1. CHAPTER 5 McGraw-Hill/Irwin Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved. How to Form a Business

2. ANNE BEILER Auntie Anne’s 5-2 Started selling pretzels when her family was living paycheck to paycheck. Now Auntie Anne’s has over 1,200 locations and brings in over $410 million! Beiler sold the company in 2005 to start focusing on charity work.

3. MAJOR FORMS of OWNERSHIP 5-3 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 (C-Corp) -- A legal entity with authority to act and have liability apart from its owners. S Corporation (S-Corp) -- A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships Limited Liability Company (LLC) -- A company similar to an S-corporation but without the special eligibility requirements Owning a Business The Five Most Common Forms – The designated type of business as it is operated in regards to tax & liability reasons

4. FORMS of BUSINESS OWNERSHIP 5-4 Factors to consider before choosing a form of ownership: Legal liability Tax implications Future capital needs Cost of formation and ongoing administration

5. MAJOR BENEFITS of SOLE PROPRIETORSHIP 5-5 LO 4-1 1)Ease of starting and ending the business 2)Being your own boss 3)Pride of ownership 4)Leaving a legacy 5)Retention of company profit 6)No special taxes

6. DISADVANTAGES of SOLE PROPRIETORSHIPS 5-6 LO 4-1 1)Unlimited Liability -- Any debts or damages incurred by the business are your debts, even if it means selling your home, car or anything else (i.e. the owner is personally responsible for the debts of the business). 2)Limited financial resources 3)Management difficulties 4)Overwhelming time commitment 5)Few fringe benefits 6)Limited growth 7)Limited life span

7. Source: Inc., www.inc.com, accessed November 2014.www.inc.com WORK-LIFE BALANCING ACT 5-7 % of small business owners Work over 80 hours per week Work over 40 hours per week

8. PARTNERSHIPS 5-8 LO 4-2  A voluntary association of two or more persons to act as co- owners of a business for profit  Less common form of ownership than sole proprietorship or corporation  No legal limit on the maximum number of partners; most have only two  Large accounting, law, and advertising partnerships have multiple partners  Partnerships are usually a pooling of special talents or the result of a sole proprietor taking on a partner

9. General Partnership -- All owners share in operating the business and in assuming liability for the business’s debts. MAJOR TYPES of PARTNERSHIPS 5-9 LO 4-2 Limited Partnership -- A partnership with one or more general partners and one or more limited partners.

10. TYPES OF PARTNERS 5-10 LO 4-2 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.

11. ADVANTAGES of PARTNERSHIPS 5-11 LO 4-2 More financial resources Shared management and pooled/complementar y skills and knowledge Longer survival No special taxes

12. DISADVANTAGES of PARTNERSHIPS 5-12 LO 4-2 Unlimited liability (general partners only) Division of profits Disagreements among partners Difficult to terminate

13. There is no such thing as a perfect partner but ask these questions when you try to find your best match: PICKING YOUR PARTNER 5-13 LO 4-2 Do you share the same goals? Do you share the same vision for the company? What skills does he/she have? Are yours the same? What can he/she bring to the business? What type of decision maker is he/she? Do you trust each other? How does he/she problem solve?

14. CONVENTIONAL CORPORATIONS 5-14 LO 4-3 Conventional (C) Corporation -- A state- chartered legal entity with authority to act and have liability separate from its owners (its stockholders). Most common type of corporation is a “C” corporation A corporation is a legal entity, separate from its owners Requirements vary by state, many states are “corporation-friendly” Corporations are owned by stockholders Articles of incorporations must be filed and corporate bylaws adopted

15. ADVANTAGES & DISADVANTAGES of CORPORATIONS 5-15 LO 4-3 ADVANTAGES 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 DISADVANTAGES Initial cost Extensive paperwork Double taxation Corporations pay a tax on their profit; stockholders who receive a dividend also have to pay a tax Two tax returns Size Difficulty of termination Possible conflict with stockholders and board of directors

16. SPECIAL ELEMENTS OF A CORPORATION 5-16 LO 4-3 Corporate ownership Stock The shares of ownership of a corporation 2 Types: 1) Common Stock (voting privileges), 2) Preferred Stock (no voting rights, dividends paid first) Stockholder (aka Shareholder) A person who owns a share or shares of a corporation’s stock Dividend A portion of the corporation’s profit (earnings) that is distributed to stockholders Board of Directors The governing body of the corporation, elected by stockholders and appoint corporate officers Closed (private) corporation A corporation whose stock is owned by relatively few people and is not sold to the general public Open (public) corporation A corporation whose stock is bought and sold on security exchanges and can be purchased by any individual

17. HOW OWNERS AFFECT MANAGEMENT 5-17 LO 4-3

18. Source: Fortune, www.fortune.com, accessed November 2014.www.fortune.com The BIG BOYS of BUSINESS America’s Largest Corporations 5-18 Photo Credit: Walmart Stores LO 4-3 1.Walmart 2.Exxon Mobil 3.Chevron 4.Berkshire Hathaway 5.Apple

19. Source: Forbes, www.forbes.com, accessed November 2014.www.forbes.com PRIVACY PLEASE The Ten Largest Private Corporations in the U.S. 5-19 LO 4-3

20. Source: Bloomberg Businessweek, www.businessweek.com, accessed November 2014.www.businessweek.com EVEN the BIG GUYS MAKE MISTAKES 5-20 LO 4-3

21. WHO CAN INCORPORATE? 5-21 LO 4-3 Anyone - truckers, doctors, plumbers, athletes and small business owners can incorporate. Normally stock is not issued to outsiders when individuals incorporate, so the advantages and disadvantages are not exactly the same as for large corporations. Major advantages are limited liability and possible tax benefits.

22. OLDIES BUT GOODIES America’s Oldest Corporations 5-22 LO 4-3

23. S CORPORATIONS 5-23 LO 4-3 S Corporation -- A unique government creation that looks like a corporation, but is taxed like sole proprietorships and partnerships. S corporations have shareholders, directors and employees, plus the benefit of limited liability. Profits are taxed only as the personal income of the shareholder.

24. WHO CAN FORM S CORPORATIONS? 5-24 LO 4-3 Qualifications for S Corporations: -Have no more than 100 shareholders. -Have shareholders that are individuals or estates and are citizens or permanent residents of the U.S. -Have only one class of stock. -Derive no more than 25% of income from passive sources. If an S corporation loses its S status, it may not operate under it again for at least 5 years.

25. LIMITED LIABILITY COMPANIES 5-25 LO 4-3 Limited Liability Company (LLC) -- Similar to an S corporation, but without the eligibility requirements. Advantages of LLCs: 1.Limited liability 2.Choice of taxation 3.Flexible ownership rules 4.Flexible distribution of profits and losses 5.Operating flexibility Disadvantages of LLCs: 1.No stock, therefore ownership is nontransferable 2.Limited life span 3.Fewer incentives 4.Taxes 5.Paperwork