1. Introduction to Business and Technology
Forms of ownership
Introduction to Business and Technology

2. Small business Independent business with fewer than 500 employees
99.9% of ~26 million US businesses
Responsible for 60-80% of all new jobs
Owner = Manager
One or few locations
Small market
Not dominant in field

3. Excellence in Business, 3e
The three most common forms of business ownership are sole proprietorship, partnership, and corporation. Each form has its own characteristic internal structure, legal status, size, and fields to which it is best suited. Each has key advantages and disadvantages for the owners.
© Prentice Hall, 2007
Excellence in Business, 3e

4. Sole proprietorship Owned by one person Easiest and least expensive
Examples:
Farms
Retail establishments
Small service businesses
Home based businesses (caterer, consultant, computer programmers)

5. Excellence in Business, 3e
Sole Proprietorship
Advantages
Disadvantages
Ease of establishment
Self-satisfaction
Privacy
Tax advantages
Unlimited liability
Personal pressure
Difficult to get funding
Limited life
A sole proprietorship has many advantages. One is ease of establishment. All you have to do to launch a sole proprietorship is obtain necessary licenses, start a checking account for the business, and open your doors. Another advantage is the satisfaction of working for yourself. As a sole proprietor, you also have the advantage of privacy; you do not have to reveal your performance or plans to anyone. Although you may need to provide financial information to a banker if you need a loan, and you must provide certain financial information when you file tax returns, you do not have to prepare any reports for outsiders as you would if the company were a public corporation.
One major drawback of a sole proprietorship is the proprietor’s unlimited liability. From a legal standpoint, the owner and the business are one and the same. In some cases, the sole proprietor’s independence can also be a drawback because it means that the business depends on the talents and managerial skills of one person. Other disadvantages include the difficulty of a single-person operation obtaining large sums of capital and the limited life of a sole proprietorship.
© Prentice Hall, 2007
Excellence in Business, 3e

6. If starting a business on your own seems a little intimidating, you might decide to share the risks and rewards of going into business with a partner. In that case, you would form a partnership—a legal association of two or more people as co-owners of a business for profit.
Partnerships are of two basic types. In a general partnership, all partners are considered equal by law, and all are liable for the business’s debts. To guard against personal liability exposure, some organizations choose to form a limited partnership. Under this type of partnership one or more persons act as general partners who run the business, while the remaining partners are passive investors (that is, they are not involved in managing the business). These partners are called limited partners because their liability (the amount of money they can lose) is limited to the amount of their capital contribution.

7. Partnership Advantages
Easy to Establish
Tax Advantages
Strength in Numbers
Diversity of Skills
Proprietorships and partnerships have some of the same advantages. Like proprietorships, partnerships are easy to form. Partnerships also provide the same tax advantages as proprietorships, because profits are taxed at individual income-tax rates rather than at corporate rates.
However, in a couple of respects, partnerships are superior to sole proprietorships, largely because there’s strength in numbers. When you have several people putting up their money, you can start a more ambitious enterprise. In addition, the diversity of skills that good partners bring to an organization leads to innovation in products, services, and processes, which improves your chances of success.
The partnership form of ownership also broadens the pool of capital available to the business. Not only do the partners’ personal assets support a larger borrowing capacity, but the ability to obtain financing increases because general partners are legally responsible for paying off the debts of the group. Finally, by forming a partnership you increase the chances that the organization will endure, because new partners can be drawn into the business to replace those who die or retire.
Increased Capital
Extended Life
© Prentice Hall, 2007
Excellence in Business, 3e

8. Partnership Disadvantages
Unlimited
Liability
Interpersonal
Problems
Unproductive
Partners
Managing
Partner
Law Suits
Debts
Except in limited liability partnerships, at least one member of every partnership must be a general partner. All general partners have unlimited liability. Thus, if one of the firm’s partners makes a serious business or professional mistake and is sued by a disgruntled client, all general partners are financially accountable. At the same time, general partners are responsible for any debts incurred by the partnership
Another disadvantage of partnerships is the potential for interpersonal problems. Difficulties often arise because each partner wants to be responsible for managing the organization. Electing a managing partner to lead the organization may diminish the conflicts, but disagreements are still likely to arise. Moreover, the partnership may have to face the question of what to do with unproductive partners.
© Prentice Hall, 2007
Excellence in Business, 3e

9. Corporations Enter Into Contracts Buy and Sell Property
Sue and Be Sued
Face Limited Liability
A corporation is a legal entity with the power to own property and conduct business. A corporation can receive, own, and transfer property; make contracts; sue; and be sued. Unlike the case with sole proprietorships and partnerships, a corporation’s legal status and obligations exist independently of its owners.
© Prentice Hall, 2007
Excellence in Business, 3e

