BUS110 Chap 5 - How to Form a Business

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*Chapter Five

How to Form a Business

Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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• Bought a used truck and started Rubbish Boys, later changed the name to 1-800-GOT-JUNK?.

• $130 million in annual earnings from locations across North America and Australia.

• Expanded through franchising.

ProfileBRIAN SCUDAMORE1-800-GOT-JUNK?

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*Basic Forms of Business Ownership

• Sole Proprietorship – • Business owned, and usually managed, by one

person.• Partnership –

• Two or more people legally agree to become co-owners of a business.

• Corporation – • Legal entity with authority to act and have

liability apart from its owners.

MAJOR FORMS of OWNERSHIPLG1

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*Basic Forms of Business Ownership

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FORMS of BUSINESS OWNERSHIP

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*Advantages of Sole ProprietorshipsSOLE PROPRIETORSHIPS

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AdvantagesAdvantages DisadvantagesDisadvantages

Ease of start/endEase of start/end

Be your own bossBe your own boss

Pride of ownershipPride of ownership

Leave a legacyLeave a legacy

Retain profitRetain profit

No special taxesNo special taxes

• Unlimited liabilityUnlimited liability• Limited financial Limited financial

resourcesresources• Management difficultyManagement difficulty• Time commitmentTime commitment• Few fringe benefitsFew fringe benefits• Limited growthLimited growth• Limited life spanLimited life span

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*Partnerships

• General Partnership –

• 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.

MAJOR TYPES of PARTNERSHIPSLG2

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*Partnerships

• General Partner – • Unlimited liability and is active in managing the

firm.

• Limited Partner – • Invests money in the business but enjoys limited

liability.

• liability for debts is limited to amount limited partner puts into company; personal assets not at risk.

TYPES OF PARTNERSLG2

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*Partnerships

TYPES of PARTNERSHIPSLG2

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GeneraGenerall

LimiteLimitedd

GPGP

GPGP

GPGP

GPGPGPGP

PassivePassiveInvestorInvestor

PassivePassiveInvestoInvestorr

PassivePassiveInvestorInvestor

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*Advantages & Disadvantages of PartnershipsPARTNERSHIPS

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AdvantagesAdvantages DisadvantagesDisadvantages• More financial More financial resourcesresources• Shared Shared managementmanagement

• Longer survivalLonger survival• No Special No Special TaxesTaxes

• Unlimited Unlimited liabilityliability

• Division of Division of profitsprofits

• DisagreementsDisagreements among among partnerspartners

• Difficult to Difficult to terminateterminate

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There is no such thing as a perfect partner but ask these questions when you try to find your best match:

• Do you share the same goals?• Do you share the same vision for the company?• What skills does he/she have? Are yours the same?• What can he/she bring to the business?• What type of decision maker is he/she?• Do you trust each other?• How does he/she problem solve?

PICK YOUR PARTNER WISELY(Spotlight on Small Business)

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*Corporations

• Conventional (C) Corporation – • State-chartered legal

entity • Authority to act and have

liability separate from owners (stockholders).

CONVENTIONAL CORPORATIONS LG3

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*Advantages of CorporationsCORPORATIONS

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AdvantagesAdvantages DisadvantagesDisadvantages• Limited liabilityLimited liability• More money for More money for investmentinvestment• SizeSize• Perpetual lifePerpetual life• Ease of ownershipEase of ownership changechange• Ease of drawing Ease of drawing talented talented employeesemployees• Separation ofSeparation of ownership/mgmt.ownership/mgmt.

• Extensive Extensive paperworkpaperwork• Double taxationDouble taxation• Two tax returnsTwo tax returns• SizeSize• Termination Termination difficultdifficult• Conflict with Conflict with Stockholder & Stockholder & Board Board • Initial costInitial cost

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*Advantages of Corporations

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HOW OWNERS AFFECT MANAGEMENT

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Source: Fortune, www.fortune.com, April 2009.

