Chapter 33 Entrepreneurial Concepts

Chapter 33.2 Logistics of Business Ownership

Objectives Identify the forms of business ownership Name the legal steps of establishing a business

Key Terms A legal agreement to sell a parent company’s product or services in a designated geographic area Franchise A business owned and operated by one person Sole Proprietorship Means that a business owner’s financial liability is not limited to investments in their business, but extends to his or her total ability to make payments Unlimited Liability

Key Terms A legal agreement between two or more people to be jointly responsible for the success or failure of a business Partnership When each partner shares in the profits and losses General Partnership Each limited partner is liable for any debts only up to the amount of his or her investment Limited Partnership

Key Terms A legal entity created by either a state or a federal statute authorizing individuals to operate in a business Corporation The ownership of a corporation is divided into shares of stock. The owners of a corporation are the stockholders Stockholders The personal assets of the owners cannot be taken if the company does not meet financial obligations Limited Liability

Key Terms A business that is incorporated under the laws of a state that differs from the one in which it does business Foreign Corporation Hybrid form of partnership and corporation Limited Liability Company (LLC) The registration by which the county government officially recognizes that a proprietorship or partnership exist DBA (Doing Business As)

Business Ownership Opportunities There are four ways to enter a business: 1.Purchase an existing non- franchise business 2.Take over the family business 3.Start a new business 4.Purchase a franchise business

Purchasing an Existing Nonfranchise Business When an entrepreneur buys such businesses, there is little or no help from the previous owner The prospective buyer must investigate the: –Reasons for the sale of the business –Business records –Inventory

Purchasing an Existing Nonfranchise Business The reputation of the business in the community must be considered The new owner may contract the services of the previous owner to assist with management during a transition

Taking Over the Family Business Many of the same considerations for purchasing an existing business apply to taking over a family business The difference is that the previous owner is a family member The new owner must explore potential conflicts and concerns with family members

Taking Over the Family Business Some of the challenges of taking over and running a family business are: –Managing Growth –Managing family relations –Succession Planning (transition to the next generation)

Start a New Business Starting a new business gives an entrepreneur great freedom of choice The new business owner can start the business of her choice and plan it from the ground up

Purchase a Franchise Business A franchise is a legal agreement to sell a parent company’s product or services in a designated geographic area McDonald’s Corporation and Taco Bell are examples of companies that sell franchises They are franchisors

Purchase a Franchise Business The franchisee (the person buying the franchise) has: –To invest money to buy the franchise –Pay an annual fee –Pay a share of the profits The franchisor provides a well known name, a business plan, advertising, and the proven methods and products of the parent company

Purchase a Franchise Business In franchise businesses, new business owners have a lot of help All the business planning is done by the franchisor Planning generally includes –Management training –Merchandising –Day-to-day Operations

Purchase a Franchise Business One disadvantage of franchising is the initial cost A significant amount of capital is needed to purchase most franchises The franchisee must also pay high initi8al fees to begin operations

Forms of Business Organization The choice of legal organization or structure a new business should have is a critical decision It may be the difference between success and failure It determines how fast business decisions aree implemented and how well the business competes in the marketplace

Forms of Business Organization There are four possible forms of business organization: –Sole proprietorship –Partnership –Corporation –Limited Liability Company (LLC)

Forms of Business Organization The choice depends on: – The financial and tax situation of the owner –The type of business –The number of employees who will be hired –The level of risk involved with the new business –As a business grows, these factors may change and may require reorganization

Sole Proprietorship A sole proprietorship is a business owned and operated by one person This is the most common form of business ownership Sole proprietors usually have a special skill by which they can earn a living such as plumbing

Sole Proprietorship The sole proprietor must provide the money and management skill to run the business In return for all the responsibility, the sole proprietor is entitled to all the profits

Advantages of Sole Proprietorship The sole proprietorship is usually taxed less than other forms of business There is more freedom from government regulation The owner is entitled to all the profits Business owner has great control over business

Disadvantages of Sole Proprietorship Owner is responsible for all business debts and legal judgments against the company The owner has unlimited liability, which means the owner’s financial liability is not limited to the investments in the business

The Partnership A partnership is a legal agreement between two or more people to be jointly responsible for the success or failure of a business Partnerships represent about 10% of U.S. business Common partnerships in your community may include real estate agencies and law offices

The Partnership A partnership is formed by a partnership agreement, usually prepared by an attorney The agreement specifies the responsibilities of each partner Partners share the profits and loses

The Partnership Profits are usually divided according to the amount of time and money each partner invests There are two kinds of partnerships: –General –Limited

General Partnership In a general partnership, each partner shares in the profits and losses Each partner has unlimited liability for the company’s debts Each partner’s share of the profits is taxed as personal income

Limited Partnership In a limited partnership, each limited partner is liable for any debts only up to the amount of their investment Every limited partnership must have at least one general partner The limited partner has no say in management

Advantages of Partnerships Combines the skills of owners Makes more capital available Allows easier operation and expansion Each partner has a voice in management Taxed solely on the profits of the business

Disadvantages of Partnerships The owners may not always agree All partners must assume their share of the business debt Partners responsible for the shares of any partner who canny pay Business dissolves if one partner dies

