Intro bus chapt 6 power point

© 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e s c a n n e d , c o p i e d o r d u p l i c a t e d , o r p o s t e d t o a p u b l i c l y a c c e s s i b l e w e b s i t e , i n w h o l e o r i n p a r t .

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Business Formation:Choosing The Form That Fits

LO1 What are the characteristics of the four basic forms of business ownership?

LO2 What are the advantages and disadvantages of a sole proprietorship?

LO3 What are the pros and cons of partnerships?

LO4 Why have corporations become the dominant form of business ownership?

LO5 Why are limited liability companies becoming an increasingly popular form of ownership?

LO6 What are the advantages and disadvantages of franchising?


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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Net Income by Form of Ownership

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Corporate Profit and Revenue

• Corporate form of ownership reports 66% of profits; representing only 18.3% of all entities

• Companies like Walmart, Exxon, Apple and General Electric have annual sales revenues in the billions (hundreds of billions)

• But, 24% of all corporations report revenue less than $25,000

Source: U.S. Census Bureau. The 2011Statistical Abstract of the United States Tables 743 and 744: http://www.census.gov/compendia/statab/2011/tables/11s0744.pdf, accessed January 23, 2011.


Advantages and Disadvantages of Sole Proprietorships

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Disadvantages: Limited Financial

Resources

Unlimited Liability

Limited ability to attract and maintain talented employees

Heavy workload and responsibilities

Lack of Permanence

Advantages: Ease of Formation

Retention of Control

Pride of Ownership

Retention of Profits

Possible Tax Advantages

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General Partnerships: Two Heads Can Be Better Than One

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Advantages: Pooled Financial Resources

Shared Responsibilities

Ease of Formation

Tax Advantages

Disadvantages: Unlimited Liability

Disagreements

Lack of Continuity

Difficulty in withdrawing from agreement


Limited Partnerships

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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.©Jose Luis Pelaez Inc/Blend Images/Jupiterimages


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The Name Game

©Oliver Suckling/Shutterstock.com

Source: Naming Your Business, Business Owner’s Toolkit website, http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P01_4800; Choosing the Right Name for My Corporation or Limited Liability Company, SCORE website, http://www.score.org/leg_choosing_name.html; Business Name Registration (Doing Business As), Business.gov website, http://www.business.gov/register/business-name/dba.html

• Choosing a name depends on the type of business

• Most sole proprietorships and general partnerships operate under their names

• Must confirm name (or similar) is not being used

• Many states required a DBA (doing business as) be filed

• Corporations must be filed with the state and use special wording Corporation, incorporated, company, limited or an abbreviation The words bank or cooperative cannot be used unless approved by a

regulatory agency


Corporations: An Artificial Person

• Most common type of corporation is a “C” corporation

• A corporation is a legal entity, separate from its owners

• Requirements vary by state, many states are “corporation-friendly”

• Corporations are owned by stockholders• Articles of incorporations must be filed and

corporate bylaws adopted10


Stock Ownership in Major Corporations

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Corporations: The Role of Board of Directors

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• Elected by stockholders to oversee the operation of their company and protect their interests

• 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

© Timm Schamberger/AFP/Getty Images


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Form of Business Aims for Social Responsibility

• Maryland created new business form: benefit corporation

• Like a C Corporation but includes provisions for social/environmental goals

• They are not nonprofits, they are legally covered to focus on non-financial goals

• Priority to employees, customers, environmentalistsSource: “Maryland Signs Benefit Corporation Law,” by Tasha Petty, Little Green Submarine website, http://www.littlegreensubmarine.com/maryland-signs-benefit-corporation-law/; “Maryland First State in Union to Pass Benefit Corporation Legislation,” CSR Newswire website, http://www.csrwire.com/press/press_release/29332-Maryland-First-State-in-Union-to-Pass-Benefit-Corporation-Legislation.

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Advantages and Disadvantages of Corporations

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Disadvantages:• Expense/complexity of

formation and operation

• Double Taxation

• Paperwork and Regulation

• Complications when operating in more than one state

• Conflicts of Interest

Advantages:• Limited Liability

• Permanence

• Easy to Transfer Ownership

• Ability to Raise Capital

• Specialized Management


Other Types of Corporations: Same but Different

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TYPE KEY ADVANTAGE LIMITATIONSS 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


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Stockholders Get “Say on Pay”

• Board of Directors’ job is to protect the voice of the stockholders

• The Recession of 2008/2009 brought that oversight into question regarding CEO Pay

• CEOs were enjoying high salaries and perks while laying off workers

• Congress passed the Dodd-Frank Act which gives stockholders “some” voice in executive compensation

©Arcady/ Shutterstock.com

Source: “New Law Has Effect on Pay for Executives” by David Nicklaus, St. Louis Post Dispatch, page B1, January 7, 2007; Dodd-Frank's 'say on pay' could impact executive pay by Ronald D. Orol, Marketwatch Website: http://www.marketwatch.com/story/new-say-on-pay-law-could-temper-ceo-pay-2010-08-26; Dodd-Frank: What it Means for Comp and Governance by Daniel J. Ryterband, Bloomberg BusinessWeek website: http://www.businessweek.com/managing/content/jul2010/ca20100716_567635.htm.


