8/19/2011. How to Form a Business BRIAN SCUDAMORE GOT-JUNK? MAJOR FORMS of OWNERSHIP

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1 Chapter Five How to Form a Business McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved. BRIAN SCUDAMORE GOT-JUNK? Bought a used truck and started Rubbish Boys, later changed the name to GOT-JUNK?. $130 million in annual earnings from locations across North America and Australia. Expanded through franchising. Profile 5-2 MAJOR FORMS of OWNERSHIP Sole Proprietorship -- A business owned, and usually managed, by one person. Basic Forms of Business Ownership LG1 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

2 FORMS of BUSINESS OWNERSHIP Basic Forms of Business Ownership LG1 5-4 MAJOR BENEFITS of SOLE PROPRIETORSHIP Ease of starting and ending the business Being your own boss Pride of ownership Leaving a legacy Retention of company profit No special taxes Advantages of Sole Proprietorships LG1 5-5 DISADVANTAGES of SOLE PROPRIETORSHIPS 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 Disadvantages of Sole Proprietorships LG

3 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 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. LG2 5-8 OTHER FORMS of PARTNERSHIPS 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. LG

4 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 More financial resources Shared management and pooled skills and knowledge Longer survival No special taxes ADVANTAGES of PARTNERSHIPS Advantages & Disadvantages of Partnerships LG DISADVANTAGES of PARTNERSHIPS Advantages & Disadvantages of Partnerships LG2 Unlimited liability Division of profits Difficult to terminate Disagreements among partners

5 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 Conventional (C) Corporation -- A statechartered legal entity with authority to act and have liability separate from its owners (its stockholders)

6 Limited liability Ability to raise more money for investment Size Perpetual life ADVANTAGES of CORPORATIONS Ease of ownership change Ease of attracting talented employees Separation of ownership from management Advantages of Corporations 5-16 HOW OWNERS AFFECT MANAGEMENT Advantages of Corporations 5-17 The BIG BOYS of BUSINESS America s Largest Corporations Advantages of Corporations 1. Wal-Mart 2. Exxon Mobil 3. Chevron 4. General Electric 5. Bank of America 6. ConocoPhillips 7. AT&T 8. Ford Motor 9. J.P. Morgan Chase 10. Hewlett-Packard Source: Fortune, accessed September

7 PRIVACY PLEASE The Ten Largest Private Corporations in the U.S. Company State Industry Cargill MN Farming Koch Industries KS Chemicals Chrysler MI NY Automobiles GMAC Financial Services MI Financial Bechtel CA Construction Mars VA Food HCA TN Hospitals PricewaterhouseCoopers NY Business Services Publix Supermarkets FL Grocery Ernst & Young NY Business Services Advantages of Corporations Source: Forbes, accessed September Initial cost Extensive paperwork Double taxation Two tax returns Size DISADVANTAGES of CORPORATIONS Difficulty of termination Possible conflict with stockholders and board of directors Disadvantages of Corporations 5-20 WHO 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. Individuals Can Incorporate

8 OLDIES BUT GOODIES America s Oldest Corporations 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 5-22 S CORPORATIONS S Corporations 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 WHO CAN FORM S CORPORATIONS? Qualifications for S Corporations: 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

9 LIMITED LIABILITY COMPANIES Limited Liability Companies 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 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

10 PROGRESS ASSESSMENT What are the major advantages and disadvantages of incorporating a business? Progress Assessment 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 TYPES of MERGERS Vertical Merger -- Joins two firms in different stages of related business. Corporate Expansion: Mergers and Acquisitions LG4 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

11 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 FRANCHISING 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 ADVANTAGES of FRANCHISING Management and marketing assistance Personal ownership Nationally recognized name Financial advice and assistance Lower failure rate Advantages & Disadvantages of Franchises

12 Large start-up costs Shared profit Management regulation Coattail effects DISADVANTAGES of FRANCHISING Restrictions on selling Fraudulent franchisors Advantages & Disadvantages of Franchises 5-34 WOMEN in FRANCHISING Women own about half of U.S. companies yet receive less than 4% of venture capital. Diversity in Franchising 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 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

13 HOME-BASED FRANCHISES Advantages: Relief from commuting stress Extra family time Low overhead expenses Main Disadvantage: Isolation Home-Based Franchises 5-37 GLOBAL FRANCHISING 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 WHAT to CHOOSE? Picking Franchises that May Survive a Recession 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 Source: Richard Gibson, Wall Street Journal, February 12,

14 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 Source: Wall Street Journal, accessed September COOPERATIVES 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. LG6 Members democratically control the business by electing a board of directors that hires professional management 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?