1. Exxon Mobil

2. Wal-Mart

3. Chevron

4. ConocoPhillips

5. General Electric

Advantages of CorporationsThe BIG BOYS of BUSINESS

America’s Largest CorporationsLG3

6. General Motors

7. Ford

8. AT&T

9. Hewlett-Packard

10. Valero Energy

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Source: Forbes, www.forbes.com, November 2008.

Advantages of Corporations

Company State Industry

Cargill MN Farming

Koch Industries KS Chemicals

Chrysler MI Automobiles

GMAC Financial Services MI Financial

PricewaterhouseCoopers NY Business Services

Mars VA Food

Bechtel CA Construction

HCA TN Hospitals

Ernst & Young NY Business Services

Publix Supermarkets FL Grocery

PRIVACY PLEASEThe Ten Largest Private Corporations in the U.S.

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*Individuals Can Incorporate

• Anyone - truckers, doctors, plumbers, athletes and small business owners can incorporate.

• Normally, stock is not issued when individuals incorporate so the advantages and disadvantages are not exactly the same as for large corporations.

• Major advantages are limited liability and possible tax benefits.

WHO CAN INCORPORATE?LG3

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*S Corporations

• S Corporation – • Unique government creation • looks like a corporation • taxed like sole proprietorships and partnerships.• S corporations have shareholders, directors

and employees, plus the benefit of limited liability.

• Profits are taxed only as the personal income of the shareholder.

S CORPORATIONSLG3

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*S Corporations

• Qualifications for S Corporations:- No more than 100 shareholders.- Shareholders are individuals or estates and are

citizens or permanent residents of the U.S.- Only one class of stock.- Derive no more than 25% of income from passive

sources.

• If an S corporation loses its S status, it may not operate under it again for at least 5 years.

WHO CAN FORM S CORPORATIONS? LG3

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*Limited Liability Companies

LIMITED LIABILITY COMPANIESLG3

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Limited LiabilityLimited Liability

Tax ChoiceTax Choice

Flexible Ownership Flexible Ownership RulesRules

Flexible Profit & Loss Flexible Profit & Loss DistributionDistribution

Operating FlexibilityOperating Flexibility

• No StockNo Stock

• Limited Life SpanLimited Life Span

• Fewer IncentivesFewer Incentives

• TaxesTaxes

• PaperworkPaperwork

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*Corporate Expansion: Mergers and Acquisitions

• Merger -- The result of two firms joining to form one company.

• Acquisition -- One company’s purchase of the property and obligations of another company.

MERGERS and AQUISITIONSLG4

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TYPES of MERGERSLG4

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Conglomerate – completely unrelated industries

Vertical – different stages of related business.

Horizontal – same stage of same industry

No Relationship

between companies

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• Leveraged Buyout (LBO) – • An attempt by employees, management or a

group of investors to buy out the stockholders in a company.

• Range in size from $50 million to $31 billion and from small businesses to giant corporations.

• In 2007, foreign investors poured $414 billion into U.S. companies.

LEVERAGED BUYOUTSLG4

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*Franchises

• 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.

• More than 900,000 franchised businesses operate in the U.S., employing approximately 10 million people.

FRANCHISINGLG5

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*Advantages & Disadvantages of Franchises

FRANCHISINGLG5

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Management & marketing Management & marketing assistanceassistance

Personal ownershipPersonal ownership

Recognized nameRecognized name

Financial advice & Financial advice & assistanceassistance

Lower failure rateLower failure rate

High start-up costsHigh start-up costsShared ProfitShared Profit

Management regulationManagement regulationCoattail effectsCoattail effects

Restrictions on sellingRestrictions on sellingFraudulent franchisorsFraudulent franchisors

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*Franchising in International Markets

• Canada is the most popular target for U.S. based franchises; South Africa and the Philippines are becoming popular despite high cost.

• Franchising is successful when the product is convenient, high quality, great service is included and the franchisee adapts to the region.

