**

How to Form a *

CHAPTER
Business

5
Nickels
*
McHugh
*
McHugh

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1-1
BASIC FORMS OF BUSINESS
OWNERSHIP
 Sole Proprietorship: A business that is owned and
usually managed by one person. Example: if someone
starts a tea stall by himself only.

 Partnership: A legal form of business with two or

more owners. Example: Mr. Karim and his friend starts
a business together where both of them have
contributed.

 Corporation: A legal entity with authority to act and

have liability apart from its owners. Example:
Microsoft.
SOLE PROPRIETORSHIPS ADVANTAGES
 Ease of starting and ending the business
 Being your own boss

 Pride of ownership

 Retention of company profit

 No special taxes
SOLE PROPRIETORSHIP DISADVANTAGES
 Unlimited liability
 Limited financial resources available

 Management difficulties

 time commitment

 Limited growth
ADVANTAGES OF PARTNERSHIPS

 More financial resources

 Shared management, skills and knowledge

 Longer survival

 No special taxes
DISADVANTAGES OF PARTNERSHIPS
 Unlimited liability
 Division of profits

 Disagreements among partners

 Difficulty in termination
ADVANTAGES OF CORPORATIONS

 Limited liability
 Ability to raise more money for investment

 Size

 Perpetual life

 Ease of ownership change

 Separation of ownership from management

DISADVANTAGES OF CORPORATIONS
 Initial cost
 Extensive paperwork

 Double taxation

 Size

 Difficulty of termination
CORPORATE EXPANSION: MERGERS
AND ACQUISITIONS
 Merger: The results of two firms forming one new
company.

 Acquisition: One company’s purchase of the property

and obligations of another company.
3 TYPES OF CORPORATE MERGERS
 Vertical merger: The joining
of two companies involved in
different stages of related
businesses.

 Horizontal merger: The

joining of two firms in the
same industry.

 Conglomerate merger: The

joining of firms in completely
unrelated industries.
FRANCHISE AGREEMENT

 An arrangement whereby someone with a good

idea for a business sells the rights to use the
business name and sell a product or service to
others in a given territory.

 Franchisor: A company that develops a product

concept and sells others the rights to make and sell
the products.

 Franchisee: A person who buys a franchise.

ADVANTAGES OF FRANCHISES
 Management and marketing assistance
 Personal ownership

 Nationally recognized name

 Financial advice and assistance

 Lower failure rate

DISADVANTAGES OF FRANCHISES
 Large start-up costs
 Shared profit

 Management regulation

 Coattail effects

 Restrictions on selling

 Fraudulent franchisors