Ch. 5 How to Form a Business

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 *Notes: Worldwide, co-ops serve one billion members! Members democratically control the business by electing a board of directors that hires professional management

Sole Proprietorship

A business owned, and usually managed, by one person

Acquisition

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

Percentage of Businesses

Sole Proprietorships - 72% Corporations - 20% Partnerships - 8%

Disadvantages of Partnerships

1) Unlimited liability 2) Division of profits 3) Disagreements among partners 4) Difficulty of termination

Advantages of Sole Proprietorships

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 profits 6. No special taxes

Qualifications for S Corporations

1. Have no more than 100 shareholders 2. Have shareholders that are individuals or estates, and who (as individuals) are citizens or permanent residents of the U.S. 3. Have only one class of stock 4. 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

Disadvantages of Corporations

1. Initial cost 2. Extensive paperwork 3. Double taxation 4. Two tax returns 5. Size 6. Difficulty of termination 7. Possible conflict with stockholders and board of directors

Disadvantages of Franchises

1. Large start-up costs 2. Shared profit 3. Management regulation 4. Coattail effects 5. Restrictions on selling 6. Fraudulent franchisors

Advantages of Corporations

1. Limited liability 2. Ability to raise more money for investment 3. Size 4. Perpetual life 5. Ease of ownership change 6. Ease of attracting talented employees 7. Separation of ownership from management

Advantages of LLCs

1. Limited liability 2. Choice of taxation 3. Flexible ownership rules 4. Flexible distribution of profits and losses 5. Operating flexibility

Advantages of Franchises

1. Management and marketing assistance 2. Personal ownership 3. Nationally recognized name 4. Financial advice and assistance 5. Lower failure rate

Advantages of Partnerships

1. More financial resources 2. Shared management and pooled/complementary skills and knowledge 3 Longer survival 4. No special taxes

Disadvantages of LLCs

1. No stock, therefore ownership is nontransferable 2. Limited life span 3. Fewer incentives 4. Taxes 5. Paperwork

Home-Based Franchises (Advantages)

1. Relief from commuting stress 2. Extra family time 3. Low overhead expenses

Disadvantages of Sole Proprietorships

1. Unlimited liability — The responsibility of business owners for all of the debts of the business. 2. Limited financial resources 3. Management difficulties 4. Overwhelming time commitment 5. Few fringe benefits 6. Limited growth 7. Limited life span

Limited Liability Company (LLC)

A company similar to an S corporation but without the special eligibility requirements.

Corporation

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

Partnership

A legal form of business with two or more owners

Types of Mergers (Examples)

A soft drink company buys a mineral water company, which is a horizontal merger (companies in the same industry) A soft drink company buys an artificial sweetener company, which is a vertical merger (companies in different stages in related industries) A soft drink company buys a snack food company, which is a conglomerate merger (companies in unrelated industries)

Conventional (C) Corporation

A state-chartered legal entity with authority to act and have liability separate from its owners (its stockholders).

S corporation

A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships *Notes: 1) S corporations have shareholders, directors, and employees, plus the benefit of limited liability, 2) Profits are taxed only as the personal income of the shareholders

Corporation Types

Alien corporations do business in the United States but are chartered (incorporated) in another country. Domestic corporations do business in the state in which they are chartered (incorporated). Foreign corporations do business in one state but are chartered in another. Closed (private) corporations have stock that is held by a few people and isn't available to the general public. Open (public) corporations sell stock to the general public. Quasi-public corporations are chartered by the government as an approved monopoly to perform services to the general public. Professional corporations are owned by those who offer professional services. Nonprofit (or not-for-profit) corporations don't seek personal profit for their owners. Multinational corporations operate in several countries.

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 733,000 franchised businesses operate in the U.S., employing approximately 13.3 million people

Leveraged Buyout (LBO)

An attempt by employees, management, or a group of private 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 family businesses to giant corporations Business acquisitions are not limited to U.S. buyers

Individuals Can Incorporate

Anyone—truckers, doctors, plumbers, athletes, and small business owners—can incorporate Normally stock is not issued to outsiders when individuals incorporate, so the advantages and disadvantages are not exactly the same as for large corporations Major advantages are limited liability and possible tax benefits

Franchising in Global Markets

Canada is the most popular target for U.S.-based franchises Franchisors are finding it easier now to move into China, South Africa, the Philippines, and the Middle East International franchising goes both ways—some foreign franchises have come to the U.S., including Kumon Learning Centers and H&R Block.

Percentage of Total Receipts

Corporations - 81% Partnerships - 13% Sole Proprietorships - 6%

Questions to Ask When Choosing a Business Partner

Do you share the same goals? Do you share the same vision for the company? What skills does the person have? Do they complement yours? What can the person bring to the business? What type of decision maker is the person? Do you trust each other? How does the person respond to adversity? Does he or she try to solve the problem or try to defend his or her ego? Can the person accept constructive criticism? To what extent can you build excitement into the partnership?

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 does not have any management responsibility or liability for losses beyond the investment. *Limited liability — The responsibility of a business's owners for losses only up to the amount they invest; limited partners and shareholders have limited liability. 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 liability partnership (LLP)— A partnership that limits partners'risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision

Major Types of Partnerships

General partnership — A partnership in which 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.

Home-Based Franchises (Main Disadvantages)

Isolation Long hours

E-Commerce in Franchising

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

How Owners Affect Management

Owners and stockholders elect a board of directors. The board, in turn, hires officers. The officers set corporate objectives and select managers. The managers supervise employees, who are at the bottom of the chart. The daily operations are structured as a pyramid with officers at the top

How owners affect management

Owners/stockholders > (elect board of directors) > Board of Directors (hire officers) > Officers (set corporate objectives and select managers), Managers (supervise employees), Employees

Merger

The result of two firms forming one company

Types of Mergers

Vertical merger — The joining of two companies in different stages of related businesses Horizontal merger — The joining of two firms in the same industry Conglomerate merger — The joining of firms in completely unrelated industries

Diversity in Franchising

Women own about half of U.S. companies, yet ownership of franchises is about 21 percent More women are becoming franchisors. Auntie Anne's, Decorating Den, and Build-a-Bear were started by women. DiversityFran is an initiative to build awareness of franchising opportunities within minority communities Dunkin Brands' Diversity in Franchising Initiative offers financing and development support to minorities and military veterans Over 20 percent of franchises are minority-owned

Franchisors use technology, including social media, to...

• 1. Extend their brands 2. Meet the needs of both customers and franchisees 3. Expand their businesses