Five
*
How *
Chapter to Form
a Business
McGraw-Hill/Irwin
Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
The Business Value
Chain
ENVIRONMENT
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Company Infrastructure
Human Resource Management
Technology
Procurement
Inbound
Outbound Marketing
Operations
Service
Logistics
Logistics & Sales
ENVIRONMENT
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MAJOR FORMS of OWNERSHIP
Basic Forms of
Business
Ownership
*
LG1
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
FORMS of
BUSINESS OWNERSHIP
*
Basic Forms of
Business
Ownership
*
LG1
5-4
MAJOR BENEFITS of SOLE
PROPRIETORSHIP
*Advantages of
Sole
Proprietorships
LG1
*
Ease of starting and
ending the business
Being your own boss
Pride of ownership
Leaving a legacy
Retention of company
profit
No special taxes
5-5
DISADVANTAGES of SOLE
PROPRIETORSHIPS
*Disadvantages
of Sole
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
Limited growth
Limited life span
5-6
PROGRESS ASSESSMENT
*Progress
Assessment
*
Most people who start businesses in the United
States are sole proprietors. What are the
advantages and disadvantages of sole
proprietorships?
Why would unlimited liability be considered a
major drawback to sole proprietorships?
5-7
*
MAJOR TYPES of PARTNERSHIPS Partnerships
General Partnership -- All owners share in
*
LG2
operating the business and in assuming liability for
the businesss debts.
Limited Partnership -- A partnership with one or
more general partners and one or more limited
partners.
5-8
*
TYPES OF PARTNERS
Partnerships
*
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.
5-9
ADVANTAGES of
PARTNERSHIPS
*
Advantages &
Disadvantages
of Partnerships
LG2
*
More financial resources
Shared management and
pooled skills and
knowledge
Longer survival
No special taxes
5-10
DISADVANTAGES of
PARTNERSHIPS
*
Advantages &
Disadvantages
of Partnerships
LG2
*
Unlimited liability
Division of profits
Difficult to terminate
Disagreements among
partners
5-11
*
PICK YOUR PARTNER WISELY
(Spotlight on Small Business)
*
There is no such thing as a perfect partner but
ask these questions when you try to find your
best match:
Do you share the same goals?
Do you share the same vision for the company?
What skills does he/she have? Are yours the same?
What can he/she bring to the business?
What type of decision maker is he/she?
Do you trust each other?
How does he/she problem solve?
5-12
PROGRESS ASSESSMENT
*Progress
Assessment
*
Whats the difference between a limited partner
and a general partner?
What are some of the advantages and
disadvantages of partnerships?
5-13
CONVENTIONAL
CORPORATIONS
*
Corporations
LG3
*
Conventional (C)
Corporation -- A statechartered legal entity with
authority to act and have
liability separate from its
owners (its stockholders).
5-14
*
ADVANTAGES of
CORPORATIONS
Advantages of
Corporations
LG3
*
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
5-15
HOW OWNERS AFFECT
MANAGEMENT
*
Advantages of
Corporations
LG3
*
5-16
*
The BIG BOYS of BUSINESS
Advantages of
Corporations
Americas Largest Corporations
1.
Exxon Mobil
6.
Wal-Mart
7.
Ford
3.
Chevron
8.
AT&T
4.
ConocoPhillips
9.
Hewlett-Packard
5.
General Electric
*
General Motors
2.
LG3
10. Valero Energy
Source: Fortune, www.fortune.com, April 2009.
5-17
*
Advantages of
Corporations
PRIVACY PLEASE
The Ten Largest Private Corporations in the U.S.
LG3
Company
State
Industry
Cargill
MN
Farming
Koch Industries
KS
Chemicals
Chrysler
MI
Automobiles
GMAC Financial
Services
MI
Financial
PricewaterhouseCoope
rs
NY
Business Services
Mars
VA
Food
Bechtel
CA
Construction
HCA
TN
Hospitals
Ernst & Young
NY
Business Services
FL
*
Grocery
Source: Forbes, www.forbes.com, November 2008.
