Course : MGMT6011 - Introduction to Management and

Business
Effective Period : September 2017

How to Form a Business

Session 17
 Learning Objectives
1. Compare the Advantage and Disadvantage of sole
proprietorship
2. Describe the differences between general and limited
partners, and compare the advantage and
disadvantage of partnerships.
3. Compare the Advantage and Disadvantage of
corporations, and summarize the differences between
C Corporations, S corporations, and limited liability
companies.
4. Define and give examples of three types of corporate
mergers, and explain the role of leverage buyouts and
taking a firm private.
5. Outline the advantage and disadvantage of franchises,
and discuss the opportunities for diversity in
franchising
6. Explain the role of cooperatives
 Basic Forms of Business Ownership

• 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.
 FORMS of
BUSINESS OWNERSHIP
 MAJOR BENEFITS of SOLE
PROPRIETORSHIP

1. Ease of starting and ending the

business
2. Being your own boss
3. Pride of ownership
4. Leaving a legacy
5. Retention of company profit
6. No special taxes
 DISADVANTAGES of SOLE
PROPRIETORSHIPS
1. Unlimited Liability -- Any debts or damages
incurred by the business are your debts, even if
it means selling your home, car or anything
else.
2. Limited financial resources
3. Management difficulties
4. Overwhelming time commitment
5. Few fringe benefits
6. Limited growth
7. Limited life span
 PARTNERSHIPS

• General Partnership -- • Master Limited

All owners share in
operating the business
and in assuming liability
for the business’s debts.
• Limited Partnership --
A partnership with one or • Limited Liability
more general partners
and one or more limited
partners.
Partnership -- A partnership
that looks much like a
corporation but is taxed like a
partnership and thus avoids
the corporate income tax.
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.
ADVANTAGES of DISADVANTAGES of
PARTNERSHIPS PARTNERSHIPS

1. More financial
resources
1. Unlimited
liability
2. Shared
management and 2. Division of
pooled skills and profits
knowledge
3. Difficult to
3. Longer survival terminate
4. No special taxes
4. Disagreements
 Corporations

• Conventional (C)
Corporation -- A state-
chartered legal entity with
authority to act and have
liability separate from its
owners (its stockholders).
 ADVANTAGES of
CORPORATIONS

1. Limited liability
2. Ability to raise more money for
investment
3. Size
4. Perpetual life
5. Ease of ownership change
6. Ease of attracting talented employees
7. Separation of ownership from
management
HOW OWNERS AFFECT MANAGEMENT
 DISADVANTAGES of
CORPORATIONS

1. Initial cost
2. Extensive paperwork
3. Double taxation
4. Two tax returns
5. Size
6. Difficulty of termination
7. Possible conflict with
stockholders and board of
directors
 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:

- 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.
 Limited Liability Company (LLC)
Similar to a S corporation but without the eligibility requirements.

• Advantages of LLCs: Disadvantage of LLCs:

- Limited liability • No stock, therefore
- Choice of taxation ownership is
nontransferable
- Flexible ownership
rules • Limited life span
- Flexible distribution • Fewer incentives
of profit and losses
• Taxes
- Operating flexibility
• Paperwork
 MERGERS and AQUISITIONS

• Merger -- The result of two firms joining to form

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

•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.
 LEVERAGED BUYOUTS

• 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
 DISADVANTAGES of
ADVANTAGES of FRANCHISING
FRANCHISING
• Large start-up costs
• Management and
• Shared profit
marketing assistance
• Management
• Personal ownership
regulation
• Nationally recognized
name • Coattail effects
• Financial advice and • Restrictions on
assistance selling
• Lower failure rate • Fraudulent
franchisors
 HOME-BASED FRANCHISES

Advantages:
• Relief from commuting stress
• Extra family time
• Low overhead expenses

Main Disadvantage:
• Isolation
 GLOBAL FRANCHISING

•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.
 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.
• Members democratically control the
business by electing a board of
directors that hires professional
management.
 References

• William G. Nickels, James M. McHugh,

and Susan M. McHugh.
2016.Understanding Business, eleventh
Edition. Mc Graw Hill. ISBN : 978-981-
4670-37-1