1. Types of Ownership Unit 3

2. What are the Different Ways You Can Become a Business Owner? There are 4 common ways that you can become a business owner: ▫Buying an existing business ▫Franchise ownership ▫Entering a family business ▫Starting your own business

3. Buy an Existing Business Owners sell their business for many reasons: ▫Insufficient sales or profits ▫New competition ▫Fear of changing economic conditions ▫Retirement ▫Dispute among partners ▫Death or illness of a partner ▫Owner just decides to do something different

4. Advantages of Buying an Existing Business The business already has the necessary equipment, suppliers, and procedures in place. ▫May also have customer loyalty The seller of a business may train a new owner There are prior records of revenues, expenses, and profits Financial arrangements can be easier ▫Payment plan laid out by seller

5. Disadvantages of Buying an Existing Business Many businesses are for sale because they are not making a profit Serious problems may be inherited ▫Poor reputations, trouble with suppliers, poorly located, etc. Capital is required There may be staff problems ▫Some employees may not like the change

6. Steps in Buying a Business Write specific objectives about he kind of business you want to buy ▫Identify businesses for sale that meet your objectives Meet with business sellers or brokers to investigate opportunities Visit during business hours ▫Observe the business in action Ask owner to provide complete financial records ▫At least the past 3 years

7. Steps in Buying a Business Ask for important information in written form Determine how you would finance the business Get expert help to determine a price to offer for the business ▫An accountant or valuator

8. Franchise Ownership A franchise is a legal agreement that gives an individual the right to market a company’s products or services in a particular area ▫A franchisee is the person who purchases a franchise agreement ▫A franchisor is the person or company that offers a franchise for purchase

9. Franchise Ownership There are currently more than 770,000 franchises operating in the U.S. ▫The franchise handbook lists more than 1,700 franchise opportunities by categoryThe franchise handbook ▫Provides information about the costs and capital requirements

10. Operating Costs of a Franchise The initial franchise fee is the amount the local franchise owner pays in return for the right to run the franchise ▫Fee can be anywhere from a few thousand to a few hundred thousand dollars ▫Usually nonrefundable Startup costs: the costs associated with beginning a business ▫The costs of renting a facility, equipping the outlet, purchasing inventory

11. Operating Costs Royalty fees: weekly or monthly payments made by the local owner to the franchise company ▫Usually a percentage of your franchise’s income Advertising fees: paid to the franchise company to support television, magazine, or other advertising of the franchise as a whole

12. Investigate the Franchise Opportunity The Federal Trade Commission (FTC) regulates franchises and has established guidelines to assist in buying a franchise If you decide to purchase ▫Complete an application to give to the franchisor ▫Once approved you will receive 2 documents:  The Franchise Disclosure Document  The franchise agreement

13. The Franchise Disclosure Document A regulatory document describing a franchise opportunity that prospective franchisees must receive before signing a contract. ▫State and federal laws require that the franchisor provide these documents at least 14 days before the franchisee signs a contract Document includes the following information:  Brief history, brief summary, fees and royalties, initial startup costs,  at least 100 current franchisees’ contact info., terms of franchise agreement,  reasons franchisor may terminate, franchisor responsibilities, principal obligations

14. Advantages of Owning a Franchise An entrepreneur is provided with an established product or service ▫Attract customers who are familiar Franchisors offer management, technical, and other assistance ▫May include on-site training, aid with starting the new business, handling daily operations, tips on crisis management Equipment and supplies can be less expensive ▫Large franchises may be able to purchase in huge quantities A guarantee of consistency attract customers ▫A contract mandates a certain level of quality. ▫Consumers know what quality to expect

15. Disadvantages of Owning a Franchise Franchise fees can be costly and cut down on profits ▫The initial capital is often high Owners of franchises have less freedom to make decisions than other entrepreneurs ▫Franchisees must offer only certain products or services, charge prices set by the franchisor, and use standard uniforms and packaging materials Franchisees are dependent on the performance of other franchisee in the chain The franchisor can terminate the franchise agreement ▫When the franchise expires, the franchisor can choose to not renew the agreement

16. Enter a Family Business According to some estimates, ▫As many as 90% of all businesses are owned by families Even many large companies, such as Walmart and Ford Motor Company continue to be owned largely by people who are related to the company founder

17. Advantages of a Family Business Leadership is highly stable ▫Leaders usually stay in the position for many years There is a high level of commitment and loyalty from employees A family business may offer more flexibility than other types ▫More leeway to work flexible or part-time schedules ▫Or to choose your own hours

18. Disadvantages of a Family Business Leaders and/or employees may be inadequate ▫Automatically promote family members or give them a job despite qualifications There is less freedom to make decisions ▫Must be prepared to make compromises Family politics often enter into decision making ▫The distinction between business life and private life is blurred ▫Family problems may affect the business There is often no exit strategy