Publix Supermarkets
5-18
*
DISADVANTAGES of
CORPORATIONS
Disadvantages
of Corporations
LG3
*
Initial cost
Extensive paperwork
Double taxation
Two tax returns
Size
Difficulty of termination
Possible conflict with stockholders and board of
directors
5-19
*
WHO CAN INCORPORATE?
Individuals Can
Incorporate
*
LG3
Anyone truckers, - doctors, plumbers, athletes
and small business owners can incorporate.
Normally, stock is not issued when individuals
incorporate so the advantages and
disadvantages are not exactly the same as for
large corporations.
Major advantages are limited liability and
possible tax benefits.
5-20
*
S CORPORATIONS
S Corporations
LG3
*
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.
5-21
WHO CAN FORM
S CORPORATIONS?
*
S Corporations
*
LG3
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.
5-22
*
LIMITED LIABILITY COMPANIES
Limited Liability
Companies
LG3
*
Limited Liability Company (LLC) -- Similar to a
S corporation but without the eligibility requirements.
Advantages of LLCs:
-
Limited liability
Choice of taxation
Flexible ownership rules
Flexible distribution of profit and losses
Operating flexibility
5-23
*
DISADVANTAGES of LLCs
Limited Liability
Companies
LG3
*
No stock, therefore ownership is nontransferable
Limited life span
Fewer incentives
Taxes
Paperwork
5-24
PROGRESS ASSESSMENT
*Progress
Assessment
*
What are the major advantages and
disadvantages of incorporating a business?
Whats the role of owners (stockholders) in the
corporate hierarchy?
If you buy stock in a corporation and someone
gets injured by one of the corporations products,
can you be sued? Why or why not?
Why are so many new businesses choosing a
limited liability company (LLC) form of
ownership?
5-25
*
MERGERS and AQUISITIONS
Corporate
Expansion:
Mergers and
Acquisitions
*
LG4
Merger -- The result of two firms joining to form one
company.
Acquisition -- One companys purchase of the
property and obligations of another company.
5-26
*
TYPES of MERGERS
Corporate
Expansion:
Mergers and
Acquisitions
LG4
*
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.
5-27
*
LEVERAGED BUYOUTS
Corporate
Expansion:
Mergers and
Acquisitions
*
LG4
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.
5-28
*
FRANCHISING
Franchises
*
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.
5-29
ADVANTAGES of FRANCHISING
*Advantages &
Disadvantages
of Franchises
LG5
*
Management and marketing
assistance
Personal ownership
Nationally recognized name
Financial advice and
assistance
Lower failure rate
5-30
DISADVANTAGES of
FRANCHISING
*Advantages &
Disadvantages
of Franchises
LG5
*
Large start-up costs
Shared profit
Management regulation
Coattail effects
Restrictions on selling
Fraudulent franchisors
5-31
*
HOME-BASED FRANCHISES
Home-Based
Franchises
LG5
*
Advantages:
Relief from commuting stress
Extra family time
Low overhead expenses
Main Disadvantage:
Isolation
5-32
WHAT to CHOOSE?
Picking Franchises that May Survive a Recession
*Franchising in
International
Markets
LG5
*
Focus on tried-and-true name brands.
Stick to core goods and services.
Be choosy about the site.
Dont pinch pennies.
Have a fallback choice.
Dont assume the franchise will pay off.
Source: Richard Gibson, Wall Street Journal, www.wsj.com, February 12, 2008.
5-33
*
COOPERATIVES
Cooperatives
*
LG6
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.
5-34
PROGRESS ASSESSMENT
*Progress
Assessment
*
What are some of the factors to consider before
buying a franchise?
What opportunities are available for starting a
global franchise?
Whats a cooperative?
5-35