Business 100 Chapter 5

cooperative

A business owned and controlled by the people who use it, producers, consumers, or workers with similar needs who pool their resources for mutual gain.

sole proprietorship

A business that is owned and usually managed by one person

horizontal merger

The joining of two firms in the same industry

franchisor

A company that develops a product concept and sells other the rights to make and sell the products

corporation

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

partnership

A legal form of business with two or more owners

general partnership

A partnership in which all owners share in the operating the business and in assuming liability and in assuming liability for the businesses' debts.

limited liability partnership (LLP)

A partnership that limits partner's risk of losing their personal assets to only their acts and omissions and to the acts and omissions of people under their supervision.

master limited partnership (MLP)

A partnership that looks much like a corporation (in that it acts like a corporation and is traded on a stock exchange) but is taxed like a partnership and thus avoids the corporate income tax.

limited partnership

A partnership with one or more general partners and one or more limited partners

franchisee

A person who buys a franchise

Learning Objective 5.5 Outline the advantages an disadvantages of franchises

ADVANTAGES OF FRANCHISES 1. MANAGEMENT AND MARKETING ASSISTANCE, providing a greater chance of success through: a. An established product b. Help in choosing a location c. Assistance in all phases of operation d. Intensive training e. Local marketing efforts 2. PERSONAL OWNERSHIP: You are still your own boss, although you must follow the rules, regulations, and procedures of the franchise. 3. NATIONALLY RECOGNIZED NAME: You get instant recognition and support. 4. FINANCIAL ADVICE AND ASSISTANCE a. Franchisees get assistance arranging financing and learning to keep records. b. Some franchisors will even provide financing to potential franchisees. 5. LOWER FAILURE RATE a. Historically, the failure rate for franchises has been lower than that of other business ventures. b. However, because many weak franchises have entered the field, care is needed. C. DISADVANTAGES OF FRANCHISES 1. LARGE START-UP COSTS 10 a. Most franchises charge a fee for the rights to the franchise. b. Start-up costs can be as high as $2 million (for a Dunkin' Donuts franchise). 2. SHARED PROFIT: The franchisor often demands a large share of the profits, or ROYALTY, based on sales, not profit. 3. MANAGEMENT REGULATION a. Some franchisees find the company's rules and regulations burdensome. b. In recent years, franchisees have banded together to resolve their grievances with franchisors. c. In 2010, the KFC National Council & Advertising Cooperative sued KFC to gain control of advertising strategies. 4. COATTAIL EFFECTS a. The actions of other franchisees have an impact on the franchise's future growth and level of profitability, a phenomenon known as a COATTAIL EFFECT. b. Franchisees must also watch for competition from fellow franchisees. 5. RESTRICTIONS ON SELLING a. Many franchisees face restrictions when reselling their franchises. b. Franchisors often insist on approving the new owner, who must meet their standards. 6. FRAUDULENT FRANCHISORS a. Most franchisors are not large systems; many are small, obscure companies. b. There has been an increase in complaints to the FTC about franchisors that delivered little or nothing that they promised.

Advantages of Limited Liability Companies

ADVANTAGES OF LLCs: a. LIMITED LIABILITY: Personal assets are protected. b. CHOICE OF TAXATION: LLCs can choose to be taxed as partnerships or as corporations. c. FLEXIBLE OWNERSHIP RULES: LLCs do not have to comply with ownership restrictions as S corporations do. d. FLEXIBLE DISTRIBUTION OF PROFITS AND LOSSES: Profit and losses don't have to be distributed in proportion to the money each person invests. e. OPERATING FLEXIBILITY: Reporting requirements are less than for a corporation.

