*
Chapter Five
*
How to Form
a Business
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
BRIAN SCUDAMORE
*
Profile
1-800-GOT-JUNK?
*
• Bought a used truck and started Rubbish Boys,
later changed the name to
http://www.1800gotjunk.com.
• $130 million in annual earnings from locations
across North America and Australia.
• Expanded through franchising.
5-2
*
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.
5-3
FORMS of
BUSINESS OWNERSHIP
*
Basic Forms of
Business
Ownership
*
LG1
5-4
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
5-5
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
5-6
*
PROGRESS ASSESSMENT
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?
5-7
*
MAJOR TYPES of PARTNERSHIPS Partnerships
• General Partnership -- All owners share in
*
LG2
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.
5-8
*
OTHER FORMS of
PARTNERSHIPS
Partnerships
*
LG2
• 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.
5-9
*
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.
5-10
ADVANTAGES of
PARTNERSHIPS
*
Advantages &
Disadvantages
of Partnerships
LG2
*
• More financial resources
• Shared management and
pooled skills and
knowledge
• Longer survival
• No special taxes
5-11
DISADVANTAGES of
PARTNERSHIPS
*
Advantages &
Disadvantages
of Partnerships
LG2
*
• Unlimited liability
• Division of profits
• Difficult to terminate
• Disagreements among
partners
5-12
*
PICK YOUR PARTNER WISELY
(Spotlight on Small Business)
*
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?
5-13
*
PROGRESS ASSESSMENT
Progress
Assessment
*
• What’s the difference between a limited partner
and a general partner?
• What are some of the advantages and
disadvantages of partnerships?
5-14
CONVENTIONAL
CORPORATIONS
*
Corporations
LG3
*
• Conventional (C)
Corporation -- A statechartered legal entity with
authority to act and have
liability separate from its
owners (its stockholders).
5-15
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ADVANTAGES of
CORPORATIONS
Advantages of
Corporations
LG3
*
• Limited liability
• Ability to raise more money for investment
• Size
• Perpetual life
• Ease of ownership change
• Ease of attracting talented employees
• Separation of ownership from management
5-16
HOW OWNERS AFFECT
MANAGEMENT
*
Advantages of
Corporations
LG3
*
5-17
*
The BIG BOYS of BUSINESS
America’s Largest Corporations
Advantages of
Corporations
1.
Exxon Mobil
6.
General Motors
2.
Wal-Mart
7.
Ford
3.
Chevron
8.
AT&T
4.
ConocoPhillips
9.
Hewlett-Packard
5.
General Electric
10. Valero Energy
LG3
*
Source: Fortune, www.fortune.com, April 2009.
5-18
*
Advantages of
Corporations
PRIVACY PLEASE
The Ten Largest Private Corporations in the U.S.
LG3
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
*
Source: Forbes, www.forbes.com, November 2008.
5-19
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DISADVANTAGES of
CORPORATIONS
Disadvantages
of Corporations
LG3
*
• Initial cost
• Extensive paperwork
• Double taxation
• Two tax returns
• Size
• Difficulty of termination
• Possible conflict with stockholders and board of
directors
5-20
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WHO CAN INCORPORATE?
Individuals Can
Incorporate
LG3
*
• 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.
5-21
*
OLDIES BUT GOODIES
America’s Oldest Corporations
Individuals Can
Incorporate
LG3
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
*
5-22
*
S CORPORATIONS
S Corporations
*
LG3
• S Corporation -- A unique government creation that
looks like a corporation but is 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.
5-23
WHO CAN FORM
S CORPORATIONS?
*
S Corporations
*
LG3
• Qualifications for S Corporations:
-
•
Have no more than 100 shareholders.
Have shareholders that are individuals or estates and
are citizens or permanent residents of the U.S.
Have 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.
5-24
*
LIMITED LIABILITY COMPANIES
Limited Liability
Companies
LG3
*
• Limited Liability Company (LLC) -- Similar to a
S corporation but without the eligibility requirements.
• Advantages of LLCs:
-
Limited liability
Choice of taxation
Flexible ownership rules
Flexible distribution of profit and losses
Operating flexibility
5-25
*
DISADVANTAGES of LLCs
Limited Liability
Companies
LG3
*
• No stock, therefore ownership is nontransferable
• Limited life span
• Fewer incentives
• Taxes
• Paperwork
5-26
*
VERMONT WANTS to be the HOME
of YOUR NEW VIRTUAL COMPANY
(Legal Briefcase)
*
• 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.
5-27
*
PROGRESS ASSESSMENT
Progress
Assessment
*
• 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?
5-28
*
MERGERS and AQUISITIONS
Corporate
Expansion:
Mergers and
Acquisitions
*
LG4
• Merger -- The result of two firms joining to form one
company.
• Acquisition -- One company’s purchase of the
property and obligations of another company.
5-29
*
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.
5-30
*
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 from $50 million to $31
billion and have involved everything from small
businesses to giant corporations.
• In 2007, foreign investors poured $414 billion into
U.S. companies.
5-31
*
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.
• More than 900,000 franchised businesses
operate in the U.S., employing approximately 10
million people.
5-32
ADVANTAGES of FRANCHISING
*Advantages &
Disadvantages
of Franchises
LG5
*
• Management and marketing
assistance
• Personal ownership
• Nationally recognized name
• Financial advice and
assistance
• Lower failure rate
5-33
DISADVANTAGES of
FRANCHISING
*Advantages &
Disadvantages
of Franchises
LG5
*
• Large start-up costs
• Shared profit
• Management regulation
• Coattail effects
• Restrictions on selling
• Fraudulent franchisors
5-34
*
WOMEN in FRANCHISING
Diversity in
Franchising
LG5
*
• 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.
5-35
ROOT, ROOT, ROOT for the
GREEN TEAM
*
*
(Thinking Green)
• 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 lowflow toilets save millions of gallons of water.
• New stadiums of the Mets and Twins also have
earned LEED certifications.
5-36
*
HOME-BASED FRANCHISES
Home-Based
Franchises
LG5
*
Advantages:
• Relief from commuting stress
• Extra family time
• Low overhead expenses
Main Disadvantage:
• Isolation
5-37
GLOBAL FRANCHISING
*Franchising in
International
Markets
LG5
*
• 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.
5-38
WHAT to CHOOSE?
Picking Franchises that May Survive a Recession
*Franchising in
International
Markets
LG5
*
• 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.
Source: Richard Gibson, Wall Street Journal, www.wsj.com, February 12, 2008.
5-39
HIGH FLYERS
Ten High-Performing Franchises
1. Arthur Murray Dance Studios
2. Banfield Pet Hospitals
3. Bojangles’ Famous Chicken ‘n
Biscuits
4. Denny’s
5. Friendly’s
6. The Melting Pot
7. Nathan’s Famous
8. Servpro
9. Stanley Steamer
10. Two Men and a Truck
*Franchising in
International
Markets
LG5
*
Source: Wall Street Journal, www.wsj.com, February 12, 2008.
5-40
*
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 – 120 million in the U.S.
• Members democratically control the business by
electing a board of directors that hires
professional management.
5-41
*
PROGRESS ASSESSMENT
Progress
Assessment
*
• 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?
5-42