*

Chapter Five

*
How to Form
a Business

McGraw-Hill/Irwin

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

MAJOR FORMS of OWNERSHIP

Basic Forms of
Business
Ownership

LG1

Sole Proprietorship -- A business owned, and

usually managed, by one person.

Partnership -- Two or more people legally agree to

become co-owners of a business.

Corporation -- A legal entity with authority to act

and have liability apart from its owners.

5-2

FORMS of
BUSINESS OWNERSHIP

Basic Forms of
Business
Ownership

LG1

5-3

MAJOR BENEFITS of SOLE

PROPRIETORSHIP

*Advantages of

Sole
Proprietorships
LG1

Ease of starting and

ending the business
Being your own boss
Pride of ownership
Leaving a legacy
Retention of company
profit
No special taxes
5-4

DISADVANTAGES of SOLE
PROPRIETORSHIPS

*Disadvantages

of Sole
Proprietorships
LG1

Unlimited Liability -- Any debts or damages

incurred by the business are your debts, even if it

means selling your home, car or anything else.

Limited financial resources

Management difficulties
Overwhelming time commitment
Few fringe benefits
Limited growth
Limited life span
5-5

MAJOR TYPES of PARTNERSHIPS Partnerships

General Partnership -- All owners share in

LG2

operating the business and in assuming liability for

the businesss debts.

Limited Partnership -- A partnership with one or

more general partners and one or more limited
partners.

5-6

*
TYPES OF PARTNERS

Partnerships

LG2

General Partner -- An owner (partner) who has

unlimited liability and is active in managing the firm.

Limited Partner -- An owner who invests money in

the business but enjoys limited liability

Limited Liability means that liability for the debts

of the business is limited to the amount the limited
partner puts into the company; personal assets are
not at risk.

5-7

ADVANTAGES of
PARTNERSHIPS

Advantages &
Disadvantages
of Partnerships

LG2

More financial resources

Shared management and
pooled skills and
knowledge
Longer survival
No special taxes

5-8

DISADVANTAGES of
PARTNERSHIPS

Advantages &
Disadvantages
of Partnerships

LG2

Unlimited liability
Division of profits
Disagreements among
partners
Difficult to terminate

5-9

CONVENTIONAL
CORPORATIONS

*
Corporations
LG3

Conventional Corporation A legal entity with authority to

act and have liability
separate from its owners (its
stockholders).

5-10

ADVANTAGES of
CORPORATIONS

Advantages of
Corporations
LG3

Limited liability
Ability to raise more money for investment
Size and economies of scale
Perpetual life
Ease of ownership change
Ease of attracting talented employees
Separation of ownership from management

5-11

HOW OWNERS AFFECT

MANAGEMENT

Advantages of
Corporations
LG3

5-12

DISADVANTAGES of
CORPORATIONS

Disadvantages
of Corporations
LG3

Initial cost
Extensive paperwork
Double taxation (in the U.S.)
Size and less flexibility
Difficulty of termination
Possible conflict with stockholders and board of
directors

5-13

MERGERS and AQUISITIONS

Corporate
Expansion:
Mergers and
Acquisitions

LG4

Merger -- The result of two firms joining to form

one company.

Acquisition -- One companys purchase of the

property and obligations of another company.

Synergy Effect the combination of two to

produce a result greater than the sum of their
individual effects.

5-14

TYPES of MERGERS

Corporate
Expansion:
Mergers and
Acquisitions

LG4

Vertical Merger -- Joins two firms in different stages

of related business.

Horizontal Merger -- Joins two firms in the same

industry and allows them to diversify or expand their

products.

Conglomerate Merger -- Unites firms in completely

unrelated industries in order to diversify business
operations and investments.

5-15

LEVERAGED BUYOUTS

Corporate
Expansion:
Mergers and
Acquisitions

LG4

Leveraged Buyout (LBO) -- An attempt by

employees, management or a group of investors to

buy out the stockholders in a company.

LBOs have ranged in size and have involved

everything from small businesses to giant
corporations.

5-16

FRANCHISING

*
Franchises
LG5

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.

Currently, more than 825,000 franchised

businesses operate in the U.S., creating
approximately 17.5 million jobs.
Examples like fast food restaurants and
convenience stores
5-17

ADVANTAGES of FRANCHISING

*Advantages &

Disadvantages
of Franchises
LG5

Management and marketing

assistance
Personal ownership
Nationally recognized name
Financial advice and
assistance
Lower failure rate

5-18

DISADVANTAGES of
FRANCHISING

*Advantages &

Disadvantages
of Franchises
LG5

Large start-up costs

Shared profit
Management regulation
Coattail effects
Restrictions on selling
Fraudulent franchisors

5-19

New Development in Franchising Home-Based

Franchises
LG5

* Diversity in franchising and increasing

involvement of women and minority
Home-based franchising, via E-commence
Use of new technology (in promotion and
dissemination of information)

Growing of International franchising (e.g.

McDanalds has more than 13,500
restaurants in 117 countries)
5-20

COOPERATIVES

*
Cooperatives
LG6

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.
Members democratically control the business by
electing a board of directors that hires
professional management.
5-21