* * Chapter Five How to Form a Business McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

* * Basic Forms of Business Ownership Sole Proprietorship -- A business owned, and usually managed, by one person. Partnership -- Two or more people legally agree to become co-owners of a business. Corporation -- A legal entity with authority to act and have liability apart from its owners. MAJOR FORMS of OWNERSHIP LG1 5-2

* * Basic Forms of Business Ownership LG1 FORMS of BUSINESS OWNERSHIP 5-3

* * Advantages of Sole Proprietorships Ease of starting and ending the business Being your own boss Pride of ownership Leaving a legacy Retention of company profit No special taxes MAJOR BENEFITS of SOLE PROPRIETORSHIP LG1 5-4

* * Disadvantages of Sole Proprietorships Unlimited Liability -- Any debts or damages incurred by the business are your debts, even if it means selling your home, car or anything else. Limited financial resources Management difficulties Overwhelming time commitment Few fringe benefits Limited growth Limited life span DISADVANTAGES of SOLE PROPRIETORSHIPS LG1 5-5

* * Partnerships General Partnership -- 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. MAJOR TYPES of PARTNERSHIPS LG2 5-6

* * 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 enjoys limited liability. Limited Liability means that liability for the debts of the business is limited to the amount the limited partner puts into the company; personal assets are not at risk. TYPES OF PARTNERS LG2 5-7

* * Advantages & Disadvantages of Partnerships More financial resources Shared management and pooled skills and knowledge Longer survival No special taxes ADVANTAGES of PARTNERSHIPS LG2 5-8

* * Advantages & Disadvantages of Partnerships Unlimited liability Division of profits Difficult to terminate Disagreements among partners DISADVANTAGES of PARTNERSHIPS LG2 5-9

* * Corporations Conventional (C) Corporation -- A state- chartered legal entity with authority to act and have liability separate from its owners (its stockholders). CONVENTIONAL CORPORATIONS LG3 5-10

* * Advantages of Corporations 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 ADVANTAGES of CORPORATIONS LG3 5-11

* * Advantages of Corporations LG3 HOW OWNERS AFFECT MANAGEMENT 5-12

* * Source: Fortune, accessed September Wal-Mart 2. Exxon Mobil 3. Chevron 4. General Electric 5. Bank of America Advantages of Corporations The BIG BOYS of BUSINESS America’s Largest Corporations LG3 6. ConocoPhillips 7. AT&T 8. Ford Motor 9. J.P. Morgan Chase 10. Hewlett-Packard 5-13

* * Disadvantages of Corporations Initial cost Extensive paperwork Double taxation Two tax returns Size Difficulty of termination Possible conflict with stockholders and board of directors DISADVANTAGES of CORPORATIONS LG3 5-14

* * Corporate Expansion: Mergers and Acquisitions Merger -- The result of two firms joining to form one company. Acquisition -- One company’s purchase of the property and obligations of another company. MERGERS and AQUISITIONS LG4 5-15

* * Corporate Expansion: Mergers and Acquisitions Vertical Merger -- Joins two firms in different stages of related business. Horizontal Merger -- Joins two firms in the same industry and allows them to diversify or expand their products. Conglomerate Merger -- Unites firms in completely unrelated industries in order to diversify business operations and investments. TYPES of MERGERS LG4 5-16

* * 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. More than 900,000 franchised businesses operate in the U.S., employing approximately 10 million people. FRANCHISING LG5 5-17

* * Advantages & Disadvantages of Franchises Management and marketing assistance Personal ownership Nationally recognized name Financial advice and assistance Lower failure rate ADVANTAGES of FRANCHISING LG5 5-18

* * Advantages & Disadvantages of Franchises Large start-up costs Shared profit Management regulation Coattail effects Restrictions on selling Fraudulent franchisors DISADVANTAGES of FRANCHISING LG5 5-19

* * Home-Based Franchises Advantages: Relief from commuting stress Extra family time Low overhead expenses Main Disadvantage: Isolation HOME-BASED FRANCHISES LG5 5-20

* * Franchising in International Markets Canada is the most popular target for U.S. based franchises; South Africa and the Philippines are becoming popular despite high cost. Franchising is successful when the product is convenient, high quality, great service is included and the franchisee adapts to the region. International franchising goes both ways – some foreign franchises have come to the U.S. GLOBAL FRANCHISING LG5 5-21