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6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
BUSN
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Business Formation:Choosing the Form that Fits
• What are the four basic forms of business and their characteristics?
• What are the advantages and disadvantages of a sole proprietorship?
• What are the pros and cons of partnerships?
• Why have corporations become the dominant form of business ownership?
• Why are limited liability companies becoming increasingly popular?
• What are the advantages and disadvantages of franchising?
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BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Business Ownership Options: The Big Four
Sole Proprietorship – the business is owned by a single individual
Partnership – two or more people serve as co-owners of the business
Corporation – the business is a separate legal entity
Limited Liability Company – a hybrid with characteristics of both a corporation and partnership
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BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Business Ownership Options: The Big Four
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(Source: U.S. Census Bureau, The 2009 Statistical Abstract, Table 722: Number of Tax Returns, Receipts, and Net Income by Type of Business: 1990-2005: http://www.census.gov/prod/2008pubs/09statab/business.pdf)
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advantages and Disadvantages of Sole Proprietorships
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Advantages:Ease of Formation
Retention of Control
Pride of Ownership
Retention of Profits
Possible Tax Advantages
Disadvantages:Limited Financial Resources
Unlimited Liability
Limited ability to attract and maintain talented employees
Lack of Permanence
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Partnerships: Two Heads (and Bankrolls) Can Be Better Than One
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Advantages:Pooled Financial Resources
Shared Responsibilities
Ease of Formation
Tax Advantages
Disadvantages:Unlimited Liability
Disagreements
Difficulty in withdrawing from agreement
Lack of Continuity
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Partnerships: General vs. Limited
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General PartnershipsAll partners have the right to participate in the management of the firm and share in any profits/losses.
Limited PartnershipsAll partners contribute financially and share in the profits but the limited partner(s) cannot actively participate in management.
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Partnerships: Two Heads (and Bankrolls) Can Be Better Than One
• Limited Partnership – includes at least one general partner and at least one limited partner
• Limited Liability Partnership – All partners are actively involved but they have some form of limited liability. The amount of liability differs per state.
• Limited partners have limited liability
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BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Corporations: The Advantages and Disadvantages of Being an Artificial Person
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• A corporation is a legal entity, separate and distinct from its owners.
• Corporations are owned by stockholders.
• The Board of Directors establishes the mission and objectives.
• The Board is elected by the stockholders to represent their interests.
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Corporations: The Advantages and Disadvantages of Being an Artificial Person
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Disadvantages:• Expense/complexity of
formation and operation
• Double Taxation
• Paperwork and Regulation
• Conflicts of Interest
Advantages:• Limited Liability
• Permanence
• Easy to Transfer Ownership
• Ability to Raise Capital
• Specialized Management
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Corporations: The Role of Board of Directors
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• Oversee the operation of corporation and protect investors’ interest
• Establish mission and set objectives
• Rarely get involved in day-to-day management
• Responsible for monitoring the performance of the corporate officers
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Other Types of Corporations: Characteristics
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© 2009 South-Western, a division of Cengage Learning 12
TYPE KEY ADVANTAGE LIMITATIONS
S Corp. • IRS does not tax earnings separately
• Stockholders have limited liability
• No more than 100 stockholders• Stockholders must be U.S. citizens or permanent residents
Statutory Close Corp.
• Not require to have a board or hold annual meetings
• Owners can participate in management while maintaining limited liability
• Limited number of stockholders• Stockholders must offer shares to owner first before selling publicly
• Not all states allow this corporation type
Nonprofit Corp.
• Earnings are exempt from federal and state income taxes
• Members/directors have limited liability
• Contributions made by individuals are tax-deductible
• May have dues paying members but no stockholders
• Can’t distribute dividends• Can’t make political donations• Must keep accurate records to document tax-exemption
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Corporate Restructuring: Mergers & Acquisitions
• Mergers – two companies agree to a combination of equals
• Acquisitions – when one firm buys another
• Corporations look for:
Growth opportunitiesOperational efficienciesCompetitive advantages
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BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of Mergers & Acquisitions
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Type of Merger
Definition Objective Example
Horizontal Combine firms in same industry
• Increase size• Increase market
power• Gain efficiency
AT&T and SBC
Vertical Combine companies with
buyer-seller relationship
• Provide tighter integration and increase control
Time Warner and Turner
Broadcasting
Conglomerate Combination of unrelated
companies
• Increase company’s diversity.
GE acquiring RCA
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Divestitures: When Less is More
Divestitures allow the firm to streamline their operations and focus.
• Spin-off – setting up the division or part of the business as a separate company
Sell stock to existing stockholders
• Carve-out – setting up a separate business from an operation
Sell stock to outside investors
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BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Limited Liability Company: The New Kid on the Block
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Advantages:• Limited Liability
• Tax Pass-Through
• Flexible Ownership
• Simplified Management and Operation
Disadvantages:• Franchise Taxes
• Foreign Status in other States
• State Law Differences
• Limited to Select Industries
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Franchising: Proven Methods for a Price
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• Not a form of ownership but an operation option.
Build-a-BearSubwayJiffy LubeMcDonald’s
• The franchisee uses the brand name, trademark and practices of the franchisor.
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Franchising: Proven Methods for a Price
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Advantages:Less Risk
Training and Support
Brand Recognition
Access to Funding
Disadvantages:Costs
Lack of Control
Negative Halo Effect
Growth Challenges
Restriction on Sale
Poor Execution
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Franchising in Today’s Economy
• Franchising has been expanding into foreign markets.
• McDonald’s has slightly more franchises abroad than in the U.S.
• The number of women franchisees and franchisors is growing.
• Minority participation in franchising is low.
The International Franchising Association has launched an initiative to recruit minority franchisees.
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BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Franchising in Today’s Economy
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(Source: Individual franchise opportunity pages for each listed franchise on the Entrepreneur.com website, http://www.entrepreneur.com/franchiseopportunities/index.html, accessed February 1, 2009)
BUSN
6 Business Formation: Choosing the Form that Fits
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Entering Into A Franchise Agreement
• Know all the facts before signing the dotted line
• Franchisors must provide a Franchise Disclosure Document (FDD)
• The Federal Trace Commission (FTC) require:The FDD Must be written in plain English
The franchisor must be give 14 days to review the FDD
The Franchisee should have a lawyer review the document
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©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Looking Back
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• What are the four basic forms of business and their characteristics?
• What are the advantages and disadvantages of a sole proprietorship?
• What are the pros and cons of partnerships?
• Why have corporations become the dominant form of business ownership?
• Why are limited liability companies becoming increasingly popular?
• What are the advantages and disadvantages of franchising?