6 Business Formation Choosing the Form that Fits

6 Business Formation: Choosing the Form that Fits Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OUTCOMES 1 Describe the characteristics of the four basic forms of business ownership 2 Discuss the advantages and disadvantages of a sole proprietorship 3 Evaluate the pros and cons of the partnership as a form of business ownership Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 2

LEARNING OUTCOMES 4 Explain why corporations have become the dominant form of business ownership 5 Explain why limited liability companies are becoming the increasingly popular form of business ownership 6 Evaluate the advantages and disadvantages of franchising Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 3

News and Books • News: What business type will you choose? • Important Website: • https: //www. sba. gov/starting-business/chooseyour-business-structure • Book: The book helps determine the best business structure to allow principles to devote more time and energy to running the business successfully and avoiding potential financial risk. Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 4

Forms of Business Ownership • Sole proprietorship: Single owner who manages the company • Partnership: Voluntary agreement between two or more co-owners of a business for profit • General partnership: All partners can take an active role in managing the business and have unlimited liability for claims against them Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 5

Forms of Business Ownership • Corporation: Business is considered a legal entity, separate and distinct from its owners • Articles of incorporation: Establishes the existence of a new corporation • Limited liability: Owners are not personally liable for claims against their firm and their personal assets are protected • Limited liability company (LLC): Offers limited liability to owners and flexible tax treatment • LLC Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 6

Advantages and Disadvantages of Sole Proprietorship Advantages • • • Ease of formation Retention of control Pride of ownership Retention of profits Possible tax advantage Disadvantages • Limited financial resources • Unlimited liability • Limited liability to attract and maintain talented employees • Heavy workload and responsibilities • Lack of permanence Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 7

Advantages and Disadvantages of Partnerships Advantages • Ability to pool financial resources • Ability to share responsibilities and capitalize on complementary skills • Ease of formation • Possible tax advantage • • Disadvantages Unlimited liability Potential for disagreements Lack of continuity Difficulty in withdrawing from a partnership Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 8

Limited Partnership and Limited Liability Partnership (LLP) • Limited partnership: Includes at least one general partner who actively manages the company and accepts unlimited liability • Other partner gives up the right to actively manage the company in exchange of limited liability • LLP: All partners have the right to participate in the management and have limited liability for company debts Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 9

C Corporation • Offers limited liability to all its owners, who are called stockholders • Requires filing articles of incorporation, paying filing fees, and adoption of corporate bylaws • Institutional investors: Organization that pools contributions from investors, clients, or depositors and uses these funds to buy stocks and securities • Board of directors: Elected by stockholders to represent their interests Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 10

Advantages and Disadvantages of C Corporation Advantages • Limited liability • Permanence • Ease of transfer of ownership • Ability to raise financial capital • Ability to make use of specialized management Disadvantages • Expense and complexity of formation and operation • Complications when operating in multiple states • Double taxation of earning and additional taxes • More paperwork and regulation and less secrecy • Possible conflicts of interest Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 11

Characteristics of S, Statutory Close, and Nonprofit Corporations Type Advantages Disadvantages S Corporation • IRS does not tax earnings of S • Can have only 100 stockholders Corporations separately • With only rare exceptions, each • Stockholders have limited liability stockholder must be a U. S. citizen Statutory Close (or Closed) Corporation • Operates under simple arrangements • Owners can participate in management • Limited number of stockholders • Stockholders can’t sell shares to the public without offering the shares to existing owners Nonprofit Corporation • Earnings are exempt from federal and state income taxes • Members and directors have limited liability • Individuals who contribute money or property to the nonprofit can take a tax deduction • Cannot have stockholders • Cannot distribute dividends to members • Cannot contribute funds to a political campaign • Keep accurate records and file paperwork to document taxexempt status Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 12

Corporate Restructuring • Acquisition: One firm buys another firm • Merger: Two formerly independent business entities combine to form a new organization • Divestiture: Transfer of total or partial ownership of some of the firm’s operations to investors or to another company • CEO Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 13

Advantages and Disadvantages of Limited Liability Company (LLC) Advantages • Limited liability • Tax pass-through • Simplicity and flexibility in management and operation • Flexible ownership • • • Disadvantages Complexity of formation Annual franchise tax Foreign status in other states Limits on firms that can form LLCs Differences in state laws Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 14

Franchise • Licensing arrangement in which a franchisor allows franchisees to use its name, trademark, products, and business methods in exchange for monetary payments • Distributorship: Franchisor makes a product and licenses the franchisees to sell it • Business format franchise: Franchisee pays for the right to use the name, trademark, and business and production methods of the franchisor • Franchise Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 15

Advantages and Disadvantages of Franchising Advantages • • Less risk Training and support Brand recognition Easier access to funding • • • Disadvantages Costs Lack of control Negative halo effect Growth challenges Restrictions on sale Poor execution Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 16

The Franchise Agreement • The contractual arrangement between a franchisor and franchisee that spells out the duties and responsibilities of both parties • Franchise Disclosure Document (FDD): A detailed description of all aspects of a franchise that the franchisor must provide to the franchisee at least fourteen calendar days before the franchise agreement is signed Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 17

SUMMARY • Basic forms of business ownership are sole proprietorship, partnership, corporation, and LLC • Corporations are a dominant form of business ownership because they are legal entities that stand apart from the owners • Limited liability companies are becoming the increasingly popular form of business ownership because they have limited liability, tax pass-through, and are simple and flexible to manage Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 18

SUMMARY • Evaluating the advantages and disadvantages of franchising helps one to understand why it is a well-established method of operating a business in today’s economy Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 19

KEY TERMS • • Sole proprietorship Partnership General partnership Corporation Articles of incorporation Limited liability company (LLC) • Limited partnership • Limited liability partnership (LLP) • C corporation • Corporate bylaws • Stockholder • Institutional investor • Board of directors • S corporation Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 20

KEY TERMS • Statutory close (closed) corporation • Nonprofit corporation • Acquisition • Merger • Divestiture • Horizontal merger • Vertical merger • Conglomerate merger Franchise Franchisor Franchisee Distributorship Business format franchise • Franchise agreement • Franchise Disclosure Document (FDD) • • • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. BUSN 9 | CH 6 21