Entrepreneurship

© 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 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 adopted9


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


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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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. 20

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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Entrepreneurship

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Transcript of Entrepreneurship