Lecture Three

How to
Lec
Form a
Business

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Five
LEARNING GOALS

1. Compare the advantages and disadvantages of sole proprietorships.

2. Describe the differences between general and limited partners, and

compare the advantages and disadvantages of partnerships.

3. Compare the advantages and disadvantages of corporations and

summarize the differences between C corporations and limited liability
companies.

4. Outline the advantages and disadvantages of franchises, and discuss the

opportunities for diversity in franchising and the challenges of global
franchising.

5-2
Basic Forms
of Business
Ownership MAJOR FORMS of 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.

5-3
Basic Forms
of Business
Ownership
FORMS of
BUSINESS OWNERSHIP

5-4
Advantages
of Sole
Proprietorshi
MAJOR BENEFITS of SOLE
ps LG1 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

5-5
Disadvantage
s of Sole DISADVANTAGES of SOLE
Proprietorshi
ps LG1 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 5-6
Partnerships
MAJOR TYPES of PARTNERSHIPS
LG2

• 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.
5-7
Partnerships

TYPES OF PARTNERS
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.
5-8
Partnerships
OTHER FORMS of
LG2 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.
5-9
Advantages &
Disadvantages
of ADVANTAGES of
Partnerships
LG2 PARTNERSHIPS

• More financial
resources
• Shared
management and
pooled/complement
ary skills and
knowledge
• Longer survival
• No special taxes
5-10
Advantages &
Disadvantages
of DISADVANTAGES of
Partnerships
LG2 PARTNERSHIPS

• Unlimited liability
• Division of profits
• Disagreements
among partners
• Difficult to terminate

5-11
Corporations
CONVENTIONAL
LG3 CORPORATIONS

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

5-12
Advantages
of
Corporations
ADVANTAGES of
LG3 CORPORATIONS

• 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
• Anyone can incorporte 5-13
Advantages
of
Corporations The BIG BOYS of BUSINESS
LG3 America’s Largest Corporations

1. Walmart
2. Exxon Mobil
3. Chevron
4. ConocoPhillips
5. Fannie Mae Photo Courtesy of: Walmart Stores

Source: Fortune, www.fortune.com, accessed June 2011.

5-14
Disadvantage
s of DISADVANTAGES of
Corporations
LG3 CORPORATIONS
• Initial cost
• Extensive
paperwork
• Double taxation
• Two tax returns
• Size
• Difficulty of
termination
• Possible conflict
with stockholders
5-15
Corporate
Expansion:
Mergers andMERGERS and ACQUISITIONS
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.

5-16
Corporate
Expansion:
Mergers and TYPES of MERGERS
Acquisitions
LG4

• Vertical Merger -- Joins two firms in

different stages of related businesses.
• 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.

5-17
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 825,000 franchised

businesses operate in the U.S.,
employing approximately 17.5 million
people.
5-18
Advantages
ADVANTAGES of FRANCHISING
of Franchises

LG5

• Management and
marketing
assistance
• Personal ownership
• Nationally
recognized name
• Financial advice and
assistance
• Lower failure rate

5-19
Disadvantage
s of
Franchises
DISADVANTAGES of
LG5 FRANCHISING

• Large start-up costs

• Shared profit
• Management regulation
• Coattail effects
• Restrictions on selling
• Fraudulent franchisors

5-20
Thank you