1. How to Form a Business Chapter 05 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 1. Compare the advantages and disadvantages of sole proprietorships. 2. Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships. 3. Compare the advantages and disadvantages of corporations and summarize the differences between C corporations, S corporations and limited liability companies. LEARNING GOALS Chapter Five 5-2

3. 4. Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private. 5. Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising. 6. Explain the role of cooperatives. LEARNING GOALS Chapter Five 5-3

4. Basic Forms of Business Ownership 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 -- A legal entity with authority to act and have liability apart from its owners. MAJOR FORMS of OWNERSHIP 5-4 http://www.youtube.com/watch?v=pPVkG9krOMI

5. FORMS of BUSINESS OWNERSHIP Basic Forms of Business Ownership 5-5

6. Source: Forbes, April 11, 2011. 1. Atlanta, GA 2. Baltimore, MD 3. Nashville, TN 4. Houston, TX 5. Miami - Ft. Lauderdale, FL ETHNIC BUSINESS CENTERS Cities with the Most Minority-Run Firms Basic Forms of Business Ownership Photo Courtesy of: James Rintamaki 5-6

7. Advantages of Sole Proprietorships 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 MAJOR BENEFITS of SOLE PROPRIETORSHIP LG1 5-7

8. Disadvantages of Sole Proprietorships 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. 2) Limited financial resources 3) Management difficulties 4) Overwhelming time commitment 5) Few fringe benefits 6) Limited growth-hard to expand 7) Limited life span-the business retires with the owner DISADVANTAGES of SOLE PROPRIETORSHIPS LG1 5-8

9. Partnerships General Partnership -- All owners share in operating the business and in assuming liability for the business’s debts. MAJOR TYPES of PARTNERSHIPS LG2 Limited Partnership -- A partnership with one or more general partners and one or more limited partners. 5-9 http://www.youtube.com/watch?v=wdi43UA2ofE

10. Master Limited Partnership -- A partnership that looks much like a corporation, BUT is taxed like a partnership and avoids the corporate income tax. Limited Liability Partnership -- Limits partners’ risk of losing their personal assets to the outcomes of only their own acts and omissions and those of people under their supervision. OTHER PARTNERSHIPS LG2 Partnerships 5-10

11. In an LLP, some or all partners have limited liability. It has elements of partnerships AND corporations. In an LLP, one partner is not responsible or liable for another partner's misconduct or negligence. (An important difference from a limited partnership) An LLP contains a different level of tax liability from a corporation. Much confusion between LLPs in the U.S. vs. the UK, as the UK-LLP is, (despite it’s name) legislated as a Corporate body rather than a partnership. LLP (continued) LG2 Partnerships 5-11 http://en.wikipedia.org/wiki/Limited_liability_partnership

12. 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 -- The liability for the debts of the business is limited to the amount the limited partner puts into the company; personal assets- not at risk. TYPES OF PARTNERS LG2 Partnerships 5-12

13. Advantages & Disadvantages of Partnerships More financial resources Shared management and pooled/complementary skills and knowledge Longer survival No special taxes ADVANTAGES of PARTNERSHIPS LG2 5-13

14. Unlimited liability Division of profits Disagreements among partners Difficult to terminate DISADVANTAGES of PARTNERSHIPS LG2 Advantages & Disadvantages of Partnerships 5-14

15. Nobody’s perfect! But ask these questions when you try to find your best partner/match: 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? PICK YOUR PARTNER WISELY (Spotlight on Small Business) 5-15

16. Corporations Conventional (C) Corporation -- A state- chartered legal entity with authority to act and have liability separate from its owners (its stockholders). CONVENTIONAL CORPORATIONS LG3 5-16

17. Advantages of Corporations 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 ADVANTAGES of CORPORATIONS LG3 5-17

18. HOW OWNERS AFFECT MANAGEMENT LG3 Advantages of Corporations 5-18

19. Source: Fortune, www.fortune.com, accessed June 2011.www.fortune.com 1. Walmart 2. Exxon Mobil 3. Chevron 4. ConocoPhillips 5. Fannie Mae The BIG BOYS of BUSINESS America’s Largest Corporations LG3 Advantages of Corporations Photo Courtesy of: Walmart Stores 5-19

