Chapter 5 Types of Businesses Starting a Business Choosing an Organizational Form

Who are the Entrepreneurs? Mark Zuckerburg – Facebook Mitchell and Mollie Murphree – ◦ Five Senses Restaurant Mark Davis ◦ Insert Therapeutics

Setting Up Your Small Business Choose a legal form of business and register it with the government. Make a business plan ◦ Especially if you plan to go for a loan or attract an investor. Visit your local TSBDC and SCORE offices.

What Is a Form of Business, and Why Do We Need to Choose One? Our government does keep tabs on businesses, for the consumer’s sake. ◦ A legal form of business is a way of describing how the business is treated for tax and legal purposes. ◦ Getting some tax and legal benefits means you give up others – you decide which form is best.

Option 1: Sole Proprietor The most common form of ownership You are the business. Only one owner is allowed. ◦ With 2, you become a partnership. No limitation of liability. ◦ People can sue you for everything you own. Net income from the business is treated as your personal income. ◦ Goes into line on the Must file for business license in TN.filebusiness license TN

Option 2: Partnerships 2 or more owners No limited liability ◦ Exception: General vs. limited partnerships More likely to survive than sole prop. ◦ Why? Division of profits, liability, and conflicts are the downside ◦ Partnership agreements can help with this.

Special Types of Partnerships Limited Partnerships ◦ General and limited partners ◦ Limited partners cannot manage  “Silent partners” – cannot work over 500 hours per year in the business MLP ◦ Master Limited Partnership  Can be publicly traded LLP ◦ Limited Liability Partnership  Only liable for your own mistakes and those under your supervision

Review Questions What is the main difference between a sole proprietorship and a partnership? What is unlimited liability? How are sole proprietorships and partnerships taxed?

Option 3: Corporations Exist separately from owner Represent over 70% of U.S. revenues ◦ Should tell you something about sole proprietorships! S and C – different tax treatment and ownership allowances Perpetual life More red tape and money to start up ($100 extra just in fees from TN)

Option 4: Limited Liability Companies (LLCs) Very much like S-corporation Can be taxed as self-employment Usually for professionals Flexible distribution of profit Must have approval of other owners to sell out Must dissolve by deadline; dies with owners

Growing a Corporation Could be done through public offering Could be done through ◦ Merger (two companies form a new legal entity, combining into one) ◦ Acquisition (one company buys the other’s stock)

Types of Mergers Vertical mergers: ◦ Mergers between suppliers and purchasers Horizontal mergers: ◦ Mergers between companies in the same industry (AOL-Time Warner) Conglomerate mergers: ◦ Unite firms in different industries (Walt Disney and ABC) ◦ Don’t usually generate extra value for investors!

Franchises One firm already has a successful product or service Offers its trademarks and patented business processes to another for… Initial franchise fee and ongoing royalties Still have to pick a legal form Franchise Opportunities

Pros and Cons of Franchises Pros ◦ Assistance with operations ◦ Motivation to excel vs. being an employee ◦ Instant brand image ◦ Lower failure Cons ◦ Larger start-up costs ◦ Royalties ◦ Control of parent company ◦ No control over other franchise locations

Cooperatives Formed for increased purchasing or marketing power MTEMC is a cooperative ◦ Owned by the users of the electricity Farm cooperatives ◦ Farmers band together to get better pricing Each member has one vote Other examples? Ace Hardware, Ocean Spray, True Value Hardware

Ways that Companies Grow Mergers ◦ Vertical ◦ Horizontal ◦ Conglomerate Acquisitions Leveraged Buyout (not growth, but ownership change)