Corporate Restructuring: Mergers & Acquisitions

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Large corporations constantly look for ways to grow and

achieve competitive advantage.

Mergers – two companies agree to a combination of

equals

Acquisitions – when one firm buys another

©Tom Merton/OJO Images/Jupiterimages


Types of Mergers & Acquisitions

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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 investors19


The Limited Liability Company: The New Kid on the Block

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Advantages:• Limited Liability

• Tax Pass-Through

• Simplified Management and Operation

• Flexible Ownership

Disadvantages:• Complexity of Formation

• Franchise Taxes

• Foreign Status in other States

• Limited to Select Industries

• State Law Differences


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Which Would You Choose?

• Which business form would be best for each of the following businesses types? T-Shirt/Screen Printing Restaurant Beauty Salon Landscaping Home/Office Cleaning

• What if the business expanded, would you change the form?

• Would you consider a franchise for any of these businesses? What business form would you choose for a franchise?


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Franchising: Proven Methods for a Price

• The franchisee uses the brand name, trademark and practices of the franchisor

• Growth in women franchises

• Minority participation has increased under new initiatives

• A well-established method for operating a business

Source: Fit for Franchising, by Taylor Mallory, Pink Magazine June/July 2007, pinkmagazine.com website: http://www.pinkmagazine.com/franchise/women/2007/burzynski.html; Franchising Attracts More Women, Minorities by Julie Bennett, Startup Journal, accessed through Entrepreneur.com website: http://www.entrepreneur.com/franchises/franchisezone/startupjournal/article61324.html; Female Franchisors Few and Far Between by Julie M. Young, e-magnify.com website: https://www.e-magnify.com/resources_articlearchiveresults.asp?categoryID=18; Fit to Be a Franchisee: Many Businesswomen Choose Franchises that Connect With Personal Interests by Nancy Lacewell, June 7, 2006 Business First of Louisville website: http://www.bizjournals.com/louisville/stories/2006/05/22/story2.html.. Boosting Diversity in Franchising by Joan Szabo, December 5, 2006, Franchise Update website: http://www.franchise-update.com/article/188/. Bridging the Gap Between the Minority Community and the Franchising Industry, Minority Franchising website: http://www.minorityfranchising.com/, accessed January 20, 2011; MinorityFran, International Franchise Association website: http://www.franchise.org/files/MinorityFran%20Broch%20by%20page.pdf, accessed January 20, 2011.

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Franchising in Foreign Markets

© Karen Cowled/Alamy

• Franchising in foreign markets have shown great opportunities for growth

• Markets are less intense and less saturated McDonald’s 12,693

Subway 7,235

Curves 2,868

• McDonald’s has slightly more franchises in foreign countries than the U.S. 23

Source: Entrepreneur.com website pages for individual franchisors: http://www.entrepreneur.com/franchises/mcdonalds/282570-0.html; http://www.entrepreneur.com/franchises/subway/282839-0.html; http://www.entrepreneur.com/franchises/curves/282265-0.html, accessed January 22, 2011.


Advantages and Disadvantages of Franchising

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Disadvantages:Costs

Lack of Control

Negative Halo Effect

Growth Challenges

Restriction on Sale

Poor Execution

Advantages:Less Risk

Training and Support

Brand Recognition

Access to Funding


Franchising Costs

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Some Franchisees Are Quite Happy When They Don’t Earn Profit

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Many customers like doing business with nonprofit franchisees.

Nonprofit franchising is a good way for companies to be socially responsible and build goodwill.

Nonprofits can boost their fundraising efforts.

Ben & Jerry franchises its PartnerShops to nonprofit

corporations.

Source: “The Ben & Jerry’s Law: Principles Before Profit,” by John Tozzi, Bloomberg Business Week, April 26, 2010, pp. 65-66. Ben & Jerry’s website, http://www.benjerry.com/scoop_shops/partnershops/, accessed August 2, 2009; Nonprofit Owned Franchises: A Strategic Business Approach, prepared by Community Wealth Ventures and IFA Educational Foundation, March 2004

© David Lee/Alamy


Entering Into A Franchise Agreement

• Know all the facts before signing the dotted line: Terms and Conditions Fees and Other Payments Training and Support Specific Operational Requirements Conflict Resolution Assigned Territory

• Franchisors must provide a Franchise Disclosure Document (FDD)

• The Federal Trade Commission (FTC) require: The FDD must be written in plain English The franchisor must be given 14 days to review the FDD The Franchisee should have a lawyer review the document

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Looking Back• What are the characteristics of the four basic forms of business ownership?

• 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 an increasingly popular form of ownership?

• What are the advantages and disadvantages of franchising?