* * * How to Form a Business CHAPTER 5 Nickels McHugh McHugh * * 1-1
Basic Forms of Business Ownership Sole Proprietorship: A business that is owned and usually managed by one person. Example: if someone starts a tea stall by himself only. Partnership: A legal form of business with two or more owners. Example: Mr. Karim and his friend starts a business together where both of them have contributed. Corporation: A legal entity with authority to act and have liability apart from its owners. Example: Microsoft.
Sole Proprietorships Advantages Ease of starting and ending the business Being your own boss Pride of ownership Retention of company profit No special taxes
Sole Proprietorship Disadvantages Unlimited liability Limited financial resources available Management difficulties time commitment Limited growth
Advantages of Partnerships More financial resources Shared management, skills and knowledge Longer survival No special taxes
Disadvantages of Partnerships Unlimited liability Division of profits Disagreements among partners Difficulty in termination
Advantages of Corporations Limited liability Ability to raise more money for investment Size Perpetual life Ease of ownership change Separation of ownership from management
Disadvantages of Corporations Initial cost Extensive paperwork Double taxation Size Difficulty of termination
Corporate Expansion: Mergers and Acquisitions Merger: The results of two firms forming one new company. Acquisition: One company’s purchase of the property and obligations of another company.
3 Types of Corporate Mergers Vertical merger: The joining of two companies involved 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.
Franchisee: A person who buys a franchise. 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. Franchisor: A company that develops a product concept and sells others the rights to make and sell the products. Franchisee: A person who buys a franchise.
Advantages of Franchises Management and marketing assistance Personal ownership Nationally recognized name Financial advice and assistance Lower failure rate
Disadvantages of Franchises Large start-up costs Shared profit Management regulation Coattail effects Restrictions on selling Fraudulent franchisors