The Corporation A corporation is a legal entity created by either a state or a federal statute authorizing individuals to operate an enterprise A corporation is a business that is owned by several people but is considered to be a one person entity under law

The Corporation A corporation has several unique features: –Legal permission to operate –Separate legal entity –Stockholders –Board of directors

Legal permission to operate To operate a business as a corporation the owners must file an application with tae officials for permission Once the application is approved, this document becomes the corporation’s charter

Separate legal entity A corporation is a separate legal entity that is created by law A corporation can borrow money, sign contracts, buy or sell property, and sue and be sued in court

Stockholders The ownership of a corporation is divided into shares of stock If the corporation sells stocks, it is one way to raise money The owners of a corporation are the stock holders

Board of Directors Stockholders own the corporation, but often do not manage it Instead, the stockholders elect a board of directors that is responsible for major decisions that affect the company

The Corporation Corporations offer owners limited liability Limited liability means that the personal assets of the owners cannot be taken if the company does not meet its financial obligations or if it gets into legal trouble Corporations are not affected by death, incapacity, or bankruptcy of a single shareholder

Types of Corporations There are many types of corporations, but the two main categories are: –Private corporations –Public corporations

Private Corporation A private corporation is formed by private persons This category is very broad and includes closely held corporations and publicly held corporations

Public Corporation A public corporation is a business entity created by the federal, state, or local government This group can include incorporated cities as well as schools, transit, and sanitation districts

Types of Corporations A closely held corporation is owned by a few persons or a family Shares or stocks of a closely held corporation are not sold to the public A publicly held corporation is one whose stock is owned by a large group of people

Types of Corporations Selling stock helps a corporation raise capital In the U.S., stocks are sold on the –NY Stock Exchange (NYSE) –American Stock Exchange (AMEX) –National Association of Securities Dealers Automated Quotations (NASDAQ)

Types of Corporations If a corporation succeeds, the value of the stock raises and the stockholders benefit Stockholders own their shares within limited liability EX: If a stockholder purchased $1,000 worth of Dell computers stock and the company fails, the investor looses only his investment of $1,000

Forming a Corporation Forming a corporation is a complicated process An entrepreneur must determine: –A company’s internal structure –The process for selecting a board of directors and officers An entrepreneur must also chose the state in which to incorporate the company

Forming a Corporation A foreign corporation is one that is incorporated under the laws of a state that differs from the one in which it does business Foreign means another state not another country Foreign corporations must register with each state in which they intend to do business

Advantages of Corporations Each owner has limited liability It is easier to raise capital with corporations than with other forms of business Owners can easily enter or exit the business simply by buying or selling stock Management is shared

Disadvantages of Corporations Complexity of formation Increased government regulation Corporate profits are taxed Shareholders are taxed on their dividends Intricate accounting and record keeping

The Limited Liability Company The limited liability company (LLC) is a relatively new form of business organization The business structure is a hybrid of a partnership and a corporation Its owners (members) are shielded fro personal liability and profits go directly to owners without taxation

Legal Steps to Establishing a Business Before an entrepreneur can officially open the doors of a new business he or she must legally protect the business –Step One: Find Help –Step Two: Register the Business –Step Three: Obtain License

Step 1: Find Help New business owners may wish to consult an accountant, attorney, or other advisor to determine the best organization When a corporation is formed, the laws of many states require an attorney to guide the entrepreneur through the complicated process

Step 2: Register the Business To form a sole proprietorship or a partnership, a business owner must file for a DBA at the local county clerk’s office DBA (Doing Business A’s) is the registration by which the county government officially recognizes that a new proprietorship or partnership exists

Step 2: Register the Business DBA protects the name of the business for a certain amount of years The name protection applies only to the county where the business is registered There is usually a fee associated with filing for registration

Step 2: Register the Business To form a corporation, an entrepreneur must file Articles of Incorporation with the corporation and securities bureau in the sate department of commerce Articles of Incorporation identify –the name and address of a new corporation – its purpose, –name of initial directors –amount of stock issued to each director

Step 2: Register the Business There is a filing fee but the business becomes protected and no other business may register under that business’s name

Step 2: Register the Business An LLC is established by filing Articles of Organization within the state This document describes the LLC and lists the names of its members and initial managers Many states require LLCs to have an operating agreement

Step 3: Obtain Licenses Depending on the type of business and its location, a new owner may have to obtain one or more licenses Licenses establish minimum standards of education and training They also regulate where businesses can locate, and they protect neighborhoods

Step 3: Obtain Licenses Individual states license many businesses and occupations, such as: – doctors –Accountants –Cosmetologists –Barbers –marriage counselors –pharmacists

Step 3: Obtain Licenses Licensing is done to: – Protect the public from unqualified people practicing in a business –To maintain the health and welfare of the citizens The community may require special local licenses or permits to comply with zoning ordinances, building codes and safety hazards

Step 3: Obtain Licenses Local governments use licensing as a way to regulate people who plan to enter certain types of businesses Most communities require a business owner to obtain a license before opening a hotel, restaurant or movie theater

After You Read! 1.List the four ways to become a business owner. 2.What are the four legal forms of business organization and which is the most common? 3.What is one advantage of a limited liability company?