*

Chapter Five

*
How to Form a
Business?
 Basic Forms of Ownership: Global Practice

• Sole Proprietorship
• Partnership
• Corporation (for profit)
• Nonprofit Corporation
(not-for-profit)
• Cooperative
• Franchises
 Basic Forms of Ownership

• Sole Proprietorship: A business that is owned, and usually managed, by any

person.

• Partnership: A legal form of Business with two or more owners.

• Corporation: A legal entity with authority to act and have liability apart from its
owners.

• Cooperatives: Some people dream of forming a business of true equals --an

organization owned and operated democratically by its members. These grassroots
business organizers often refer to their businesses as a "group," "collective," or "co-
op“ --but these are often informal rather than legal labels.

For example, a consumer co-op could be formed to run a food store, a bookstore, or any
other retail business. Or a workers' co-op could be created to manufacture and sell
arts and crafts
 Basic Forms of Ownership

• Nonprofit Corporations:
– A nonprofit corporation is a corporation formed to carry out a
charitable, educational, religious, literary, or scientific purpose.
– A nonprofit can raise much-needed funds by soliciting public and
private grant money and donations from individuals and companies.

• Franchise:
The right to use a specific business’s name and sell its products or
services in a given territory.
• Franchisor: The firm which allows franchisee to use the brand name.
• Franchisee: A person who buys a franchise.
 Basic Forms of Ownership: Worldwide

Number Sales
• Sole Proprietorship
74% 5%

• Partnership
8% 5%
• Corporation
18% 90%
 *Advantages of
MAJOR BENEFITS of SOLE Sole
Proprietorships
PROPRIETORSHIP LG1
*
• Ease of starting and
ending the business
• Being your own boss
(Excitement as working yourself..)

• Pride of ownership
• Leaving a legacy (Ongoing
business for next generation…)

• Retention of company
profit (Profits & increased value…)
• No special taxes (taxed on the
personal income of the owner..)
5-6
 *Disadvantages
DISADVANTAGES of SOLE of Sole
Proprietorships
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 [No health insurance, no pension plan, no sick leave and no
vacation pay….]

• Limited growth
• Limited life span
5-7
 Types of Partnerships

General Limited

GP
Passive Passive
GP Investor
GP Investor
GP
GP

Passive
Investor

LP (Limited Partner): One or more GPs and One or more LPs.

 *
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.

• Joint Ventures- Act as general partnership, but for only a

limited period of time or for a single project. Partners in a
joint venture can be recognized as an ongoing partnership if
they continue the venture, but they must file as such

5-9
 *
Advantages &
Disadvantages
ADVANTAGES of PARTNERSHIPS of Partnerships
LG2
*
• More financial resources
• Shared management and
pooled skills and
knowledge
• Longer survival
• No special taxes (Only on personal
Income…)

5-10
 *
Advantages &
DISADVANTAGES of PARTNERSHIPS Disadvantages
of Partnerships

• Unlimited liability LG2

*
 (For GPs like Sole Proprietorships…)

• Division of profits
• Difficult to terminate
• Who gets what amount?

• How benefits will be distributed and what

proportion?

• Disagreements among
partners
• Who gets authority over employees?

• Who hires and fires employees?

• Who works what hours?

5-11
a. Company Limited by Shares
– i. Public Limited Company and
– Ii. Private Limited Company

b. Company Limited by Guarantees

is private company, very like a private company limited by shares, but it does not have a share
capital. It is widely used for charities, clubs, community enterprises and some co-
operatives. The vast majority of such companies are non-profit distributing, but they do
not have to be.

c. Unlimited Company
Many people refer to a sole trader's business or a partnership as an unlimited company, but
such businesses are not in fact companies. Unlimited companies are a fairly rare type of
corporation aggregate as each member is jointly and severally liable for the debts of the
company in the event of its winding-up. The incorporation of an unlimited company may be
suitable where limited liability is not essential but perpetual succession is important. An
unlimited company does not have to file accounts with the registrar of companies , unless it is
the parent or subsidiary of an undertaking whose member’s liability is limited at that time .An
unlimited company may or may not have a share capital.
 Corporation

