchise agreement. A franchise can be formed as a sole proprietorship, a partnership, or a corporation. The U.S. Census Bureau estimates that one out of every 10 businesses in the United States is a franchise.21 Some of the best-known franchises are McDonald's, Jiffy Lube, 7-Eleven, Weight Watchers, and Holiday Inn. According to the International Franchise Association, the more than 770,000 franchised businesses operating in the United States create approximately 8.5 million Page 137jobs that produce a direct and indirect economic impact of $839 billion in the U.S. economy.22 The most popular businesses for franchising are restaurants (fast food and full service) and gas stations with convenience stores. McDonald's, the largest restaurant chain in the United States in terms of sales, is often considered the gold standard of franchising. Retail stores, financial services, health clubs, hotels and motels, and automotive parts and service centers are also popular franchised businesses. Today a fast-growing franchise sector is senior care. In fact, Entrepreneur magazine's 2013 list of 100 fastest-growing franchises included nine senior care concepts.23 With roughly 40 million seniors in the United States today and projections the number will double in the next 20 years, it's a market that is not going to disappear.24 See Figure 5.9 for some tips on evaluating franchises.

S corporations

is unique government creation that looks like a corporation but is taxed like a sole propretorship and partnerships. The name comes from the fact that the rules governing them are in subchapter S of chapter 1. axed like sole proprietorships and partnerships. (The name comes from the fact that the rules governing them are in Subchapter S of Chapter 1 of the Internal Revenue Code.) The paperwork and details of S corporations are similar to those of conventional (C) corporations. S corporations have shareholders, directors, and employees, and the benefit of limited liability, but their profits are taxed only as the personal income of the shareholders—thus avoiding the double taxation of C corporations. Have no more than 100 shareholders. (All members of a family count as one shareholder.) Have shareholders that are individuals or estates, and who (as individuals) are citizens or permanent residents of the United States. Have only one class of stock. (You can read more about the various classes of stock in chapter 19.) Derive no more than 25 percent of income from passive sources (rents, royalties, interest). \ An S corporation that loses its S status may not operate under it again for at least five years. The tax structure of S corporations isn't attractive to all businesses.16 For one thing, the benefits change every time the tax rules change. The best way to learn all the benefits or shortcomings for a specific business is to go over the tax advantages and liability differences with a lawyer, an accountant, or both.

multinational corporation

is a firm that operates in several countries.

Articles of Partnership

is a voluntary contract between/among two or more persons to place their capital, labor, and skills into business, with the understanding that there will be a sharing of the profits and losses between/among partners.

Closed (private) corporation

is one whose stock is held by a few people and isn't available to the general public.

Unlimited Liability

that is, any debts Page 122 or damages incurred by the business are your debts and you must pay them, even if it means selling your home, your car, or whatever else you own.

nonprofit (or not for profit)

Corporation is one that doesn't seek personal profit for its owners.

Quasi-public corporation

A corporation charted by the government as an approved monopoly to perform services to the general public. Public utilities are examples.

Corporation

A legal entity with authority to act and have liability separate from its owners.

Foreign Corporation

Does business in one state but is chartered in another. About one-third of all corporations are chartered in Delaware because of its relatively attractive rules of incorporation. A foreign corporation must register in states where it operates.

A domestic Corporation

Does business in the state in which its chartered (incorporated)

Sole Proprietorship

Example of ease of formation

Conventional Corporation

Is a state chartered legal entity with authority to act and have liability separate from its owners. Its stockholders.

