1. Select a Type of Ownership7
Select a Type of Ownership
7.1 Decide to Purchase, Join, or Start a Business
7.2 Choose a Legal Form of Business
7.3 Legal Issues and Business Ownership

2. Ideas in Action Capitalize on Youth Marketing
By recognizing an unmet need in the marketplace, Tina Wells was able to establish a business that helped companies connect better with teens.
Tina reinvests profits into her company to help the company remain strong.
Tina is a regular speaker at various professional meetings.
Chapter 7

3. Lesson 7.1 Decide to Purchase, Join, or Start a Business
Goals
Discuss purchasing an existing business.
Describe how to evaluate a franchise opportunity.
Chapter 7

4. List advantages and disadvantages of joining a family business.
Determine whether to start a new business.
Chapter 7

5. Terms franchise initial franchise fee startup costs royalty fees
advertising fees
Chapter 7

6. Purchase an Existing Business
Owners sell businesses for a variety of reasons including:
insufficient profits
new competition
retirement
dispute among partners
illness of a partner
Chapter 7

7. There are many ways to find a business that is for sale including:
classified ads
consulting a business broker
industry networking
market research
Chapter 7

8. Advantages of Buying an Existing Business
The equipment, suppliers, and procedures are in place.
Goodwill may already be established.
The seller may train the new owner.
Established financial records exist.
Financial arrangements, including loans, may be easier.
Chapter 7

9. Disadvantages of Buying an Existing Business
The business may be for sale because it is not profitable.
Serious problems may be inherited.
Capital is required.
Chapter 7

10. Steps in Purchasing a Business
Write specific objectives about the kind of business you want to buy.
Identify businesses for sale that meet the objectives.
Meet with business sellers or brokers to identify specific opportunities.
Chapter 7

11. Visit during business hours to observe the business in action.
Obtain accounting records for the prior three years.
Get important information in writing.
reviewed by a lawyer
reviewed by an accountant
Chapter 7

12. Determine how you would finance the business.
Get expert help to determine the price to offer for the business.
Chapter 7

13. What are some of the advantages and disadvantages of buying an existing business?
Chapter 7

14. Franchise Ownership franchise franchisee franchisor
a legal agreement that gives an individual the right to market a company’s products or services in a particular area
franchisee
the person who purchases a franchise
franchisor
the company that offers the franchise for purchase
Chapter 7

15. Operating Costs of a Franchise
initial franchise fee
the amount the local franchise owner pays in return for the right to run the franchise
startup costs
the costs associated with running a business
Chapter 7

16. royalty fees advertising fees
weekly or monthly payments made by the local owner to the franchise company
advertising fees
paid to the franchise company to support television, magazine, or other advertising of the franchise as a whole
Chapter 7

17. Investigate the Franchise Opportunity
The FTC requires franchise sellers to provide detailed disclosure information at least 10 business days before finalizing a purchase.
The disclosure document should include the following:
contact information for at least ten previous purchaser who live nearest to you
Chapter 7

18. the fully audited financial records of the seller
background and experience of the business’s key executives
cost of starting and maintaining the business
the responsibilities you and the seller will have once you have invested in the opportunity
Chapter 7

19. Evaluate a Franchise
Study the disclosure document and proposed contract carefully.
All costs and royalty fees should be provided.
Interview current owners.
shills
business references who are paid to give favorable reports
Chapter 7

20. Research the franchisor’s history and profitability.
Investigate claims about your potential earnings.
Does projected local demand match potential earnings?
Have the seller provide, in writing, the number and percentage of owners who have done as well as they claim you will.
Chapter 7

21. Listen carefully to sales presentations.
Do not sign up immediately.
Do not fall for a promise of easy money.
Shop around.
Compare services offered by similar franchisors.
Chapter 7

22. Get the seller’s promises in writing.
Determine what will happen if you want to cancel the franchise agreement.
Ask for advice from professionals.
Chapter 7

23. Advantages of Owning a Franchise
An entrepreneur is provided with an established product or service.
Franchisors offer management, technical, and other assistance.
Equipment and supplies can be less expensive.
A guarantee of consistency attracts customers.
Chapter 7

24. Disadvantages of Owning a Franchise
Franchise fees can be costly and cut down on profits.
Owners of franchises have less freedom to make decisions than other entrepreneurs.
Chapter 7

25. The franchisor can terminate the franchise agreement.
Franchisees are dependent on the performance of other franchises in the chain.
The franchisor can terminate the franchise agreement.
Chapter 7

26. What should you consider when evaluating a franchise opportunity?
Chapter 7

27. Enter a Family Business
The U.S. economy is dominated by family businesses.
Some estimates indicate 90% of businesses are family owned.
Many large companies are still owned by relatives of the company founder.
Chapter 7

