Chapter 5How to Form a Business

Wha

t is a

sole

pr

oprie

tors

hip

A business that is owned,

and usually managed by one person.

Adva

ntag

es o

f A

Sole

Pro

prie

tors

hips Ease of starting and ending the

business. Being your own boss. Pride ownership Leaving a legacy.

Retention of company profits.

No special taxes.

Disa

dvan

tage

s of a

so

le p

ropr

ieto

rshi

ps

Unlimited liability-the risk of personal losses.Limited financial resources.Management difficulties.Overwhelming time commitment.Few fringe benefits.Limited growth.Limited life span.

WHA

T IS

A

PART

NERS

HIP

A legal form of business with two or more owners.

Type

s of

PART

NERS

HIPS General Partnerships

Limited partnerships Master limited partnerships

general & lim

itedGeneral

partner

Is an owner

who has

unlimited

liability and

is active in

managing

the firm.

Limited Partner

Is an owner

who invest

money in the

business but

does not have

any management

responsibility

or liability for

losses beyond

his or her

investment.

Adva

ntag

es o

f Pa

rtner

ship

s More financial resources. Shared management and

pooled or complimentary skills and knowledge.

Longer survival. No special taxes.

Disa

dvan

tage

s of

Partn

ersh

ips Unlimited liability.

Division of profits.Disagreements among

partners.Difficulty of termination.

Wha

t is a

Co

rpor

atio

n A state chartered legal entity with authority to act and have liability separate from its owners.

Adva

ntag

es o

f Co

rpor

atio

ns

Ability to raise more money from investments

Size Perpetual lifeLimited liabilityEase of ownership

changeEase of attracting

talented employees

Separation of ownership from management

Disa

dvan

tage

s of

Corp

orat

ions

Initial costExtensive paper workDouble taxationTwo tax returnsSizeDifficulty of terminationConflict with stockholders and

board directors

S-Co

rpor

atio

ns A unique government creation that looks

like a corporation but is taxed like sole proprietorships and partnerships.

Must have no more than 100 shareholders ( family members count as 1 share holder).

Have shareholders that are individuals or estates and who are United States Citizens or a permanent resident of the United States.

S-Co

rpor

atio

ns

(Con

t.) Have only one class of stock Derive no more than 25%

of income from passive sources. For example rent,

royalties, and interest.

C-Co

rpor

atio

ns

Stockholders are not liable for the

debts or other problems of the

corporation beyond the money

they invest in it by buying

ownership shares or stocks. Do not have to worry about losing

their property because of a

problem in the business which is a

big benefit. Enables many people to share in

the ownership and the profits in

the business without working

there or having any commitments

to it.

Limite

d lia

bilit

y co

mpa

nies

Have the advantages of limited liability without having the problems of forming a corporation or having the limits by S-corporations.Have the right to be

taxed as partnerships or corporations.

Type

s Of M

erge

rs Vertical MergerHorizontal MergerConglomerate Merger

Wha

t is a

Ve

rtica

l Mer

ger? The joining of two

companies involved in different stages of related business.Examples: Pepsi and

sweet and low.

Wha

t is a

Ho

rizon

tal M

erge

r?

The joining of two firms in the same industry.

Example: Coca Cola and Vitamin Water.

Wha

t is a

Co

nglo

mer

ate

Merg

er? The joining of firms in

completely unrelated industries.

Example: Coca Cola and Nabisco.

Wha

t is a

Le

vera

ged

Buyo

ut?

An attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing.

Example: Toys R US Individuals who are

together or alone buy all the stock for themselves is known as a private firm.

Wha

t is a

Fr

anch

ise? The right to use a

specific business’s name and sell its products or services in a given territory.Example: McDonald’s

Adva

ntag

es o

f a

Fran

chise

Management and marketing assistance.

Personal ownershipNationally recognized

name.Financial advice and assistance.Lower failure rate.

Disa

dvan

tage

s of

Fran

chise

s Large start up costs.Shared profit.Management regulation.Coattail effects.Restrictions on selling.

Fraudulent franchisors.

Oppo

rtuni

ties f

or

Dive

rsity

in

Fran

chisi

ng

Women are opening more business in the United States.Example: Jazzercise and

Auntie Anne’s Pretzel.Minority owned businesses are growing six times the national rate.Example: Dominos pizza

–delivering the dream.

Chal

leng

es o

f Gl

obal

Fr

anch

ises Hard to change an

idea or sell a product that works well in different countries to another country making it hard to get used to the area.

Wha

t is a

Co

oper

ative

?

A business owned and controlled by the people who use it such as its producers, consumers, or workers who have the same needs who pool their possessions for mutual gain.

The

Role

of

Coop

erat

ives

Are formed to get more economic power than by themselves.Small businesses are

cooperatives because they want to have more purchasing, marketing, or development of there

product.