disadvantage of a franchise

Large start-up costs. Most franchises demand a fee for the rights to the franchise. Start-up costs for a Jazzercise franchise range from $4,200, but if it's Dunkin' Donuts you're after, you'd better have a lot more dough—-approximately $1.5 million.29 Shared profit. The franchisor often demands either a large share of the profits in addition to the start-up fees or a percentage commission based on sales, not profit. This share is called a royalty. For example, if a franchisor demands a 10 percent royalty on a franchise's net sales, 10 cents of every dollar the franchisee collects (before taxes and other expenses) must be paid to the franchisor.30 Management regulation. Management "assistance" has a way of becoming managerial orders, directives, and limitations. Franchisees feeling burdened by the company's rules and regulations may lose the drive to run their own business. Often franchisees will band together to resolve their grievances with franchisors rather than fighting their battles alone.31 For example, the KFC National Council & Advertising Cooperative, which represents all U.S. franchisees, sued KFC to gain control of advertising strategies. The franchisees were angry over Yum! Brands' (owners of KFC) decision to implement an ad strategy that emphasized a shift to grilled chicken rather than fried chicken. The campaign centered around the slogan "Unthink KFC," which was exactly what customers did. Sales plummeted 7 percent that quarter and franchisees had to throw away up to 50 percent of their grilled chicken supplies. Page 140Coattail effects. What happens to your franchise if fellow franchisees fail? The actions of other franchises have an impact on your future growth and profitability. Due to this coattail effect, you could be forced out of business even if your particular franchise has been profitable. For example, the customer passion for high-flying franchisor Krispy Kreme sank as the market became flooded with new stores and the availability of the product at retail locations caused overexposure. McDonald's and Subway franchisees complain that due to the company's relentless growth, some new stores have taken business away from existing locations, squeezing franchisees' profits per outlet. Restrictions on selling. Unlike owners of private businesses, who can sell their companies to whomever they choose on their own terms, many franchisees face restrictions on the resale of their franchises. To control quality, franchisors often insist on approving the new owner, who must meet their standards. Fraudulent franchisors. Most franchisors are not large systems like McDonald's and Subway. Many are small, rather obscure companies that prospective franchisees may know little about. Most are honest, but complaints to the Federal Trade Commission have increased about franchisors that delivered little or nothing of what they promised. Before you buy a franchise, make certain you check out the facts fully and remember the old adage "You get what you pay for."

Advantages of corporations

Limited liability. A major advantage of corporations is the limited liability of their owners. Remember, limited liability means that the owners of a business are responsible for its losses only up to the amount they invest in it. Ability to raise more money for investment. To raise money, a corporation can sell shares of its stock to anyone who is interested. This means that millions of people can own part of major companies like IBM, Apple, and Coca-Cola, and smaller corporations as well. If a company sells 10 million shares of stock for $50 a share, it will have $500 million available to build plants, buy materials, hire people, manufacture products, and so on. Such a large amount of money would be difficult to raise any other way. Corporations can also borrow money by obtaining loans from financial institutions like banks. They can also borrow from individual investors by issuing bonds, which involve paying investors interest until the bonds are repaid sometime in the future.10 You can read about how corporations raise funds through the sale of stocks and bonds in Chapter 17. Size. "Size" summarizes many of the advantages of some corporations. Because they can raise large amounts of money to work with, big corporations can build modern factories or software development facilities with the latest equipment. They can hire experts or specialists in all areas of operation. They can buy other corporations in different fields to diversify their business risks. In short, a large corporation with numerous resources can take advantage of opportunities anywhere in the world. But corporations do not have to be large to enjoy the benefits of incorporating. Many doctors, lawyers, and individuals, as well as partners in a variety of businesses, have incorporated. The vast majority of corporations in the United States are small businesses. Page 129Perpetual life. Because corporations are separate from those who own them, the death of one or more owners does not terminate the corporation. Ease of ownership change. It is easy to change the owners of a corporation. All that is necessary is to sell the stock to someone else. Ease of attracting talented employees. Corporations can attract skilled employees by offering such benefits as stock options (the right to purchase shares of the corporation for a fixed price). Separation of ownership from management. Corporations are able to raise money from many different owners/stockholders without getting them involved in management. The corporate hierarchy in Figure 5.5 shows how the owners/stockholders are separate from the managers and employees. The owners/stockholders elect a board of directors, who hire the officers of the corporation and oversee major policy issues. The owners/stockholders thus have some say in who runs the corporation but have no real control over the daily operations.11