20. Source: Forbes, www.forbes.com, accessed June 2011.www.forbes.com PRIVACY PLEASE The Ten Largest Private Corporations in the U.S. LG3 Advantages of Corporations 5-20

21. Disadvantages of Corporations Initial cost Extensive paperwork Double taxation Two tax returns Size Difficulty of termination Possible conflict with stockholders and board of directors DISADVANTAGES of CORPORATIONS LG3 5-21

22. Source: Bloomberg Businessweek, May 16, 2011. EVEN the BIG GUYS MAKE MISTAKES LG3 Disadvantages of Corporations 5-22

23. Individuals Can Incorporate Anyone - truckers, doctors, plumbers, athletes and small business owners can incorporate. When individuals incorporate, stock is not always issued, so the advantages and disadvantages are not exactly the same as for large corporations. Major advantages are limited liability and possible tax benefits. WHO CAN INCORPORATE? LG3 5-23

24. OLDIES BUT GOODIES America’s Oldest Corporations LG3 Individuals Can Incorporate 5-24

25. S Corporations S Corporation -- A unique government creation that looks like a corporation, but is taxed like a sole proprietorship or partnerships. S Corporations -- Have shareholders, directors and employees, plus the benefit of limited liability. S Corporations -- Profits are taxed only as the personal income of the shareholder, avoiding double taxation. S CORPORATIONS LG3 5-25

26. Qualifications for S Corporations:  There are no more than 100 shareholders  Shareholders 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. (rent, royalties, interest, etc) If an S corporation loses its S status, it may not operate under it again for at least 5 years. WHO CAN FORM S CORPORATIONS? LG3 S Corporations 5-26

27. Limited Liability Companies Limited Liability Company (LLC) -- Similar to an S corporation, but without the eligibility requirements. Advantages of LLCs:  Limited liability  Choice of taxation  Flexible ownership rules  Flexible distribution of profits and losses  Operating flexibility LIMITED LIABILITY COMPANIES LG3 5-27

28. No stock, therefore ownership is nontransferable Limited life span Fewer incentives No stock options Benefits are not deductible Taxes on Profits Paperwork DISADVANTAGES of LLCs LG3 Limited Liability Companies 5-28

29. Vermont allows a new kind of LLC that exists only online. Registration documents can be filed online, meetings can be held through online communication, and relationships can be established electronically. Virtual companies allow online contributors with different skills, availability and interest to interact and be successful. VIRTUAL COMPANIES (Legal Briefcase) 5-29

30. Corporate Expansion: Mergers and Acquisitions Merger -- T wo firms joining to form one company. MERGERS and ACQUISITIONS LG4 Acquisition -- One company’s purchase of the property and obligations of another company. 5-30

31. Vertical Merger -- Joins two firms in different stages of related businesses. (Staples-Office Depot) Horizontal Merger -- Joins two firms in the same industry and allows them to diversify or expand their products. (Ford Motor and Autolite Spark Plugs) Conglomerate Merger -- Unites firms in completely unrelated industries in order to diversify business operations and investments. (Disney-ABC) TYPES of MERGERS LG4 Corporate Expansion: Mergers and Acquisitions 5-31

32. TYPES of MERGERS LG4 Corporate Expansion: Mergers and Acquisitions 5-32 PeriodNameFacet 1889 - 1904First WaveHorizontal mergers 1916 - 1929Second WaveVertical mergers 1965 - 1989Third Wave Diversified conglomerate mergers 1992 - 1998Fourth Wave Congeneric mergers; Hostile takeovers; Corporate Raiding 2000 - CurrentFifth WaveCross-border mergers Economic history has been divided into Merger Waves based on the merger activities in the business world. http://en.wikipedia.org/wiki/Mergers_and_acquisitions