28. Advantages of a Family Business
Benefits of working at a family business include:
pride and a sense of mission
a feeling of continuity from keeping the business in the family for another generation
enjoyment derived from working with relatives
Chapter 7

29. Disadvantages of a Family Business
Challenges of working in a family business include:
family members, regardless of their ability, often hold senior management positions
poor business decisions can be made
it is difficult to retain non-family employees
Chapter 7

30. Family politics often enter into business decision making.
Business and private life often affect each other.
Independent decision making is curtailed.
It can be challenging to determine what to do with the business when there is not a family member available to run it.
Chapter 7

31. What are some of the advantages and disadvantages of entering a family business?
Chapter 7

32. Starting Your Own Business
If purchasing a franchise or joining a family business will not work for you, consider starting your own business.
Chapter 7

33. Advantages of Starting Your Own Business
Independent business owners enjoy:
complete autonomy over all business decisions
the ability to create their own destiny
the challenge of creating something brand new
feeling triumphant when the business turns a profit
Chapter 7

34. Disadvantages to Starting Your Own Business
Risks to consider when starting your own business include:
product demand is uncertain
all decisions are made independently
there is no advisory group to guide you or provide you with a business template
Chapter 7

35. Why is it more difficult to start a new business than to take over an existing business or purchase a franchise?
Chapter 7

36. Lesson 7.2 Choose a Legal Form of Business
Goals
List advantages and disadvantages of a sole proprietorship.
List advantages and disadvantages of a partnership.
List advantages and disadvantages of a corporation.
Chapter 7

37. Terms sole proprietorship partnership corporation share of stock
board of directors
dividends
Chapter 7

38. Sole Proprietorship sole proprietorship
a business that is owned exclusively by one person
Chapter 7

39. Advantages of a Sole Proprietorship
minimal government regulation
accurate tax records
certain employment laws
Sole proprietorship is the most common form of U.S. business ownership.
Chapter 7

40. Disadvantages of a Sole Proprietorship
It can be difficult to raise money for the business.
You bear the burden of all the risks.
If the business fails, your personal assets can be jeopardized.
Chapter 7

41. Why are sole proprietorships the most common form of business ownership?
Chapter 7

42. Partnership partnership Advantages of a partnership include:
a business owned by two or more people
Advantages of a partnership include:
multiple sources of capital
risks are spread among partners
minimal government regulation
Chapter 7

43. Disadvantages of a partnership include:
responsibilities and profits are shared
can be held liable for errors of partners
Chapter 7

44. Partnership Agreements
outline the rights and responsibilities of each of the owners including
business name
names of partners
investment by each partner
delegation of management duties
accounting method used
Chapter 7

45. rights to audit accounting documents
profit distribution
salaries
length of partnership
conditions under which partnership can be dissolved
asset distribution upon dissolution of partnership
Chapter 7

46. Chapter 7

47. Name some of the advantages and disadvantages of a partnership.
Chapter 7

48. Corporation corporation share of stock
a business that has the legal rights of a person but is independent of its owners
share of stock
a unit of ownership in a corporation
The individual or group that owns most shares maintains control of the company.
Chapter 7

49. board of directors dividends
a group of people who meet several times a year to make important decisions affecting the company
in addition to strategic decisions, they also determine dividend payments
dividends
distributions of corporate profits to shareholders
The board of directors is not involved in the daily management of the company.
Chapter 7

50. Disadvantages of a Corporation
The disadvantages of a corporation include:
A lawyer is required to establish a corporation because a corporation is complex.
costly
Chapter 7

51. Articles of incorporation need to be well written.
Corporations are subject to more government regulation that other types of businesses.
Income is taxed twice.
corporate income
individual income
Chapter 7

52. Advantages of Incorporation
In a corporation, personal liability is limited to the amount of money each shareholder invested in the company.
Personal assets of shareholders are protected.
Corporations can raise money by selling stock.
Chapter 7

53. S Corporation S corporation
a corporation organized under Subchapter S of the Internal Revenue Code
not taxed as a business
If the business looses money, owners can use the losses to offset other sources of personal income.
tax break
Chapter 7

54. Limited Liability Company
Limited Liability Company (LLC)
offers the limited liability protections of a corporation to its owners
not subjected to the rules of an S corporation
provides the benefits of partnership taxation and limited personal liability
may be limited to a business life of 30 years
Chapter 7

55. What is the main benefit of setting up your business as a corporation?
Chapter 7

56. Lesson 7.3 Legal Issues and Business Ownership
Goals
Recognize how laws promote competition.
Describe how to protect intellectual property.
Chapter 7