Learning Objective 5.2 a Compare the advantages and disadvantages of partnerships

ADVANTAGES OF PARTNERSHIPS 1. MORE FINANCIAL RESOURCES: Two or more people can pool their money and credit. 2. SHARED MANAGEMENT AND POOLED/ COMPLEMENTARY KNOWLEDGE: Partners give each other time off and provide different skills and perspectives. 3. LONGER SURVIVAL: Partners are four times as likely to succeed as sole proprietorships. 4. NO SPECIAL TAXES: All profits of partners are taxed as personal income of the owners. D. DISADVANTAGES OF PARTNERSHIPS 1. UNLIMITED LIABILITY a. Each GENERAL PARTNER is liable for the debts of the firm, no matter who was responsible for causing those debts. b. You are liable for your partners' mistakes as well as your own. 2. DIVISION OF PROFITS: Sharing profits can cause conflicts. DIVISION OF PROFITS: Sharing profits can cause conflicts. 3. DISAGREEMENTS AMONG PARTNERS b. Because of potential conflicts, all terms of partnership should be spelled out IN WRITING to protect all parties. 4. DIFFICULTY OF TERMINATION a. It is not easy to get out of a partnership. b. For example: Who gets what and what happens next? c. It is best to make these decisions at the beginning. E. Many ventures avoid the disadvantages of these forms of ownership by forming corporations. a. Disagreements can arise over division of authority, purchasing decisions, and so on.

Learning Objective 5.3 Compare the advantages and disadvantages of corporations

Advantages to A CONVENTIONAL (C) CORPORATION is a state-chartered legal entity with authority to act and have liability separate from its owners. 1. Businesses do not have to be big to incorporate. 2. The corporation's owners (STOCKHOLDERS) are not liable for the debts of the corporation beyond the money they invest. 3. Many people can share in the ownership of a business without working there. 4. Corporations can choose to offer ownership to outsiders or remain private. B. ADVANTAGES OF CORPORATIONS 1. LIMITED LIABILITY a. Limited liability is probably the MOST SIGNIFICANT ADVANTAGE of corporations. b. The owners of a business are responsible for losses only up to the amount they invest. 2. ABILITY TO RAISE MORE MONEY FOR INVESTMENT a. To raise money, a corporation sells OWNERSHIP (STOCK) to anyone interested. b. It is also easier for corporations to obtain loans. c. Corporations can also borrow money from investors by issuing BONDS. 3. SIZE a. Because corporations can raise large amounts of money, they can build modern facilities. b. They can also hire experts in all areas of operation. c. They can buy other corporations in other fields to diversify their risk. d. Corporations have the size and resources to take advantage of opportunities anywhere in the world. e. Corporations do not have to be large to have these benefits. 4. PERPETUAL LIFE: The death of one or more owners does not terminate the corporation. 5. EASE OF OWNERSHIP CHANGE: Selling stock to someone else changes ownership. 6. EASE OF DRAWING TALENTED EMPLOYEES: Corporations can offer benefits such as STOCK OPTIONS—the right to purchase shares of the corporation for a fixed price. 7. SEPARATION OF OWNERSHIP FROM MANAGEMENT: Corporations can raise money from investors without having them involved in management. C. DISADVANTAGES OF CORPORATIONS 1. INITIAL COST a. Incorporation may cost thousands of dollars and involve lawyers and accountants. b. There are less expensive ways of incorporating in certain states. 2. EXTENSIVE PAPERWORK a. A corporation must keep detailed records. b. Many firms incorporate in Delaware and Nevada because favorable laws make the process easier. 3. DOUBLE TAXATION: Corporate income is taxed twice. a. The CORPORATION PAYS TAX on income before it can distribute any dividends to stockholders. b. The STOCKHOLDERS PAY TAX on the income they receive from the corporation. c. States often tax corporations more harshly than other enterprises. 4. TWO TAX RETURNS: A corporate owner must file both a corporate tax return and an individual tax return. 5. SIZE: Large corporations sometimes become inflexible and too tied down in red tape. 6. DIFFICULTY OF TERMINATION: A corporation is relatively difficult to end. POSSIBLE CONFLICT WITH STOCKHOLDERS AND BOARD OF DIRECTORS. a. The board chooses the company's officers. b. An entrepreneur can be forced out of the very company he or she founded. 8. Many people feel the hassles of incorporation outweigh the advantages.

franchise agreement

An arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory

leveraged buyout (LBO)