19. Advantages of Starting Your Own Business Working for yourself offers more freedom and independence Business owner gets to keep all of the profits ▫No royalty fees, sharing with family, etc. Starting a business offers a greater sense of personal satisfaction and achievement ▫Business is based on something you enjoy

20. Disadvantages of Starting Your Own Business There is a high level of risk and uncertainty Financing for starting a new business can be difficult to obtain ▫Most have to obtain loans and/or use their own savings for capital Starting a new business takes time and commitment ▫Initially might have to work long hours Startup business owners have a high level of responsibility

21. Legal Forms of Business

22. Liability Of Business Owners The owner’s liability is the legal obligation of a business owner to use personal money and possessions to pay the debts of the business. Unlimited liability: a business owner can be legally forced to use personal money and possessions to pay the debts Limited liability: a business owner cannot be legally forced to use personal money and possessions to pay the debts ▫Only risk the money specifically invested in the business

23. Types of Business Ownership The level of liability depends on the type of ownership structure used by the business Types of ownership: ▫Sole Proprietorship ▫Partnerships ▫Corporations  C Corporations  S Corporations  Nonprofit Corporations  Limited Liability Company

24. Sole Proprietorships A single individual owns the business, collects all profit from it, and has unlimited liability for its debt ▫In the eyes of the law, the owner and the business are one in the same The vast majority of all businesses in the U.S. are sole proprietorships

25. Advantages of Sole Proprietorships It is the simplest and least expensive option for business ownership The business income and costs are reported on the owner’s personal income tax return ▫Less paperwork and easier tax accounting Sole proprietor is the sole decision maker, with complete control over the management of the business

26. Disadvantages of Sole Proprietorships Only one person is responsible for the business ▫Raising financial backing to set up, operate, and expand the business The sole proprietor has unlimited liability May be difficult to borrow money or attract investors ▫If you are unable to work, or make poor decisions, the business may fail ▫Investors find that risky

27. Partnerships A partnership is a legally defined type of business organization in which at least two individuals share the management, profit, and liability General partnership: all partners have unlimited liability Limited partnership: structured so that at least one partner (the general partner) has limited liability for the debts of the business ▫The other partners have no say in the company’s day- to-day operation  They are only investors

28. Advantages of Partnerships A general partnership is much like a sole proprietorship as far as establishment and taxes are concerned ▫Setting up and maintaining is relatively simple ▫Requires little paperwork They can rely on the entrepreneurial skills and financial backing of at least two individuals instead of just one ▫Makes it easier to borrow money or appeal to an outside investor

29. Disadvantages of Partnerships Unlimited liability creates the risk of losing personal money and possessions Profit is split between the partners Each partner is responsible for the business- related actions of all the others Partners may have trouble agreeing on how the business should be operated

30. Partnership Agreement A legal document that clearly defines how the work, responsibilities, rewards, and liabilities will be shared by the partners Also specifies what will happen if a partner dies or decides to leave the business Well-written partnership agreement can help partners avoid conflicts ▫More time to concentrate on managing and growing the business

31. Corporations The business itself is considered a “person” (an “entity”) under the law, and limited liability is granted to the business owner(s) The owners of a corporation are its shareholder or stockholders A share of stock is a unit of ownership in a corporation ▫Corporations sell shares to raise money Each share may earn its owner a dividend ▫A portion of the corporation’s profit

32. C Corporations Most corporations are C Corporations ▫Taxed as entities by the federal government Majority of states require a corporation to have a board of directors ▫Consisting of one or more individuals responsible for making decisions about how the business should be operated

33. Advantages of Corporations Shareholders have a limited liability ▫They risk only the money they invested Shareholders can end their ownership by selling their shares to someone else ▫Shares also change hands when shareholders die The lifespan of a corporations is not tied to the life span of its owners Management of a corporation is delegated to the board of directors Corporations can raise money more easily than other forms of ownership

34. Disadvantages of Corporations They are more difficult and expensive to set up and maintain than other business structures Corporations are regulated under state laws ▫To incorporate means to set up a corporation in accordance with the laws of the particular state the business is located Must follow very specific procedures for keeping records and selling shares Corporate profit is taxed twice ▫Corporations pay taxes on its income, and shareholders pay taxes on the dividends they receive from the corporation  Double taxation

35. S Corporation A small corporation can elect to be treated as an S corporation. ▫Organized under Subchapter S of the Internal Revenue Code Not taxed as a business; only the individual shareholders are taxed on the profits they earn However, they must follow the same formalities and recordkeeping procedures as regular corporations ▫Also managed by a board of directors

36. Limited Liability Companies (LLC) Similar to a C corporation, but with simpler operating requirements and tax procedures and greater liability protection for the business owners ▫Business owners are also called members It is possible for an LLC to be owned by only one individual Popular with professionals such as doctors and lawyers ▫Combines the liability benefits of a corporation with the tax benefits of a sole proprietorship or partnership

