Chapter 5: How to Form a Business PDF

Because learning changes everything. ® Chapter 5 How to Form a Business Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the pri...

Because learning changes everything. ® Chapter 5 How to Form a Business Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Chapter Contents Basic Forms of Business Ownership Sole Proprietorships Partnerships Corporations Corporate Expansion: Mergers and Acquisitions Franchises Cooperatives Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Learning Objectives LO 5-1 Compare the advantages and disadvantages of sole proprietorships. LO 5-2 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships. LO 5-3 Compare the advantages and disadvantages of corporations and summarize the differences between C corporations, S corporations, and limited liability companies. LO 5-4 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private. LO 5-5 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising. LO 5-6 Explain the role of cooperatives. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Basic Forms of Business Ownership Three Major Forms Sole proprietorship — A business owned, and usually managed, by one person. Partnership — A legal form of business with two or more owners. Corporation — A legal entity with authority to act and have liability separate from its owners. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Figure 5.1 Forms of Business Ownership Although corporations make up only 20 percent of the total number of businesses, they earn 81 percent of the total receipts. Sole proprietorships are the most common form (72 percent), but they earn only 6 percent of the receipts. Access the text alternative for slide images. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Source: U.S. Census Bureau.  Sole Proprietorships Advantages: Disadvantages: 1. Ease of starting and ending the 1. Unlimited liability — The business. responsibility of business owners for all debts of the business. 2. Being your own boss. 2. Limited financial resources. 3. Pride of ownership. 3. Management difficulties. 4. Leaving a legacy. 4. Overwhelming time commitment. 5. Retention of company profits. 5. Few fringe benefits. 6. No special taxes. 6. Limited growth. 7. Limited life span. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  TESTPREP 1 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? Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Partnerships 1 Major Types of Partnerships General partnership — A partnership in which 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. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Partnerships 2 Types of Partners 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 does not have any management responsibility or liability for losses beyond the investment. Limited liability — The responsibility of a business’s owners for losses only up to the amount they invest; limited partners and shareholders have limited liability. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Partnerships 3 Other Forms of Partnerships Master limited partnership (MLP) — A partnership that looks much like a corporation (in that it acts like a corporation and is traded on a stock exchange) but is taxed like a partnership and thus avoids the corporate income tax. Limited liability partnership (LLP) — A partnership that limits partners’ risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Partnerships 4 Advantages of Partnerships Disadvantages of Partnerships More financial resources. Unlimited liability. Shared management and Division of profits. pooled/complementary skills and Disagreements among partners. knowledge. Difficulty of termination. Longer survival. No special taxes. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Figure 5.2 Questions to Ask When Choosing a Business Partner Access the text alternative for slide images. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  TESTPREP 2 What is the difference between a limited partner and a general partner? What are some of the advantages and disadvantages of partnerships? Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Corporations 1 Conventional (C) Corporation A state-chartered legal entity with authority to act and have liability separate from its owners (its stockholders). Enables many people to share in ownership. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Figure 5.4 Corporate Types You may find some confusing types of corporations when reading about them. Here are a few of the more widely used terms: Alien corporations do business in the United States but are chartered (incorporated) in another country. Domestic corporations do business in the state in which they are chartered (incorporated). Foreign corporations do business in one state but are chartered in another. About one-third of all corporations are chartered in Delaware because of its relatively attractive rules for incorporation. A foreign corporation must register in states where it operates. Closed (private) corporations have stock that is held by a few people and isn’t available to the general public. Open (public) corporations sell stock to the general public. Quasi-public corporations are chartered by the government as an approved monopoly to perform services to the general public. Professional corporations are owned by those who offer professional services. Nonprofit (or not-for-profit) corporations don't seek personal profit for their owners. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Corporations 2 Advantages of Corporations Disadvantages of Corporations Limited liability. Initial cost. Ability to raise more money for Extensive paperwork. investment. Double taxation. Size. Two tax returns. Perpetual life. Size. Ease of ownership change. Difficulty of termination. Ease of attracting talented employees. Possible conflict with stockholders and Separation of ownership from board of directors. management. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Figure 5.5 How Owners Affect Management Owners have an influence on how a business is managed by electing a board of directors. The board hires the top officers (and fires them if necessary). It also sets the pay for those officers. The officers then select managers and employees with the help of the human resource department. Access the text alternative for slide images. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Corporations 3 Individuals Can Incorporate Anyone—truckers, doctors, plumbers, athletes, and small business owners— can incorporate. Stock is normally not issued to outsiders when individuals incorporate, so they do not share the advantages and disadvantages of large corporations. Major advantages are limited liability and possible tax benefits. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Corporations 4 S Corporations A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships. Have shareholders, directors, and employees, plus the benefit of limited liability. Profits are taxed only as the personal income of the shareholders. If an S corporation loses its S status, it may not operate under it again for at least 5 years. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Corporations 5 Limited Liability Companies LLCs are similar to an S corporation but without the special eligibility requirements. Advantages of LLCs: Disadvantages of LLCs: 1. Limited liability. 1. No stock; ownership is nontransferable. 2. Choice of taxation. 2. Fewer incentives. 3. Flexible ownership rules. 3. Taxes. 4. Flexible distribution of profits and losses. 4. Paperwork. 5. Operating flexibility. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  TESTPREP 3 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? Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Corporate Expansion: Mergers and Acquisitions 1 Types of Expansion Merger — The result of two firms forming one company. Acquisition — One company’s purchase of the property and obligations of another company. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Corporate Expansion: Mergers and Acquisitions 2 Types of Mergers Vertical merger — The joining of two companies in different stages of related businesses. Horizontal merger — The joining of two firms in the same industry. Mergers between competitors must prove to the Federal Trade Commission (FTC) that the new combined company does not limit competition unfairly. Conglomerate merger — The joining of firms in completely unrelated industries. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Figure 5.8 Types of Mergers Access the text alternative for slide images. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Corporate Expansion: Mergers and Acquisitions 3 Other Types of Expansion Take a firm private — Management or a group of stockholders take control by obtaining all the firm’s stock. Leveraged buyout (LBO) — An attempt by employees, management, or a group of private investors to buy out the stockholders in a company. Range in size from $50 million to $34 billion and involve everything from small family businesses to giant corporations. Business acquisitions are not limited to U.S. buyers. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Franchises 1 Franchising 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. Can be formed as a sole proprietorship, a partnership, or a corporation. More than 733,000 franchised businesses operate in the U.S., creating 7.6 million jobs. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Franchises 2 Advantages of Franchises Disadvantages of Franchises 1. Management and marketing 1. Large start-up costs. assistance. 2. Shared profit. 2. Personal ownership. 3. Management regulation. 3. Nationally recognized name. 4. Coattail effects. 4. Financial advice and assistance. 5. Restrictions on selling. 5. Lower failure rate. 6. Fraudulent franchisors. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Franchises 3 Diversity in Franchising Women own about half of U.S. companies, yet ownership of franchises is about 35 percent. More women are becoming franchisors, such as those who started Auntie Anne’s, Decorating Den, and Build-a-Bear Workshops. Minorities own less than 19 percent of businesses, yet over 30 percent of franchises are minority-owned. DiversityFran and Federal Minority Business Development Agency build awareness of franchising opportunities within minority communities and provide training and support. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Franchises 4 Home-Based Franchises Advantages: Disadvantages: Relief from commuting stress. Isolation. Extra family time. Long hours. Low overhead expenses. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Franchises 5 E-commerce in Franchising Most brick-and-mortar franchises have expanded online. 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. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Franchises 6 Using Technology in Franchising Franchisors use technology, including social media, to: Extend their brands. Meet the needs of both customers and their franchisees. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Franchises 7 Franchising in Global Markets Even smaller franchises are going global. Canada is the most popular target for U.S.-based franchises, but so is China, South Africa, the Philippines, and the Middle East. They offer the same advantages as in the U.S.: convenience and a predictable level of service and quality. Adapting products and brand names to different countries creates challenges. Foreign franchises also come to the U.S. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Cooperatives Cooperative (Co-Op) A business owned and controlled by the people who use it—producers, consumers, or workers with similar needs who pool their resources for mutual gain. Serve one billion members worldwide. Members democratically control the business by electing a board of directors that hires professional management. Other cooperatives are formed to give members more economic power as a group than they have as individuals, such as a farm cooperative. Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  TESTPREP 4 What are some of the factors to consider before buying a franchise? What opportunities are available for starting a global franchise? What is a cooperative? Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  End of Main Content Because learning changes everything. ® Because learning changes everything. ® www.mheducation.com Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.