An attempt by employees, management or a group of investors to purchase and organization primarily through borrowing

general partner

An owner (partner) who has unlimited liability and is active in managing the firm

limited partner

An owner who invest money in the business but does not have any management responsibility or liability for losses beyond the investment

What is the role of cooperatives

Cooperatives are organizations owned by members/customers. Some people form cooperatives to acquire more economic power than they would as individuals. Small businesses often form cooperatives to gain more purchasing, marketing, or product development strength.

factors of production

Creation of goods/Services 1. Land or natural resources 2. Capital- money, facilities, equipment 3. entrepreneurship- willingness to take a risk 4. Labor-workers 5. Knowledge -information technology

Learning Objective 5.5 a Discuss the opportunities for diversity in franchising

D. DIVERSITY IN FRANCHISING 1. WOMEN IN FRANCHISING a. Women are underrepresented in larger franchises due to lack of money—the "GREEN CEILING." b. However, firms owned by women have grown at twice the rate of all companies. c. Women are becoming FRANCHISORS as well. d. The text uses the example of the franchise Two Men and a Truck, founded founded by entrepreneur Mary Ellen Sheets. 11 2. MINORITY FRANCHISE OWNERSHIP is growing at more than six times the national average. 3. Nearly 20% of the franchises in the U.S. are owned by African Americans, Latinos, Asians, and Native Americans. 4. Franchisors are increasingly focusing on recruiting minority franchisees. HOME-BASED FRANCHISES 1. Home-based businesses offer advantages but may leave owners with a feeling of isolation. 2. Home-based FRANCHISES feel less isolated. F. E-COMMERCE IN FRANCHISING 1. Today, Internet users worldwide can obtain franchises to open online retail stores. 2. Many franchisees with existing brick-and-mortar stores are expanding online. 3. Some franchisors prohibit franchisee-sponsored websites, however, which can lead to conflicts between franchisors and franchisees. 4. Traditional brick-and-mortar franchises require finding real estate. Online franchises require little training and franchise fees. USING TECHNOLOGY IN FRANCHISING 1. Franchisors are using technology, including social media, to meet the needs of customers and franchisees. 2. Franchise websites streamline communication with employees, customers, and vendors. 3. Using a website, every franchisee has immediate access to every subject that involves the franchise operation.

Disadvantage of Limited Liability Corporation (LLC)

DISADVANTAGES OF LLCs: a. NO STOCK i. LLC ownership is nontransferable. ii. LLC members need the approval of the other members in order to sell their interest. b. LIMITED LIFE SPAN: LLCs have to identify dissolution dates in the articles of organization. c. FEWER INCENTIVES: LLCs can't deduct the cost of fringe benefits or use stock options. d. TAXES: LLC members must pay self-employment taxes on profits. e. PAPERWORK: More paperwork is required than for sole proprietors. 4. The start-up cost for an LLC varies.

Learning Objective 5.5 b Discuss the challenges of global franchising

FRANCHISING IN GLOBAL MARKETS 1. Canada is by far the most popular market because of proximity and language. 2. The costs of franchising are high in these markets, but these are counterbalanced by less competition and rapidly expanding consumer base. 3. Newer, smaller franchises are also going international, such as Auntie Anne's and Build-A-Bear Workshop. 4. Convenience and a predictable level of service and quality are what make international franchising successful. Franchisors must be careful to adapt to the region. 6. Foreign franchises are also expanding to the U.S.

Individuals can incorporate

INDIVIDUALS CAN INCORPORATE 1. By incorporating, individuals such as doctors and lawyers can save on taxes and receive other benefits of incorporation. 2. Small corporations usually do not issue stock to outsiders, so they don't have all the same advantages and disadvantages of large corporations. 3. It is wise to consult a lawyer when incorporating. 4. It takes, on average, about 30 days to incorporate.

acquisition

One company's purchase of the property and obligations of another company

Learning Objective 5.2 Describe the differences between general and limited partners

PARTNERSHIPS A. A PARTNERSHIP is a legal form of business with two or more owners. B. TYPES OF PARTNERSHIPS 1. A GENERAL PARTNERSHIP is a partnership in which all owners share in operating the business and in assuming liability for the business's debts. 2. A LIMITED PARTNERSHIP is a partnership with one or more general partners and one or more limited partners. a. A GENERAL PARTNER is an owner (partner) who has unlimited liability and is active in managing the firm. b. A LIMITED PARTNER is an owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment. c. LIMITED LIABILITY is the responsibility of a business's LIMITED LIABILITY is the responsibility of a business's owners for losses only up to the amount they invest; limited partners and shareholders have limited liability.