57. Identify consumer laws that affect businesses.
Describe when and how a business owner should seek legal advice.
Chapter 7

58. Terms intellectual property patent copyright trademark contract
Chapter 7

59. Regulations That Promote Competition
The government has enacted various laws to make sure that competition is fair.
Chapter 7

60. Antitrust Legislation
Antitrust laws ban business activities that do not promote competition.
Sherman Act
Competitors can not get together to set prices at a certain level.
Discussing pricing with competitors is illegal.
Chapter 7

61. Clayton Act It is illegal for a business to:
require a customer to buy exclusively from it
force a customer to purchase one good in order to be able to purchase another good
Chapter 7

62. Robinson-Patman Act
It is illegal to discriminate by charging different prices to different customers.
Some economically sound reasons that allow for different prices include:
volume discounts
special distribution
legal requirements that vary by location
Retail stores are exempt if they are targeting a specific market.
Chapter 7

63. Wheeler-Lea Act
Unfair or deceptive actions or practices by businesses that may cause an unfair competitive advantage are banned.
false advertising
Businesses are required to warn consumers about possible negative features of their product.
potential side effects of medication
Chapter 7

64. Government Agencies that Protect Competition
Justice Department
The Antitrust Division takes legal action against any business it believes has tried to monopolize an industry.
prosecutes businesses that violate antitrust laws
Chapter 7

65. Federal Trade Commission (FTC)
The FTC administers most of the laws dealing with fair competition.
false advertising
price setting by competitors
price discrimination
product misrepresentation
Chapter 7

66. How do laws promote competition?
Chapter 7

67. Intellectual Property
the original creative work of an artist or inventor
songs, novels, artistic designs, inventions
No one can use someone else’s original work to make money.
Chapter 7

68. provisional patent application
the grant of a property right to an inventor to exclude others from making, using, or selling his or her invention.
lasts for 20 years
provisional patent application
allows inventor one year to research details of an idea prior to filing a patent
Chapter 7

69. copyright trademark an intellectual property law
protects works of authorship
remains in effect for 70 years after the death of an author
trademark
name, symbol, or special mark used to identify a business or brand of product
Chapter 7

70. How can entrepreneurs protect intellectual property rights?
Chapter 7

71. Laws that Protect Consumers
Licenses
State and local governments require some businesses to have licenses.
training may be required
Chapter 7

72. Consumer Protection Laws
Zoning Laws
Local governments often establish zoning regulations that control what types of buildings can be built in what area.
Consumer Protection Laws
These laws protect the public from harmful products.
Chapter 7

73. The Federal Food, Drug, and Cosmetic Act of 1938
Covering food, drugs, and cosmetics, this law bans selling products that are:
impure
improperly labeled
falsely guaranteed
unhealthful
Chapter 7

74. The Consumer Product Safety Act of 1972
sets safety standards for products other than food and drugs
The Truth-In-Lending Act of 1968
requires all banks to calculate credit costs in the same way
Chapter 7

75. The Fair Credit Billing Act of 1974
helps consumers correct credit card billing errors
during the investigation of disputed charges, interest cannot be accrued
If charged on a credit card, payment for an inferior quality product can be withheld until resolution occurs.
Chapter 7

76. What laws protect the public?
Chapter 7

77. When to Get Legal Advice
Learning some basics about the laws affecting businesses will help you handle minor legal issues independently.
Sometimes you will need to hire a lawyer.
Chapter 7

78. Chapter 7

79. contract agreement consideration
a legally binding agreement between two or more persons or parties
agreement
one party offers or agrees to something and the other party accepts
consideration
what is exchanged for the promise
Chapter 7

80. capacity
the parties are legally able to enter into a binding agreement
legality
a contract cannot have anything in it that is illegal or that would result in illegal activities
Chapter 7

81. What kinds of services can lawyers provide?
Chapter 7

82. PERFORMANCE INDICATORS EVALUATED
Explain the nature of business law.
Describe legal issues affecting businesses.
Describe strategies used to protect a business’s copyrights.
Chapter 7

83. Explain legal strategies used to protect trademarks.
Make an effective oral presentation.
Explain legal considerations for pricing.
Explain business ethics in product/service management.
Chapter 7

84. THINK CRITICALLY
Why is it important to consider copyright and trademark laws when selling merchandise?
Why are copyright and trademark laws hard to enforce in other countries?
Chapter 7

85. How can you determine the royalty percentage to be paid to a university for use of its emblem, logo, or mascot?
Why does a university need an attorney who specializes in copyright laws?
Chapter 7