MAN 470 – Berk TUNCALI. Things to consider when choosing; Tax consideration Liability exposure...
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Forms of Business Ownership and Franchising MAN 470 – Berk TUNCALI
MAN 470 – Berk TUNCALI. Things to consider when choosing; Tax consideration Liability exposure Startup capital requirement Control Business goals Management
Things to consider when choosing; Tax consideration Liability
exposure Startup capital requirement Control Business goals
Management succession plan Cost of formation
Slide 3
Sole Proprietorship A business owned and managed by one
individual. Most popular 18 million in the US $ 1 Trillion in sales
73% of the companies in the US
Slide 4
Advantages of Sole Proprietorship Simple to create (fast and
easy) Least costly form of ownership (fees and licenses) Profit
incentive (all the profit is kept after the expenses) Total
decision making authority No special legal restrictions (least
regulated) Easy to dissolve
Slide 5
Disadvantages of Sole Proprietorship Unlimited personal
liability Unlimited personal liability is a situation in which the
sole proprietor is personally liable for all of the businesss
debts. Limited skills and capabilities Feelings of isolation (no
help or feedback) Limited access to capital Lack of Continuity for
the business (if Proprietor dies so does the business)
Slide 6
Where do small business owners turn for advice? Spouse 62% of
the time Son 11% of the time Father 9.5% of the time Brother 8.8%
of the time Who else???
Slide 7
The Partnership Partnership is an association of two or more
people who co-own a business for the purpose of making profit.
Partnership Agreement is a document that states in writing all of
the terms of operating the partnership and protects the interest of
each partner.
Slide 8
A Partnership Agreement may include the following; Name of the
partnership Purpose of business Domicile of the business Duration
of the partnership Names of the partners and addresses
Contributions of each partner to the business How the profits and
losses will be distributed Salary details Expansion details
Slide 9
Advantages of Partnership Easy to establish (easy and
inexpensive) Complementary skills (two hands better than one)
Division of profits (according to the agreement) Larger pool of
capital Ability to attract limited partners Little governmental
regulation Flexibility Taxation
Slide 10
General Partners: partners who share in owning, operating and
managing a business and who have unlimited personal liability for
the partnerships debts. Limited Partners: partners who do not take
an active role in managing a business and whose liability for the
partnerships debts is limited to the amount they have
invested.
Slide 11
Disadvantages of Partnership Unlimited liability of at least
one partner Capital accumulation (cannot sell shares to generate
capital) Difficulty in disposing of partnership interest without
dissolving the partnership (if a partner dies or quits, new partner
will come in or gets bought over. Otherwise the business
dissolves.) Lack of continuity (death and inheritance of new
partner) Potential for personality and authority conflicts (like
marriage - compatibility)
Slide 12
Limited Partnerships A partnership composed of at least one
general partner and at least one limited partner. Same rules apply
as before The partner who is limited will only loose the amount
invested in the business if the things turn out for the worst.
Slide 13
Limited Liability Partnerships A special type of limited
partnership in which all partners are limited partners. They are
known as LLPs Usually limited to professionals such as attorneys,
dentists, accountants.
Slide 14
Master Limited Partnerships A partnership whose shares are
traded on stock exchange, just like a corporations.
Slide 15
Corporations Corporation is a separate legal entity apart from
its owners that receives the right to exist from the state in which
it is incorporated. Domestic Corporation: corporation doing
business in the state it is incorporated. Foreign Corporations:
corporation doing business in a state other than the one in which
it is incorporated. Alien Corporation: a corporation formed in
another country but doing business in a different country.
Slide 16
Advantages of Corporations Limited liability of Stockholders
Ability to attract capital Ability to continue indefinitely (unless
it fails) Transferable ownership (shares are easily sold)
Slide 17
Disadvantages of Corporations Cost and time involved in the
incorporations process Double taxation (corporates tax +
stockholders tax) Potential for diminished managerial incentives
(managers not having the same level of interest as the founder.