10. Excellence in Business, 3e
Corporations
Advantages
Disadvantages
Access to capital
Limited liability
Increased liquidity
Unlimited life span
Excess paperwork
Burdensome costs
Double taxation
Disclosure requirements
No other form of business ownership can match the success of the corporation in bringing together money, resources, and talent; in accumulating assets; and in creating wealth. The corporation has certain inherent qualities that make it the best vehicle for reaching those objectives. One such quality is limited liability. Although a corporate entity can assume tremendous liabilities, it is the corporation that is liable and not the private shareholders.
In addition to limited liability, corporations that sell stock to the general public have the advantage of liquidity, which means that investors can easily convert their stock into cash by selling it on the open market. Thus, corporations tend to be in a better position than proprietorships and partnerships to make long-term plans, with their unlimited life span and funding available through the sale of stock.
Corporations are not without some disadvantages. The paperwork and costs associated with incorporation can be burdensome, particularly if you plan to sell stock. In addition, corporations are taxed twice. They must pay federal and state corporate income tax on the company’s profits, and individual shareholders must pay income taxes on their share of the company’s profits received as dividends. Another drawback pertains to publicly owned corporations. As mentioned earlier, such corporations are required by the government to publish information about their finances and operations.
© Prentice Hall, 2007
Excellence in Business, 3e

11. Certain types of corporations enjoy special privileges provided they adhere to strict guidelines and rules. One special type of corporation is known as the S corporation (or subchapter S corporation). An S corporation distinction is made only for federal income tax purposes; otherwise, in terms of legal characteristics, it is no different from any other corporation. Basically, the owners receive the tax advantages of a partnership while they raise money through the sale of stock. In addition, income and tax deductions from the business flow directly to the owners, who are taxed at individual income-tax rates, just as they are in a partnership.
Limited liability companies (LLCs) are another special type of corporation. These flexible business entities combine the tax advantages of a partnership with the personal liability protection of a corporation. Furthermore, LLCs are not restricted in the number of shareholders they can have, and members’ participation in management is not restricted as it is in limited partnerships.
Some corporations are not independent entities; that is, they are owned by a single entity. Subsidiary corporations, for instance, are partially or wholly owned by another corporation known as a parent company, which supervises the operations of the subsidiary. A holding company is a special type of parent company that owns other companies for investment reasons and usually exercises little operating control over those subsidiaries.

12. The Franchising Alternative
Product franchise
Manufacturing franchise
Business-format franchise
Franchises are of three basic types. A product franchise gives you the right to sell trademarked goods, which are purchased from the franchisor and resold. Car dealers and gasoline stations fall into this category. A manufacturing franchise, such as a soft-drink bottling plant, gives you the right to produce and distribute the manufacturer’s products, using supplies purchased from the franchisor. A business-format franchise gives you the right to open a business using a franchisor’s name and format for doing business. This format including many well-known chains, including Taco Bell, Pizza Hut, UPS Stores, and Curves fitness centers.
This slide includes an image of a large scale with two packages on that scale being weighed for shipment.
©2007 Prentice Hall

13. Evaluating a Franchise
Initial franchise
Periodic royalties
Trademarks and names
Advertising and promotion
Business location
Exclusive territory
Right of first refusal
Equipment and supplies
Agreement termination
Franchise agreement
How do you protect yourself from a poor franchise investment? The best way is to study the opportunity carefully before you commit. This slide and the next suggest some points to consider as you study the package of information on the franchise.
What is covered by the original franchise fee? Does it cover a starting inventory of products and supplies?
How are the periodic royalties calculated and when are they paid?
Are all trademarks and names legally protected?
Who provides and pays for advertising and promotion?
Who selects the location of the business?
Is the franchise assigned an exclusive territory?
If the territory is not exclusive, does the franchisee have the right of first refusal on additional franchises established in nearby locations?
Is the franchisee required to purchase equipment and supplies from the franchisor or other suppliers?
Under what conditions can the franchisor and/or the franchisee terminate the franchise agreement?
Can the franchise be assigned to heirs?
©2007 Prentice Hall

14. Pros and Cons of Franchising
Advantages
Disadvantages
Get a viable business
Name recognition
Network of support
Blueprint for success
No guarantee of wealth
High monthly royalties
Limited independence
Limited flexibility
Why is franchising so popular? For one thing, when you invest in a franchise, you know you are getting a viable business, one that has “worked” many times before. If the franchise is well established, you get the added benefit of instant name recognition, national advertising programs, standardized quality of goods and services, and a proven formula for success. Buying a franchise also gives you instant access to a support network, and in many cases a readymade blueprint for building a business.
Although franchising offers many advantages, it is not the ideal vehicle for everyone. First, owning a franchise is no guarantee of wealth. Even though it may be a relatively easy way to get into business, not all franchises are hugely profitable. One of the biggest disadvantages of franchising is the monthly payment, or royalty, that must be turned over to the franchisor. Another drawback of franchises is that many allow individual operators little independence. Franchisors can prescribe virtually every aspect of the business, down to the details of employee uniforms and the color of the walls. Furthermore, when a chain loses its cutting edge in the marketplace, being stuck with a franchise can be painful. In addition, if independent retailers run into trouble with their product lines, they can change suppliers or perhaps switch rapidly to a whole new line of business. Franchisees can’t.
©2007 Prentice Hall

15. The End!!