Intro to Business Chapter 5

Franchises

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. Can be formed as a sole proprietorship, a partnership, or a corporation. More than 733,000 franchised businesses operate in the U.S., creating 7.6 million jobs.

Corporation

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

General Partnership

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

Limited Partnerships

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

Conventional (C) Corporation

A state-chartered legal entity with authority to act and have liability separate from its owners (its stockholders). Enables many people to share in ownership.

S Corporations

A unique government creation that looks like a corporation but is taxed like sole proprietorship and partnerships. Have shareholders, directors, and employees, plus the benefit of limited liability. Profits are taxed only as the personal income of the shareholders. If an S corporation loses its S status, it may not operate under it again for at least 5 years.

Types of Corporations

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. About one-third of all corporations are chartered in Delaware because of its relatively attractive rules for incorporation. A foreign corporation must register in states where it operates. Closed (private) corporations have stock that is held by a few people and isn't available to the general public.

More About Corporations

Anyone—truckers, doctors, plumbers, athletes, and small business owners—can incorporate. Stock is normally not issued to outsiders when individuals incorporate, so they do not share the advantages and disadvantages of large corporations. Major advantages are limited liability and possible tax benefits.

Sole Properietorship Advantages

Ease of starting and ending the business. Being your own boss. Pride of ownership. Leaving a legacy. Retention of company profits. No special taxes.

Global Market Franchises

Even smaller franchises are going global. Canada is the most popular target for U.S.-based franchises, but so is China, South Africa, the Philippines, and the Middle East. They offer the same advantages as in the U.S.: convenience and a predictable level of service and quality. Adapting products and brand names to different countries creates challenges. Foreign franchises also come to the U.S.

Type of Partnerships

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.

Corporation Disadvantages

Initial cost. Extensive paperwork. Double taxation. Two tax returns. Size. Difficulty of termination. Possible conflict with stockholders and board of directors.

Franchise Disadvantages

Large start-up costs. Shared profit. Management regulation. Coattail effects. Restrictions on selling. Fraudulent franchisors.

Corporation Advantages

Limited liability. Ability to raise more money for investment. Size. Perpetual life. Ease of ownership change. Ease of attracting talented employees. Separation of ownership from management.

LLC Advantages

Limited liability. Choice of taxation. Flexible ownership rules. Flexible distribution of profits and losses. Operating flexibility.

Franchises Advantages

Management and marketing assistance. Personal ownership. Nationally recognized name. Financial advice and assistance. Lower failure rate.

Types of Expansions

Merger — The result of two firms forming one company. Acquisition — One company's purchase of the property and obligations of another company.

Partnership Advantages

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

LLC Disadvantages

No stock; ownership is nontransferable. Fewer incentives. Taxes. Paperwork.

Partnership Disadvantages

Unlimited liability. Division of profits. Disagreements among partners. Difficulty of termination.

Sole Proprietorship Disadvantages

Unlimited liability — The responsibility of business owners for all debts of the business. Limited financial resources. Management difficulties. Overwhelming time commitment. Few fringe benefits. Limited growth. Limited life span.

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. Mergers between competitors must prove to the Federal Trade Commission (FTC) that the new combined company does not limit competition unfairly. 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 35 percent. More women are becoming franchisors, such as those who started Auntie Anne's, Decorating Den, and Build-a-Bear Workshops. Minorities own less than 19 percent of businesses, yet over 30 percent of franchises are minority-owned

Sole Proprietorship

a business owned and usually managed by one person

Partnership

a legal form of business with two or more owners

LLC (Limited Liability Company)

similar to an S corporation, but without the special eligibility requirements