Profit sharing or stock ownership is exercised to beat this trait)
Legal requirements and regulatory red tape (annual reports and
legal reporting necessary) Potential loss of control by the
founder(s) (owners sell their stocks to gather capital but let of
part of their ownership) ie. Microsoft was a partnership between
Paul Allen and Bill Gates in 1975. Mr. Gates had 50% but they went
public to gather capital and as a result he was left with 18.5%
ownership.
Slide 18
The S Corporation This is the same as the regular C corporation
but allows the corporation a tax advantage by being taxed as a
Partnership, hence getting rid of double taxation. This is only
valid in the US. It has certain rules such as; Corporation must be
domestic Shareholders must be residents No more than 75
shareholders
Slide 19
Limited Liability Company (LLC) This is a cross between a
partnership and a corporation. All LLCs must have at least two
owners. LLCs offer limited liability to owners and also avoids
double taxation. Less paperwork compared to Corporations. However,
they are expensive to create. It is harder to raise capital from
investors due to limited liability.
Slide 20
Joint Venture In any endeavor in which neither party can
effectively achieve the purpose alone, a joint venture becomes a
common form of ownership. Joint venture is a business agreement in
which parties agree to develop, for a finite time, a new entity and
new assets by contributing equity. Example: Concert at a
underperforming farm!
Slide 21
Slide 22
FRANCHISING Franchising is the practice of using another firm's
successful, tried and tested business model. A system of
distribution in which semi-independent business owners
(Franchisees) pay fees and royalties to a parent company
(Franchiser) in return for the right to become identified with its
trademark, to sell its products or services and use its business
format.
Slide 23
Types of Franchising Trade name franchising purchases the right
to use the franchisers trade name. Product distribution franchising
licenses to sell franchisers products. (petrol stations) Pure
franchising buys the complete business format and system from the
franchiser. (McDonalds)
Slide 24
Benefits of buying a Franchise Management training and support
(McDonalds University) Brand name appeal (internationally
recognized golden arches) Standardized quality of goods and
services (years of reputation) National advertising programs
(benefits all franchisers must pay 1-5% monthly advertisement
costs) Financial assistance (initial costs can be so high that
franchisor usually offer financial assistance) Proven products and
business formats (tried and tested) Centralized buying power
(economies of scale) Site selection and territorial protection
(location, location, location) Greater chance for success (less
risky than starting from scratch)
Slide 25
Good site for current information;
http://www.entrepreneur.com/franchises/index.html
Slide 26
McDonalds
Slide 27
Subway
Slide 28
Slide 29
Drawbacks of buying a Franchise Franchise fees and profit
sharing Strict adherence to standardized operations (no autonomy)
Restrictions on purchasing (dictated what to buy) Limited product
line (cannot create your own) Unsatisfactory training programs (can
be a pitfall) Market saturation (close proximity) Less freedom
(reporting to a boss)
Slide 30
The right way to buy a Franchise Evaluate yourself Research
your market Consider your franchise options Talk to existing
franchisees Ask the franchiser some tough questions Make your
choice
Slide 31
Trends shaping Franchising 1970s Fast food restaurants used
this idea to grow rapidly. 1980s Economy shifted towards service
sector. 1990s Today Low cost franchising era.
Slide 32
Trends shaping Franchising Changing face of Franchises Better
educated franchisees who are more sophisticated, has more business
understanding and are more financially secure. International
opportunities Becoming major export industry and growing world
wide.
Slide 33
Trends shaping Franchising Non traditional locations Try to
build smaller and less expensive stores while utilizing intercept
marketing. Intercept marketing is the principle of putting the
franchises products or services directly in the patch of potential
customers wherever they may be. (airports) Conversion franchising a
trend in which the small business owners become franchisees to gain
the advantage of name recognition.
Slide 34
Multiple unit franchising this is a popular trend in which one
franchisee opens more than one store. (sometimes as much as 200
stores) Master franchising a method of franchising that gives a
franchisee the right to create a semi-independent organization in a
particular territory to recruit, sell and support other franchises.
Piggybacking (Combination franchising) Combining two or more
franchises under one roof. Eg. Serving aging baby boomers Time
saving businesses ideas are on the rise who serve the aging baby
boomers. Around Your Neck selling clothes to people at their work
or home.