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*
* Chapter Five
How to Form
a Business
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
*
*
• Bought a used truck and started Rubbish Boys,
later changed the name to
http://www.1800gotjunk.com.
• $130 million in annual earnings from locations
across North America and Australia.
• Expanded through franchising.
Profile BRIAN SCUDAMORE 1-800-GOT-JUNK?
5-2
*
* 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
LG1
5-3
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* Basic Forms of
Business
Ownership
LG1
FORMS of
BUSINESS OWNERSHIP
5-4
*
* Advantages of
Sole
Proprietorships
• Ease of starting and
ending the business
• Being your own boss
• Pride of ownership
• Leaving a legacy
• Retention of company
profit
• No special taxes
MAJOR BENEFITS of SOLE
PROPRIETORSHIP LG1
5-5
*
* Disadvantages
of Sole
Proprietorships
• Unlimited Liability -- Any debts or damages
incurred by the business are your debts, even if it
means selling your home, car or anything else.
• Limited financial resources
• Management difficulties
• Overwhelming time commitment
• Few fringe benefits
• Limited growth
• Limited life span
DISADVANTAGES of SOLE
PROPRIETORSHIPS LG1
5-6
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* Progress
Assessment
• Most people who start businesses in the United
States are sole proprietors. What are the
advantages and disadvantages of sole
proprietorships?
• Why would unlimited liability be considered a
major drawback to sole proprietorships?
PROGRESS ASSESSMENT
5-7
*
* Partnerships
• General Partnership -- All owners share in
operating the business and in assuming liability for
the business’s debts.
• Limited Partnership -- A partnership with one or
more general partners and one or more limited
partners.
MAJOR TYPES of PARTNERSHIPS LG2
5-8
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* Partnerships
• Master Limited Partnership -- A partnership that
looks much like a corporation but is taxed like a
partnership and thus 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 FORMS of
PARTNERSHIPS LG2
5-9
*
* Partnerships
• 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.
TYPES OF PARTNERS LG2
5-10
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* Advantages &
Disadvantages
of Partnerships
• More financial resources
• Shared management and
pooled skills and
knowledge
• Longer survival
• No special taxes
ADVANTAGES of
PARTNERSHIPS LG2
5-11
*
* Advantages &
Disadvantages
of Partnerships
• Unlimited liability
• Division of profits
• Difficult to terminate
• Disagreements among
partners
DISADVANTAGES of
PARTNERSHIPS LG2
5-12
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*
There is no such thing as a perfect partner but
ask these questions when you try to find your
best 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)
5-13
*
* Progress
Assessment
• What’s the difference between a limited partner
and a general partner?
• What are some of the advantages and
disadvantages of partnerships?
PROGRESS ASSESSMENT
5-14
*
* 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
5-15
*
* 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
5-16
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* Advantages of
Corporations
LG3
HOW OWNERS AFFECT
MANAGEMENT
5-17
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*
Source: Fortune, www.fortune.com, April 2009.
1. Exxon Mobil
2. Wal-Mart
3. Chevron
4. ConocoPhillips
5. General Electric
Advantages of
Corporations The BIG BOYS of BUSINESS
America’s Largest Corporations LG3
6. General Motors
7. Ford
8. AT&T
9. Hewlett-Packard
10. Valero Energy
5-18
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*
Source: Forbes, www.forbes.com, November 2008.
Advantages of
Corporations
Company State Industry
Cargill MN Farming
Koch Industries KS Chemicals
Chrysler MI Automobiles
GMAC Financial Services MI Financial
PricewaterhouseCoopers NY Business Services
Mars VA Food
Bechtel CA Construction
HCA TN Hospitals
Ernst & Young NY Business Services
Publix Supermarkets FL Grocery
PRIVACY PLEASE The Ten Largest Private Corporations in the U.S.
LG3
5-19
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* 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
5-20
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* Individuals Can
Incorporate
• Anyone - truckers, doctors, plumbers, athletes
and small business owners can incorporate.
• Normally, stock is not issued 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.
WHO CAN INCORPORATE?
LG3
5-21
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* Individuals Can
Incorporate
Company Year Started Type of Company
J.E. Rhoads & Sons 1702 Conveyer Belts
Covenant Life Insurance 1717 Insurance
Philadelphia Insurance 1752 Insurance
Contributorship
Dexter 1767 Adhesives & Coatings
D. Landreth Seed 1784 Seeds
Bank of New York 1784 Banking
OLDIES BUT GOODIES America’s Oldest Corporations
LG3
5-22
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* S Corporations
• 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.
S CORPORATIONS
LG3
5-23
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* S Corporations
• 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.
WHO CAN FORM
S CORPORATIONS? LG3
5-24
*
* Limited Liability
Companies
• Limited Liability Company (LLC) -- Similar to a
S corporation but without the eligibility requirements.