Advantages Disadvantages

More money for Initial cost

investment Paperwork
Limited liability Two tax returns
Separation of Termination difficult
ownership/mgmt. Double taxation
Ease of ownership change
Perpetual life
Size
 List of Conglomerates in Bangladesh
Abul Khair Group, cement, steel, consumer goods, tobacco
Advanced Chemical Industries (ACI), chemicals, foods, pharma, consumer products, logistics,
consumer electronics, automobile services, communication
Akij, textiles, tobacco, cement, ceramics, printing, pharma, consumer products
Ananda Group, ship building, heavy engineering, textiles, real estate, shipping
Bashundhara Group, property development, cement, paper, steel, food
Beximco, pharmaceuticals, textiles, ceramics, aviation, media, finance, real estate, construction
City Group, consumer goods, foods, steel, printing & packaging, shipping, power & energy
Concord Group, construction, real estate, architecture & design, communication, entertainment,
hospitality, garments
Globe Janakantha Shilpa Paribar, construction, engineering, electrical cables, information
technology, printing, media
Grameen, banking, telecom, software, fisheries
Habib Group, aviation, cement, paper, energy, steel, textile
Jamuna Group, textiles, chemicals, construction, leather, engineering, beverages, media,
advertisement
Meghna Group, automobile, engineering (bicycle), cement, packaging, textile
Meghna Group of Industries, chemicals, foods and beverages, printing and packaging, shipping,
insurance
MGH group, logistics, supply chain management, aviation services, food & beverage, distribution,
shipping, information technology, media, entertainment
 The Incorporation Process of a
company
• Select company’s name
• Write articles of incorporation
• Pay required fees and taxes
• Hold organizational meeting
• Adopt bylaws, elect directors, pass operating
resolutions
Figure-How Owners Affect Management
 Cooperatives
• Cooperatives: Legal entities formed by people with
similar interests, to reduce costs and gain economic
power. Businesses owned and controlled by the
people who use it – producers, consumers, or
workers with similar needs who pool their
resources for mutual gain.

• Seller Cooperatives: Individual producers join

together to compete more effectively with
large producers.
• Buyer Cooperatives: A group of cooperative members
who unite for combined purchasing power.
 MERGERS AND ACQUISITIONS
• Merger: The combination of two or more firms to
form a new company, which often takes on a new
corporate identity. In a merger, two companies agree
to combine their operations into a single entity.

• Acquisition: The purchase of a corporation by another

corporation or investor group. In an acquisition, one
company purchases another company, and has the
right to sell off operations, merge them into similar
groups in the purchasing company, or close facilities or
cancel products altogether.
 Why Merge?
Companies would choose to merge together for different reasons:
• The combined entity would be larger, and have corresponding larger
resources for marketing, product expansion, and obtaining financing. This
could help them better compete in the marketplace.
• The combined entity could merge similar operations to reduce costs.
Corporate and administrative functions, such as human resources and
marketing, are often targets for combinations. They might also combine the
production areas if the companies produce similar products, and reduce costs
by having fewer plants or facilities in operation.
• The combined entity might have less competition in the marketplace. If the
products of the two companies competed for customers, they could combine
their offerings and use resources for improving the product, rather than
marketing against each other.
• The combined entity might have synergy in operations. Synergy is when
combined operations show lower costs or higher profits than would be
expected by just adding their financial information together on paper. This
could be due to economies of scale, where costs are lower due to higher
volume of production, or due to vertical integration, where greater control
over the production process is achieved due to owning more steps in the
production process.
 Why Acquire?

Acquisitions are undertaken for strategic reasons.