• International franchising goes both ways – some foreign franchises have come to the U.S.

GLOBAL FRANCHISINGLG5

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Source: Richard Gibson, Wall Street Journal, www.wsj.com, February 12, 2008.

• Focus on tried-and-true name brands.• Stick to core goods and services.• Be choosy about the site.• Don’t pinch pennies.• Have a fallback choice.• Don’t assume the franchise will pay off.

Franchising in International Markets

WHAT to CHOOSE?Picking Franchises that May Survive a Recession

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Source: Wall Street Journal, www.wsj.com, February 12, 2008.

1. Arthur Murray Dance Studios2. Banfield Pet Hospitals3. Bojangles’ Famous Chicken ‘n

Biscuits4. Denny’s5. Friendly’s6. The Melting Pot7. Nathan’s Famous8. Servpro9. Stanley Steamer10.Two Men and a Truck

Franchising in International Markets

HIGH FLYERSTen High-Performing Franchises

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*Cooperatives

• Cooperatives -- Businesses owned and controlled by the people who use it – producers, consumers, or workers with similar needs who pool their resources for mutual gain.

• Worldwide, 750,000 cooperatives serve 730 million members – 120 million in the U.S.

• Members democratically control the business by electing a board of directors that hires professional management.

COOPERATIVESLG6

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Review Only

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*Partnerships

• Master Limited Partnership -- A partnership that looks much like a corporation but is taxed like a partnership and thus avoids the corporate income tax.

• Limited Liability Partnership -- Limits partners’ risk of losing their personal assets to the outcomes of only their own acts and omissions and those of people under their supervision.

OTHER FORMS of PARTNERSHIPS LG2

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*Individuals Can Incorporate

Company Year Started Type of Company

J.E. Rhoads & Sons 1702 Conveyer Belts

Covenant Life Insurance 1717 Insurance

Philadelphia Insurance 1752 Insurance Contributorship

Dexter 1767 Adhesives & Coatings

D. Landreth Seed 1784 Seeds

Bank of New York 1784 Banking

OLDIES BUT GOODIESAmerica’s Oldest Corporations

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• Since June 2008, Vermont allows a new kind of LLC that exist only online.

• Registration documents can be filed online, meetings can be held through online communication, and relationships can be established electronically.

• Virtual companies allow online contributors with different skills, availability and interest to interact and be successful.

VERMONT WANTS to be the HOME of YOUR NEW VIRTUAL COMPANY

(Legal Briefcase)

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*Diversity in Franchising

• Women own about half of U.S. companies yet receive less than 4% of venture capital.

• For the past 20 years, firms owned by women have grown at twice the rate of all companies.

• More women are becoming franchisors. Auntie Anne’s, Decorating Den, Jazzercise and Two Men and a Truck are owned by women.

WOMEN in FRANCHISINGLG5

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*Home-Based Franchises

Advantages:• Relief from commuting stress• Extra family time• Low overhead expenses

Main Disadvantage:• Isolation

HOME-BASED FRANCHISESLG5

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• The Nationals in D.C. have the first sports stadium to earn the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) Rating.

• 95% of the stadium’s steel was recycled and low-flow toilets save millions of gallons of water.

• New stadiums of the Mets and Twins also have earned LEED certifications.

ROOT, ROOT, ROOT for the GREEN TEAM

(Thinking Green)

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*Progress Assessment

• 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?

PROGRESS ASSESSMENT

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• What are some of the factors to consider before buying a franchise?

• What opportunities are available for starting a global franchise?

• What’s a cooperative?

PROGRESS ASSESSMENT

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• What’s the difference between a limited partner and a general partner?

• What are some of the advantages and disadvantages of partnerships?

PROGRESS ASSESSMENT

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• 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?

PROGRESS ASSESSMENT

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BUS110 Chap 5 - How to Form a Business

Business

Transcript of BUS110 Chap 5 - How to Form a Business