Learning Objective 5.3 a Summarize the difference between C corporations, S corporations, and limited liability companies

S CORPORATIONS 1. An S CORPORATION is a unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships. a. S corporations have shareholders, directors, and employees. b. However, the profits are taxed as the personal income of the shareholders. c. They also have the benefit of limited liability. 2. S CORPORATIONS MUST: a. Have no more than 100 shareholders b. Have shareholders who are individuals or estates and are citizens or permanent residents of the U.S. c. Have only one class of stock d. Not have more than 25% of income derived from passive sources (rents, royalties, interest, etc.) 3. The TAX STRUCTURE of an S corporation isn't attractive to all businesses. 4. The benefits of S corporations change every time the tax rules change. LIMITED LIABILITY COMPANIES A LIMITED LIABILITY COMPANY (LLC) is a company similar to an S corporation but without the special eligibility requirements. a. LLCs were introduced in Wyoming in 1977. b. By 1996, all 50 states recognized LLCs. c. More than half of new business registrations in some states today are LLCs. A CONVENTIONAL (C) CORPORATION is a state-chartered legal entity with authority to act and have liability separate from its owners. 1. Businesses do not have to be big to incorporate. 2. The corporation's owners (STOCKHOLDERS) are not liable for the debts of the corporation beyond the money they invest. 3. Many people can share in the ownership of a business without working there. 4. Corporations can choose to offer ownership to outsiders or remain private.

Learning Objective 5.1 Compare the advantages and disadvantages of sole proprietorships

SOLE PROPRIETORSHIPS A. ADVANTAGES OF SOLE PROPRIETORSHIPS 1. Ease of STARTING AND ENDING the business. a. After you rent or buy the equipment, all you need is a permit from the local government. b. To get out of business, you just quit. 2. BEING YOUR OWN BOSS. Working for yourself is exciting. 3. PRIDE OF OWNERSHIP. Sole proprietors take the risk and deserve the credit. 4. LEAVING A LEGACY behind for future generations. 5. RETENTION OF COMPANY PROFITS. You don't have to share profits with anyone. 6. NO SPECIAL TAXES. Profits of the business are taxed as the personal income of the owner. DISADVANTAGES OF SOLE PROPRIETORSHIPS 1. Unlimited liability—the risk of personal losses a. You and the business are one. b. UNLIMITED LIABILITY is the responsibility of business owners for all of the debts of the business. 2. LIMITED FINANCIAL RESOURCES: Financing is limited to the funds that the sole owner can gather. 3. MANAGEMENT DIFFICULTIES: Many owners are not skilled at management and with details such as accounting. 4. OVERWHELMING TIME COMMITMENT a. The owner has no one with whom to share the burden. b. A business owner may work 12 hours a day. 5. FEW FRINGE BENEFITS: a. You have no paid vacation or health insurance. b. Fringe benefits can add up to 30% of a worker's compensation. 6. LIMITED GROWTH: Expansion is slow. 7. LIMITED LIFE SPAN. If the sole proprietor dies or leaves, the business ends.

conglomerate merger

The joining of firms in completely unrelated industries

vertical merger

The joining of two companies involved in different stages of related businesses.

limited liability

The responsibility of a businesses' owners for losses only up to the amount they invest; limited partners and shareholders have limited liability

unlimited liability

The responsibility of business owners for all of the debts of the business

merger

The result of two firms forming one company

franchise

The right to use a specific business's name and sell its products or services in a given territory