37. Legal Issues and Business Ownership

38. Regulations that Promote Competition Gov’t regulations to make sure that competition is fair ▫Federal, state, and local gov’ts Gov’t agencies that protect competition: ▫The Antitrust Division of the Justice Department  Takes legal action against any business it believes has tried to monopolize an industry  Also prosecutes businesses that violate antitrust laws ▫The Federal Trade Commission (FTC)  Deals with issues that touch the economic life of every American  Monitors false/misleading advertising, price discrimination misrepresentation of quality

39. Antitrust Legislation Beginning in 1890, laws were put in place that made monopolies illegal in certain industries ▫A monopoly is also called a trust Antitrust laws also ban other types of business activities that do not promote competition ▫Sherman Act ▫Clayton Act ▫Robinson-Patman Act ▫Wheeler-Lea Act

40. Antitrust Legislation Sherman Act ▫Illegal for competitors to get together and set prices on the products/services they sell  Discussing prices with competitors is illegal Clayton Act ▫Illegal for a business to require a customer to buy exclusively from it or to purchase one good in order to be able to purchase another good ▫Prevents anticompetitive mergers

41. Antitrust Legislation Robinson-Patman Act ▫Protects small businesses from unfair pricing practices ▫Illegal to discriminate by charging different prices to customers  Law does not apply where certain groups may be targeted by special promotions (i.e. senior citizens) Wheeler-Lea Act ▫Bans unfair or deceptive actions or practices by businesses that may cause an unfair competitive advantage  Example: false advertising ▫Also requires businesses to warn consumers about possible negative features of their products

42. Intellectual Property The original, creative work of an artist or inventor ▫Songs, novels, artistic designs, and inventions May be registered for special gov’t protections ▫Patents, trademarks, trade names, and copyrights  Provides the business owners with the exclusive use of the intellectual property in the U.S. and many foreign countries No one else can use their creations to make money

43. Intellectual Property Patent: the grant of a property right to an inventor to exclude others from making, using, or selling his or her invention ▫gives the developer time to recover from the development costs without having to worry about competition  Last for 20 years A provisional patent application ▫allows an inventor one year to investigate the feasibility, marketability, and potential license interest before deciding to file a formal patent application  Patent pending

44. Intellectual Property Copyright: protects original works of authorship ▫Literacy, dramatic, musical, and artistic works ▫Does NOT protect facts, ideas, systems, or methods of operation ▫Lasts for the life of the author plus 70 years  After this time, individual works enter the public domain and can be reproduced by anyone without permission

45. Intellectual Property Trademark: a name, symbol, or special mark used to identify a business or brand of product ▫Identified by the ™ or ®  Examples: Band-Aid ® and Kleenex ®

46. Laws that Protect Consumers Licenses: State and Local gov’ts require some businesses to have licenses ▫You and your employees may need to complete training requirements  May also need to have regular inspections Zoning Laws: local gov’t establish zoning regulations that control what types of buildings can be built in specific areas ▫certain areas are zoned for residential use only Consumer Protection Laws: Protect consumers from harmful products and unfair business practices

47. Consumer Protection Laws Federal Food, Drug, and Cosmetic Act of 1938: bans the sale of impure, improperly labeled, falsely guaranteed, and unhealthful foods, drugs, and cosmetics. ▫FDA enforces this law The Truth-in-Lending Act of 1968: requires lenders to inform consumers about all costs of credit before an agreement is signed ▫Must disclose the finance charge, including interest, service charges, and other fees

48. Consumer Protection Laws The Consumer Product Safety Act of 1972: sets safety standards for products other than food and drugs ▫Established the Consumer Product Safety Commission (CPSC)  Product recalls The Fair Credit Billing Act of 1974: helps consumers correct credit card billing errors. ▫must write to credit card issuer within 60 days of receipt of their bill ▫While the disputed charge is being investigated it cannot accrue interest

49. Legal Issues Affecting Business Contract: a legal binding agreement between two or more persons or parties ▫Some contracts must be in writing to be fully enforceable in court Tort: a wrong against people or organizations for which the law grants a remedy ▫The person injured as a result can sue and obtain compensation for damages  May occur when manufacturers make defective products that injure users

50. Torts Relating to Business Enterprises Certain elements are common to most torts and must be proved in a court of law to establish liability ▫Duty: a legal obligation to do or not to do something ▫Breach: a violation of the duty ▫Injury: a harm that is recognized by the law ▫Causation: proof that the breach caused the injury

51. Hiring a Lawyer May need to hire a lawyer to assist with legal issues How Lawyers Can Help You Assist you in choosing a legal structure Inform you of regulations and licenses Prepare and file patent applications Create documents such as lease and purchase agreements and contracts Give advice on insurance coverage Help you plan for your future Develop partnership agreements Advise you on taxes Defend you in a lawsuit or file one on your behalf