• Advantages of LLCs:
- Limited liability
- Choice of taxation
- Flexible ownership rules
- Flexible distribution of profit and losses
- Operating flexibility
LIMITED LIABILITY COMPANIES
LG3
5-25
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* Limited Liability
Companies
• No stock, therefore ownership is nontransferable
• Limited life span
• Fewer incentives
• Taxes
• Paperwork
DISADVANTAGES of LLCs
LG3
5-26
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*
• Since June 2008, Vermont allows a new kind of
LLC that exist 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.
VERMONT WANTS to be the HOME
of YOUR NEW VIRTUAL COMPANY (Legal Briefcase)
5-27
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* Progress
Assessment
• What are the major advantages and
disadvantages of incorporating a business?
• What’s the role of owners (stockholders) in the
corporate hierarchy?
• If you buy stock in a corporation and someone
gets injured by one of the corporation’s products,
can you be sued? Why or why not?
• Why are so many new businesses choosing a
limited liability company (LLC) form of
ownership?
PROGRESS ASSESSMENT
5-28
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* Corporate
Expansion:
Mergers and
Acquisitions
• Merger -- The result of two firms joining to form one
company.
• Acquisition -- One company’s purchase of the
property and obligations of another company.
MERGERS and AQUISITIONS
LG4
5-29
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* Corporate
Expansion:
Mergers and
Acquisitions
• Vertical Merger -- Joins two firms in different
stages of related business.
• Horizontal Merger -- Joins two firms in the same
industry and allows them to diversify or expand their
products.
• Conglomerate Merger -- Unites firms in
completely unrelated industries in order to diversify
business operations and investments.
TYPES of MERGERS
LG4
5-30
*
* Corporate
Expansion:
Mergers and
Acquisitions
• 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.
• In 2007, foreign investors poured $414 billion into
U.S. companies.
LEVERAGED BUYOUTS
LG4
5-31
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* 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.
• More than 900,000 franchised businesses
operate in the U.S., employing approximately 10
million people.
FRANCHISING
LG5
5-32
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* Advantages &
Disadvantages
of Franchises
• Management and marketing
assistance
• Personal ownership
• Nationally recognized name
• Financial advice and
assistance
• Lower failure rate
ADVANTAGES of FRANCHISING
LG5
5-33
*
* Advantages &
Disadvantages
of Franchises
• Large start-up costs
• Shared profit
• Management regulation
• Coattail effects
• Restrictions on selling
• Fraudulent franchisors
DISADVANTAGES of
FRANCHISING LG5
5-34
*
* Diversity in
Franchising
• Women own about half of U.S. companies yet
receive less than 4% of venture capital.
• For the past 20 years, firms owned by women
have grown at twice the rate of all companies.
• More women are becoming franchisors. Auntie
Anne’s, Decorating Den, Jazzercise and Two
Men and a Truck are owned by women.
WOMEN in FRANCHISING
LG5
5-35
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*
• The Nationals in D.C. have the first sports
stadium to earn the U.S. Green Building Council’s
Leadership in Energy and Environmental Design
(LEED) Rating.
• 95% of the stadium’s steel was recycled and low-
flow toilets save millions of gallons of water.
• New stadiums of the Mets and Twins also have
earned LEED certifications.
ROOT, ROOT, ROOT for the
GREEN TEAM (Thinking Green)
5-36
*
* Home-Based
Franchises
Advantages:
• Relief from commuting stress
• Extra family time
• Low overhead expenses
Main Disadvantage:
• Isolation
HOME-BASED FRANCHISES
LG5
5-37
*
* Franchising in
International
Markets
• Canada is the most popular target for U.S. based
franchises; South Africa and the Philippines 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.
GLOBAL FRANCHISING
LG5
5-38
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*
Source: Richard Gibson, Wall Street Journal, www.wsj.com, February 12, 2008.
• Focus on tried-and-true name brands.
• Stick to core goods and services.
• Be choosy about the site.
• Don’t pinch pennies.
• Have a fallback choice.
• Don’t assume the franchise will pay off.
Franchising in
International
Markets WHAT to CHOOSE?
Picking Franchises that May Survive a Recession LG5
5-39
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*
Source: Wall Street Journal, www.wsj.com, February 12, 2008.
1. Arthur Murray Dance Studios
2. Banfield Pet Hospitals
3. Bojangles’ Famous Chicken ‘n
Biscuits
4. Denny’s
5. Friendly’s
6. The Melting Pot
7. Nathan’s Famous
8. Servpro
9. Stanley Steamer
10.Two Men and a Truck
Franchising in
International
Markets HIGH FLYERS
Ten High-Performing Franchises LG5
5-40
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* Cooperatives
• Cooperatives -- Businesses owned and controlled
by the people who use it – producers, consumers, or
workers with similar needs who pool their resources
for mutual gain.
• Worldwide, 750,000 cooperatives 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.
COOPERATIVES
LG6
5-41
*
* Progress
Assessment
• What are some of the factors to consider before
buying a franchise?
• What opportunities are available for starting a
global franchise?
• What’s a cooperative?
PROGRESS ASSESSMENT
5-42
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