• A company might acquire another company to obtain a specific
product. It can be less expensive to purchase a company offering a
product you'd like to sell than building the product yourself.
Software companies often purchase smaller companies that offer
extensions to their product line if they become popular with
customers, so they can add the functionality to their primary
offering.
• A company may acquire to other company to increase its size. A
large company may have more visibility in the market place and
better access to the credit and other resources.
• A company may acquire to other company to control over critical
resources. For example a jewelry company might acquire a gold
mine company to ensure that they have access to gold without
market price fluctuation.
 TYPES of MERGERS
• Vertical Merger -- Joins two firms in different stages of *
related business. Example ;automobile company and parts
company.

• Horizontal Merger -- Joins two firms in the same industry

and allows them to diversify or expand their products. example;
Pepsi cola and coca cola

• Conglomerate Merger -- Unites firms in completely unrelated

industries in order to diversify business operations and
investments. conglomerate is a combination of two or
more corporations engaged in entirely different businesses that fall under one
corporate group, usually involving a parent company and many subsidiaries.
Often, a conglomerate is a multi-industry company. Conglomerates are often
large and multinational. Example; General Electric company. Sony- Ericson.

5-21
 External Corporate Growth
• Merger/Acquisition
– Horizontal
– Vertical
– Conglomerate
• Leveraged Buyout (LBO)- The acquisition of another
company using a significant amount of borrowed
money (bonds or loans) to meet the cost of acquisition.
Types of Mergers/Acquisitions

A Horizontal B
= AB

Conglomerate

Vertical
 Leveraged Buyout

Individual + Loan = Purchase of Company

Purchase Loan

Company = Collateral
 Identifying Merger Opportunities
• A purchase price that is low enough
• A target that is smaller than the buyer, and
that the buyer understands
• A buyer who pays in cash and not over
inflated stock
• Evidence the deal isn’t the brainchild of an
egocentric CEO
 *
Franchises
FRANCHISING
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.

5-26
 Franchise System
Franchiser

Franchisee

Franchise Agreement
 Franchise Contract
Franchisor, Inc.
Branded
Product/Service

Performance
Monitoring

$$$$$

Franchisee
 Franchisor
 Assigns Territory  Provides
Training/Support
 Provides Financial
Aid/Advice  Business Expansion
Using operational
 Offers Merchandise/ management
Supplies at Competitive
Price
 Franchisee
Pays Up-Front Costs
Makes Monthly Payment to Franchisor
Runs Business by Franchisor’s
Rules/Procedures
Buys Materials from Franchisor/ Approved
Supplier
 How to Avoid a Franchise Lemon

1) Research officers & their

business experience
2) Get summary of any
bankruptcy & litigation
3) Estimate all costs to set up
franchise
4) Review franchise contract &
three most recent financial
statements
 *Advantages &
Disadvantages
ADVANTAGES of FRANCHISING of Franchises
LG5
*
• Management and marketing
assistance
• Personal ownership
• Nationally recognized name
• Financial advice and
assistance
• Lower failure rate

5-32
 *Advantages &
Disadvantages
DISADVANTAGES of FRANCHISING of Franchises
LG5
*
• Large start-up costs
• Shared profit
• Management regulation
• Coattail effects
• Restrictions on selling
• Fraudulent franchisors

5-33
 Franchise Innovations
• Franchise Differentiation
• Multiple-concept franchises
• Expanded product offerings
• Cross-branding
• New ideas
 Diversity of franchising
• Sole, partnership and company are franchising
• Women are franchisor and franchisee
• Minority owned businesses are growing and
franchisors are more focused on recruiting
minority franchisees
• Home based franchising
• Ecommerce in franchising
• Use technology, social media to extend the brand
name and to meet the need of customers and
franchisees.
Benefits of a Home-Based Business

Flexible work hours

.
Quality lifestyle
Doing the work of
your choice
Opportunity to
expand using
technology
Self-motivation