©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 6

6 6 Business Formation: Choosing The Form That Fits 2 LO 1 What are the characteristics of the four basic forms of business ownership? LO2What are the advantages and disadvantages of a sole proprietorship? LO3What are the pros and cons of partnerships? LO4Why have corporations become the dominant form of business ownership? LO5Why are limited liability companies becoming an increasingly popular form of ownership? LO6What are the advantages and disadvantages of franchising?

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Business Ownership Options: The Big Four Sole Proprietorship – the business is owned by a single individual Partnership – two or more people serve as co-owners of the business Corporation – the business is a separate legal entity Limited Liability Company – a hybrid with characteristics of both a corporation and partnership 3

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Net Income by Form of Ownership 4 Source: U.S. Census Bureau. The 2011Statistical Abstract of the United States Tables 743 and 744: accessed January 23, 2011.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages and Disadvantages of Sole Proprietorships 5 Advantages: Ease of Formation Retention of Control Pride of Ownership Retention of Profits Possible Tax Advantages Disadvantages: Limited Financial Resources Unlimited Liability Limited ability to attract and maintain talented employees Heavy workload and responsibilities Lack of Permanence

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. General Partnerships: Two Heads Can Be Better Than One 6 Advantages: Pooled Financial Resources Shared Responsibilities Ease of Formation Tax Advantages Disadvantages: Unlimited Liability Disagreements Lack of Continuity Difficulty in withdrawing from agreement

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Limited Partnerships 7 Limited Partnership – includes at least one general partner and at least one limited partner Limited Partnership – includes at least one general partner and at least one limited partner Limited Liability Partnership – All partners are actively involved but they have some form of limited liability. The amount of liability differs per state. Limited Liability Partnership – All partners are actively involved but they have some form of limited liability. The amount of liability differs per state. Limited partners have limited liability.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Corporations: The Role of Board of Directors 8 Elected by stockholders to oversee the operation of their company and protect their interests Oversee the operation of corporation and protect investors’ interest Establish mission and set objectives Rarely get involved in day-to-day management Responsible for monitoring the performance of the corporate officers

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages and Disadvantages of Corporations 9 Disadvantages: Expense/complexity of formation and operation Double Taxation Paperwork and Regulation Complications when operating in more than one state Conflicts of Interest Advantages: Limited Liability Permanence Easy to Transfer Ownership Ability to Raise Capital Specialized Management

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Other Types of Corporations: Same but Different 10 TYPE KEY ADVANTAGE LIMITATIONS S Corp.IRS does not tax earnings separately Stockholders have limited liability No more than 100 stockholders Stockholders must be U.S. citizens or permanent residents Statutory Close Corp. Not require to have a board or hold annual meetings Owners can participate in management while maintaining limited liability Limited number of stockholders Stockholders must offer shares to owner first before selling publicly Not all states allow this corporation type Nonprofit Corp. Earnings are exempt from federal and state income taxes Members/directors have limited liability Contributions made by individuals are tax- deductible May have dues paying members but no stockholders Can’t distribute dividends Can’t make political donations Must keep accurate records to document tax-exemption

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Corporate Restructuring: Mergers & Acquisitions 11 Large corporations constantly look for ways to grow and achieve competitive advantage. Mergers – two companies agree to a combination of equals Acquisitions – when one firm buys another

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Mergers & Acquisitions 12

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Divestitures: When Less is More Divestitures allow the firm to streamline their operations and focus Spin-off – setting up the division or part of the business as a separate company Sell stock to existing stockholders Carve-out – setting up a separate business from an operation Sell stock to outside investors 13

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Limited Liability Company: The New Kid on the Block 14 Advantages: Limited Liability Tax Pass-Through Simplified Management and Operation Flexible Ownership Disadvantages: Complexity of Formation Franchise Taxes Foreign Status in other States Limited to Select Industries State Law Differences

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchising: Proven Methods for a Price The franchisee uses the brand name, trademark and practices of the franchisor Growth in women franchises Minority participation has increased under new initiatives A well-established method for operating a business 15 Source: Fit for Franchising, by Taylor Mallory, Pink Magazine June/July 2007, pinkmagazine.com website: Franchising Attracts More Women, Minorities by Julie Bennett, Startup Journal, accessed through Entrepreneur.com website: Female Franchisors Few and Far Between by Julie M. Young, e-magnify.com website: Fit to Be a Franchisee: Many Businesswomen Choose Franchises that Connect With Personal Interests by Nancy Lacewell, June 7, 2006 Business First of Louisville website: Boosting Diversity in Franchising by Joan Szabo, December 5, 2006, Franchise Update website: Bridging the Gap Between the Minority Community and the Franchising Industry, Minority Franchising website: accessed January 20, 2011; MinorityFran, International Franchise Association website: accessed January 20, 2011.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchising in Foreign Markets Franchising in foreign markets have shown great opportunities for growth Markets are less intense and less saturated  McDonald’s 12,693  Subway 7,235  Curves 2,868 McDonald’s has slightly more franchises in foreign countries than the U.S. 16 Source: Entrepreneur.com website pages for individual franchisors: html, accessed January 22, 2011.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages and Disadvantages of Franchising 17 Disadvantages: Costs Lack of Control Negative Halo Effect Growth Challenges Restriction on Sale Poor Execution Advantages: Less Risk Training and Support Brand Recognition Access to Funding

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchising Costs 18 Source: Entrepreneur.com website pages for individual franchisors: accessed January 22, 2011.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Entering Into A Franchise Agreement Know all the facts before signing the dotted line:  Terms and Conditions  Fees and Other Payments  Training and Support  Specific Operational Requirements  Conflict Resolution  Assigned Territory Franchisors must provide a Franchise Disclosure Document (FDD) The Federal Trace Commission (FTC) require:  The FDD must be written in plain English  The franchisor must be given 14 days to review the FDD  The Franchisee should have a lawyer review the document 19

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 6 Looking Back What are the characteristics of the four basic forms of business ownership? What are the advantages and disadvantages of a sole proprietorship? What are the pros and cons of partnerships? Why have corporations become the dominant form of business ownership? Why are limited liability companies becoming an increasingly popular form of ownership? What are the advantages and disadvantages of franchising? 20