33. Leveraged Buyout (LBO) -- An attempt by employees, management or a group of investors to buy out the stockholders in a company. LBOs have ranged in size from $50 million to $31 billion and have involved everything from small businesses to giant corporations. (Toys R Us) In 2010, foreign investors poured $300 billion into U.S. companies. (Saudi Arabia, France, Britain) LEVERAGED BUYOUTS LG4 Corporate Expansion: Mergers and Acquisitions 5-33

34. Franchises Franchise Agreement -- An arrangement whereby someone with a good idea for a business (franchisor) sells the rights to use the business name and sell a product or service (franchise) to others (franchisees) in a given territory. Over 825,000 franchised businesses operate in the U.S., employing approximately 17.5 million people. FRANCHISING LG5 5-34

35. Source: Entrepreneur, March 2010. MAKE WAY for the NEWBIES Top New Franchises LG5 Franchises 5-35

36. Advantages of Franchises Management and marketing assistance Personal ownership Nationally recognized name Financial advice and assistance Lower failure rate ADVANTAGES of FRANCHISING LG5 5-36

37. Large start-up costs Shared profit Management regulation Coattail effects Restrictions on selling Fraudulent franchisors DISADVANTAGES of FRANCHISING LG5 Disadvantages of Franchises 5-37

38. Diversity in Franchising Women own about half of U.S. companies, yet ownership of franchises is about 25%. Firms owned by women have grown at twice the rate of all companies. WOMEN in FRANCHISING LG5 More women are becoming franchisors. Auntie Anne’s and Jazzercise and are owned by women. Auntie Anne’s Jazzercise 5-38

39. Diversity in Franchising MinorityFran is an initiative to build awareness of franchising opportunities within minority communities.MinorityFran Domino’s Pizza launched a minority franchise recruitment program called Delivering the Dream.Domino’s Pizza Over 20% of franchises are minority-owned. MINORITY-OWNED FRANCHISES LG5 Photo Courtesy of: Tom Magliery 5-39

40. Home-Based Franchises Advantages: Relief from commuting stress Extra family time Low overhead expenses Main Disadvantages: Isolation Long hours HOME-BASED FRANCHISES LG5 5-40

41. Source: Neema P. Roshania, Kiplinger, January 2011. HOME SWEET HOME Top Home-Based Franchises LG5 Home-Based Franchises 5-41

42. E-Commerce in Franchising Most brick-and-mortar franchises have expanded to the Internet. Many franchisors prohibit franchisee-sponsored sites because conflicts can erupt. Sometimes “reverse royalties” are sent to franchisees who believe their sales were hurt by the franchisor’s site. Other franchises are solely based online. E-COMMERCE in FRANCHISHING LG5 5-42

43. Franchising in International Markets Canada is the most popular target for U.S.-based franchises. China, South Africa, the Philippines and the Middle East are becoming popular despite high cost. Franchising is successful when the product is convenient, high quality, great service is included and the franchisee adapts to the region. International franchising goes both ways – some foreign franchises have come to the U.S. Technology has enabled Global Franchising!! GLOBAL FRANCHISING LG5 5-43

44. Source: Entrepreneur, January 2011. 1. Hampton Hotels 2. AMPM 3. McDonald’s 4. 7-Eleven 5. Supercuts 6. Days Inn 7. Vanguard Cleaning Systems 8. Servpro 9. Subway 10. Denny’s HIGH FLYERS Ten High-Performing Franchises LG5 Franchising in International Markets Photo Courtesy of: Innisfree Hotels 5-44

45. Cooperatives Cooperatives -- Businesses owned and controlled by the people who use them– producers, consumers, or workers with similar needs who pool their resources for mutual gain. Worldwide, 750,000 co-ops serve 730 million members – 120 million in the U.S. Members democratically control the business by electing a board of directors that hires professional management. (Associated Press, Ace Hardware, True Value Hardware, Ocean Spray, etc.) COOPERATIVES LG6 5-45

46. Progress Assessment Most people who start businesses in the U.S. are sole proprietors. What are the advantages and disadvantages of sole proprietorships? Why would unlimited liability be considered a major drawback to sole proprietorships? What are some of the advantages and disadvantages of partnerships? What are the major advantages and disadvantages of incorporating a business? IN CONCLUSION 5-46