advantages of a franchise

Management and marketing assistance. Compared with someone who starts a business from scratch, a franchisee usually has a much greater chance of succeeding because he or she has an established product to sell, help choosing a location, and assistance in all phases of promotion and operation. It's like having your own store but with full-time consultants when you need them. Franchisors usually provide intensive training. For example, McDonald's sends all new franchisees and managers to Hamburger University in Oak Brook, Illinois.25 Some franchisors help their franchisees with local marketing efforts rather than having them depend solely on national advertising. Franchisees also have a network of fellow franchisees facing similar problems who can share their experiences. The UPS Store provides its more than 4,700 franchisees with a software program that helps them build customer databases along with quick and personal one-on-one phone and e-mail support.26 Personal ownership. A franchise operation is still your business, and you enjoy as much of the incentives and profit as any sole proprietor would. You are still your own boss, although you must follow more rules, regulations, and procedures than with your own privately owned business. The Spotlight on Small Business box features an example of a growing franchise that is attracting new franchisees. Nationally recognized name. It is one thing to open a gift shop or an ice cream store. It is quite another to open a new Hallmark store or a Baskin-Robbins. With an established franchise, you get instant recognition and support from a product group with established customers around the world.Page 138 Financial advice and assistance. Two major problems for small-business owners are arranging financing and learning to keep good records. Franchisees often get valuable assistance and periodic advice from people with expertise in these areas. In fact, some franchisors, including Meinike, Gold's Gym, and UPS Stores, provide financing to potential franchisees they feel will be valuable parts of the franchise system.27 Lower failure rate. Historically, the failure rate for franchises has been lower than that of other business ventures. However, franchising has grown so rapidly that many weak franchises have entered the field, so you need to be careful and invest wisely.28

Individuals Can incorporate

Not all corporations are large organizations with hundred of employees and thousands of stockholders. Many businesspeople are discouraged by the costs, paperwork, and special taxes corporations must pay. However, many others believe the advantages of incorporation outweigh the hassles. See the Seeking Sustainability box for an example of a benefit corporation, a new type of nonprofit corporation.

How owners affect management

Owners have an influence on how a business is managed by electing a board of directors. The board hire the top offices and fires them if necessary. It also sets the pay for those officers. The officers then select managers and employees with the help of the human resources department.

open (public) corporation

Sells stock to the general public. General Motors and ExxonMobil are examples of public corporations.

Disadvantages of a partnership

Unlimited liability. Each general partner is liable for the debts of the firm, no matter who was responsible for causing them. You are liable for your partners' mistakes as well as your own. Like sole proprietors, general partners can lose their homes, cars, and everything else they own if the business loses a lawsuit or goes bankrupt. Division of profits. Sharing risk means sharing profits, and that can cause conflicts. There is no set system for dividing profits in a partnership, and they are not always divided evenly. For example, if one partner puts in more money and the other puts in more hours, each may feel justified in asking for a bigger share of the profits. Disagreements among partners. Disagreements over money are just one example of potential conflict in a partnership. Who has final authority over employees? Who hires and fires employees? Who works what hours? What if one partner wants to buy expensive equipment for the firm and the other partner disagrees? All terms of the partnership should be spelled out in writing to protect all parties and minimize misunderstandings.9 The Making Ethical Decisions box offers an example of a difference of opinions between partners. Difficulty of termination. Once you have committed yourself to a partnership, it is not easy to get out of it. Sure, you can just quit. However, questions about who gets what and what happens next are often difficult to resolve when the partnership ends. Surprisingly, law firms often have faulty partnership agreements and find that breaking up is hard to do. How do you get rid of a partner you don't like? It is best to decide such questions up front in the partnership agreement. Figure 5.3 gives you ideas about what to include in partnership agreements.