CHAPTER 05

How To Form A Business

Discussion Topics

• Basic forms of business 3. Corporation

ownership • Seeking sustainability
1. Sole proprietorship • Corporate expansion
• Merger and acquisition
2. Partnership • Franchises

4. Cooperative

Introduction to Business [FNB 101]; FNB-JU 5/12/2023

Learning Objectives
• Compare the advantages and disadvantages of sole proprietorships.
• Describe the differences between general and limited partners, and compare the
advantages and disadvantages of partnerships.
• Compare the advantages and disadvantages of corporations and summarize the
differences between C corporations, S corporations and limited liability companies.
• Define and give examples of three types of corporate mergers.
• Outline the advantages and disadvantages of franchises, and discuss the opportunities
for diversity in franchising and the challenges of global franchising.
• Explain the role of cooperatives.

Introduction to Business [FNB 101]; FNB-JU 5/12/2023

Basic Forms of Business Ownership

1. Sole proprietorship- business

managed and owned by one
person
2. Partnership- when two or
more people legally agree to
become co-owners of a
business
3. Corporation- a legal entity
separate and distinct from
the owner, have liability apart
from its owner
Introduction to Business [FNB 101]; FNB-JU 5/12/2023
Sole Proprietorship:
Advantages • Ease of starting and ending the business- may
or may not need a permit, easy to star and
easy to stop
• Being your own boss
• Pride of ownership- deserve all credit of how
well the business is doing
• Leaving a legacy- business can be left for
future generations
• Retention of company profits
• No special taxes- all profit are taxed as
personal income

Introduction to Business [FNB 101]; FNB-JU 5/12/2023

Sole Proprietorship: Disadvantages
• Unlimited liability- the risk of personal losses, any debt damages incurred are debts and
owner must pay them
• Limited financial resources- funds are limited to what the owner can gather, and since
there’s only one owner, resources may be more limited
• Management difficulties- difficult to attract good employees because they can not offer
that high salary and benefits big companies can offer
• Overwhelming time commitment- no one to share the burden

• Few fringe benefits- no fringe benefits that come with working for other (health
insurance, pension plan, sick leave)
• Limited growth- expansion is slow and limited

• Limited life span- all depends on the sole proprietor, such as death or retirement (means
the same for the business)
Introduction to Business [FNB 101]; FNB-JU 5/12/2023
Partnership

• Types of partnership:
1. General partnership- all owners
share in operating the business
and in assuming liability for the
business’s debts
2. Limited partnership- one or more
general partner and one or more
limited partners

Introduction to Business [FNB 101]; FNB-JU 5/12/2023

 Limited Partnership: Partners

1. General partner- owner who has

unlimited liability and is active in
managing the firm
2. Limited partner- owner who
invests money into the business
but does not have any management
responsibility or liability for losses
beyond his investment
3. Limited liability- liability is limited
to the amount of money the
partner puts into the company
Introduction to Business [FNB 101]; FNB-JU 5/12/2023
Partnership: Pros and Cons
Advantages: Disadvantages:

1. More financial resources- two can 1. Unlimited liability- each general

gather more than one partner is liable for the debts of
the firm regardless of who caused
2. Shared management and pooled/
complementary skills and knowledge- them
one more person to help out with
management
2. Division of profits- share risks also
share profits
3. Longer survival- more likely to succeed
than a sole proprietorship 3. Disagreement among partners
4. No special taxes- only taxes as 4. Difficulty of termination- not easy
personal income to get out

Introduction to Business [FNB 101]; FNB-JU 5/12/2023

Forms of Partnership Business

• Master limited partnership (MLP)- acts and looks like a corporation, but tax
like a partnership (usually in oil and gas industries

• Limited liability partnership (LLP)- a partnership with at least one limited

partner, this limits a partner’s risk of losing personal assets.
• But this limitation in many states does not extend to contract liability such as
loans, lease, and business debt the partnership takes on (they still have to be
paid)

Introduction to Business [FNB 101]; FNB-JU 5/12/2023

 Corporations

• Conventional (C) corporation-

a state-chartered legal entity with

authority to act and have liability
separate from its owners/
stockholders.

Introduction to Business [FNB 101]; FNB-JU 5/12/2023

Corporation: Advantages
• Limited liability

• Ability to raise more money for investment

• Size- they can raise more money, they can build bigger
factories, fire more workers, invest in more advanced
tech
• Perpetual life- death of owner doesn't mean death of
corporation
• Ease of ownership change

• Ease of attracting talented employees

• Separation of ownership from management- owners

elect a board of directors, so each can specialize in their
fields.

Introduction to Business [FNB 101]; FNB-JU 5/12/2023

Corporation: • Initial cost- costly to start
Disadvantages • Extensive paperwork- a corporation must keep detailed
accounting records and needs to complete/submit many
paper works.
• Double taxation- corporate income is taxed twice, once
at the corporate level, once at personal income level
(and states typically tax corporations more heavily than
the others)
• Two tax returns- an individual who incorporates must
file a corporate and an individual tax return (can be
pretty complex)
• Size- large size can be very inflexible to market change
• Difficulty of termination
• Possible conflict with stockholders and board of
directors
Introduction to Business [FNB 101]; FNB-JU 5/12/2023
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.
• An S corp that loses its S status
many not operate under it again for
at least five years

Introduction to Business [FNB 101]; FNB-JU 5/12/2023

 S Corporation: Requirements
In order to qualify, business must:
1. Have no more than 100
shareholders
2. Have shareholders that are
individuals or estates, and who
(as individuals) are citizens or
permanent residents of the U.S.
3. Have only one class of stock
4. Derive no more than 25% of
income form passive sources
(rent, royalties, interest)

Introduction to Business [FNB 101]; FNB-JU 5/12/2023

Corporate Expansion

• Merger -- The result of two firms

joining to form one company.
• Acquisition -- One company’s
purchase of the property and
obligations of another company.

Introduction to Business [FNB 101]; FNB-JU 5/12/2023

Merger: Major Types
• Vertical Merger -- The joining of two firms in different stages of
related businesses.
• Vertical merger takes place between companies in a value chain, for example
a supplier and a distributor merging.

• Horizontal Merger -- The joining of two firms in the same.

• Horizontal mergers take place in the same industry (i.e., one competitor
merging with another)

• Conglomerate Merger -- The joining of firms in completely unrelated

industries.
• Conglomerate merger has no relationship between companies

Introduction to Business [FNB 101]; FNB-JU 5/12/2023

Thank you all.
Next Class: June 13, 2022 @ 9:30am

Class Test 01 [Marks 15]

• Short and broad questions.

Introduction to Business [FNB 101]; FNB-JU 5/12/2023