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*Chapter Five

How to Form a Business

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• Bought a used truck and started Rubbish Boys, later changed the name to 1-800-GOT-JUNK?.

• $130 million in annual earnings from locations across North America and Australia.

• Expanded through franchising.

ProfileBRIAN SCUDAMORE1-800-GOT-JUNK?

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*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.

MAJOR FORMS of OWNERSHIP

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*Basic Forms of Business Ownership

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FORMS of BUSINESS OWNERSHIP

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*Advantages of Sole Proprietorships

• Ease of starting and ending the business

• Being your own boss

• Pride of ownership

• Leaving a legacy

• Retention of company profit

• No special taxes

MAJOR BENEFITS of SOLE PROPRIETORSHIP

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*Disadvantages of Sole Proprietorships

• 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

DISADVANTAGES of SOLE PROPRIETORSHIPS

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*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?

PROGRESS ASSESSMENT

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*Partnerships

• 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.

MAJOR TYPES of PARTNERSHIPSLG2

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*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.

OTHER FORMS of PARTNERSHIPS LG2

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*Partnerships

• 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.

TYPES OF PARTNERSLG2

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*Advantages & Disadvantages of Partnerships

• More financial resources

• Shared management and pooled skills and knowledge

• Longer survival

• No special taxes

ADVANTAGES of PARTNERSHIPS

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*Advantages & Disadvantages of Partnerships

• Unlimited liability

• Division of profits

• Difficult to terminate

• Disagreements among partners

DISADVANTAGES of PARTNERSHIPS

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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?

PICK YOUR PARTNER WISELY(Spotlight on Small Business)

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*Progress Assessment

• What’s the difference between a limited partner and a general partner?

• What are some of the advantages and disadvantages of partnerships?

PROGRESS ASSESSMENT

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*Corporations

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

CONVENTIONAL CORPORATIONS

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*Advantages of 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

ADVANTAGES of CORPORATIONS LG3

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*Advantages of Corporations

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HOW OWNERS AFFECT MANAGEMENT

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Source: Fortune, www.fortune.com, April 2009.

1. Exxon Mobil

2. Wal-Mart

3. Chevron

4. ConocoPhillips

5. General Electric

Advantages of CorporationsThe BIG BOYS of BUSINESS

America’s Largest CorporationsLG3

6. General Motors

7. Ford

8. AT&T

9. Hewlett-Packard

10. Valero Energy

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Source: Forbes, www.forbes.com, November 2008.

Advantages of Corporations

Company State Industry

Cargill MN Farming

Koch Industries KS Chemicals

Chrysler MI Automobiles

GMAC Financial Services MI Financial

PricewaterhouseCoopers NY Business Services

Mars VA Food

Bechtel CA Construction

HCA TN Hospitals

Ernst & Young NY Business Services

Publix Supermarkets FL Grocery

PRIVACY PLEASEThe Ten Largest Private Corporations in the U.S.

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*Disadvantages of Corporations

• Initial cost

• Extensive paperwork

• Double taxation

• Two tax returns

• Size

• Difficulty of termination

• Possible conflict with stockholders and board of directors

DISADVANTAGES of CORPORATIONS LG3

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*Individuals Can Incorporate

• 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.

WHO CAN INCORPORATE?

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*Individuals Can Incorporate

Company Year Started Type of Company

J.E. Rhoads & Sons 1702 Conveyer Belts

Covenant Life Insurance 1717 Insurance

Philadelphia Insurance 1752 Insurance Contributorship

Dexter 1767 Adhesives & Coatings

D. Landreth Seed 1784 Seeds

Bank of New York 1784 Banking

OLDIES BUT GOODIESAmerica’s Oldest Corporations

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*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.

S CORPORATIONS

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*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.

WHO CAN FORM S CORPORATIONS?

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*Limited Liability Companies

• 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

LIMITED LIABILITY COMPANIES

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*Limited Liability Companies

• No stock, therefore ownership is nontransferable

• Limited life span

• Fewer incentives

• Taxes

• Paperwork

DISADVANTAGES

of

LLCs

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• Since June 2008, Vermont allows a new kind of LLC that exist only online.

• Registration documents can be filed online, meetings can be held through online communication, and relationships can be established electronically.

• Virtual companies allow online contributors with different skills, availability and interest to interact and be successful.

VERMONT WANTS to be the HOME of YOUR NEW VIRTUAL COMPANY

(Legal Briefcase)

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*Progress Assessment

• What are the major advantages and disadvantages of incorporating a business?

• What’s the role of owners (stockholders) in the corporate hierarchy?

• If you buy stock in a corporation and someone gets injured by one of the corporation’s products, can you be sued? Why or why not?

• Why are so many new businesses choosing a limited liability company (LLC) form of ownership?

PROGRESS ASSESSMENT

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*Corporate Expansion: Mergers and Acquisitions

• Merger -- The result of two firms joining to form one company.

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

MERGERS and AQUISITIONS

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*Corporate Expansion: Mergers and Acquisitions

• 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.

TYPES of MERGERS

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*Corporate Expansion: Mergers and Acquisitions

• 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.

LEVERAGED BUYOUTS

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*Franchises

• 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.

FRANCHISING

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*Advantages & Disadvantages of Franchises

• Management and marketing assistance

• Personal ownership

• Nationally recognized name

• Financial advice and assistance

• Lower failure rate

ADVANTAGES of FRANCHISING

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*Advantages & Disadvantages of Franchises

• Large start-up costs

• Shared profit

• Management regulation

• Coattail effects

• Restrictions on selling

• Fraudulent franchisors

DISADVANTAGES of FRANCHISING

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*Diversity in Franchising

• Women own about half of U.S. companies yet receive less than 4% of venture capital.

• For the past 20 years, firms owned by women have grown at twice the rate of all companies.

• More women are becoming franchisors. Auntie Anne’s, Decorating Den, Jazzercise and Two Men and a Truck are owned by women.

WOMEN in FRANCHISING

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• The Nationals in D.C. have the first sports stadium to earn the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) Rating.

• 95% of the stadium’s steel was recycled and low-flow toilets save millions of gallons of water.

• New stadiums of the Mets and Twins also have earned LEED certifications.

ROOT, ROOT, ROOT for the GREEN TEAM

(Thinking Green)

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*Home-Based Franchises

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

Main Disadvantage:• Isolation

HOME-BASED FRANCHISES

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*Franchising in International Markets

• 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.

GLOBAL FRANCHISING

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Source: Richard Gibson, Wall Street Journal, www.wsj.com, February 12, 2008.

• Focus on tried-and-true name brands.

• Stick to core goods and services.

• Be choosy about the site.

• Don’t pinch pennies.

• Have a fallback choice.

• Don’t assume the franchise will pay off.

Franchising in International Markets

WHAT to CHOOSE?Picking Franchises that May Survive a Recession

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Source: Wall Street Journal, www.wsj.com, February 12, 2008.

1. Arthur Murray Dance Studios2. Banfield Pet Hospitals3. Bojangles’ Famous Chicken ‘n

Biscuits4. Denny’s5. Friendly’s6. The Melting Pot7. Nathan’s Famous8. Servpro9. Stanley Steamer10.Two Men and a Truck

Franchising in International Markets

HIGH FLYERSTen High-Performing Franchises

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*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.

COOPERATIVES

LG6

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*Progress Assessment

• What are some of the factors to consider before buying a franchise?

• What opportunities are available for starting a global franchise?

• What’s a cooperative?

PROGRESS ASSESSMENT

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*Video

VIDEO TO GO HERE