6 Business Formation Choosing the Form That Fits

6 Business Formation: Choosing the Form That Fits Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Business Formations Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned,

LO 1 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: �Take an active role in managing the business �Have unlimited liability for claims against the firm Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 3

LO 1 Forms of Business Ownership (continued 1) • Corporation: Business is considered a legal entity that is separate and distinct from its owners • Created by filing the articles of incorporation and paying a fee of incorporation to the appropriate state agency • Owners of a corporation have limited liability Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 4

LO 1 Forms of Business Ownership (continued 2) • Limited liability company (LLC) • Offers limited liability to owners and flexible tax treatment Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 5

Sole Proprietorship: 73% of all businesses Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 6

LO 2 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 ability to attract and maintain talented employees • Heavy workload and responsibilities • Lack of permanence Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 7

Famous Partnerships 1) Twitter Founded by Evan Williams, Biz Stone, and Jack Dorsey, Twitter is an excellent example of successful business partnerships. In less then 3 years, these individuals managed to grow Twitter from the sound a bird makes to an incredible industry where over 63% of the brands in the world signing on to use it. From the surface of the earth to the bottom of the oceans and even in orbit, Tweets are being sent and received across the planet. 2) Ben & Jerry’s Ben Cohen and Jerry Greenfield managed to make annual sales of greater then 4 million dollars after less then 5 years in operation. Since 1978, Ben & Jerry’s has grown incredibly to include an annual profit of $326 million in 2000. With a strong emphasis on charitable giving and moral business operations, Ben & Jerry continue to pioneer both flavor types and ethical business practices. 3) Google Sergey Brin and Larry Page took a small search engine over a decade ago and turned it into the leading search engine in the entire world. Including several billion dollars in sales, having a combined ownership of 16% of their company gives them a total net worth of 46 Billion dollars. 4) Apple Steve Job and Steve Wozniak worked together to bring the Apple line of products to consumers around the world. Starting small and going through a number of challenging hurtles, both Steve’s are examples of what can be accomplished with a bold. Copyright and innovate idea. © 2019 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 11 | CH 6 8

5)Microsoft Bill Gates and Paul Allen represent another powerful business partnership that helped to revolutionize computing. With a wide range of products, services, and patents, Microsoft is one of the most valuable companies in the world. 6) Mc. Donald’s Started by Richard and Maurice Mc. Donald in 1940, Mc. Donald’s was first a barbeque stand. Later transitioning to hamburgers in 1948, Mc. Donald’s has seen exploded onto a global stage. 7) Hewlett Packard Bill Hewlett and Dave Packard helped lend their name to this iconic company. Following the tradition of being founded in a small garage, Hewlett Packard has since expanded and now produces hardware and software for agencies and individuals alike. 8) Warner Brothers Founded in Culver City California by Sam, Jack, Albert, and Harry Warner, the Warner Brothers company took some time to find its niche. Starting with direct distribution of media, the brothers soon switched to production when they found how much more lucrative it was. Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 9

LO 2 General Partnership • No limit on the number of partners • Partnership agreement should entail details regarding: • • • Initial financial contributions Specific duties and responsibilities Sharing profits (and losses) Settling disagreements Death or withdrawal of a partner Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 10

LO 3 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 advantages Disadvantages • • Unlimited liability Potential for disagreements Lack of continuity Difficulty in withdrawing from a partnership Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 11

LO 3 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 for limited liability • LLP: All partners have the right to participate in the management and have limited liability for company debts Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 12

LO 4 C Corporation • Offers limited liability to all its stockholders • Formation of a corporation requires filing articles of incorporation, paying filing fees, and adopting corporate bylaws • Stockholders can be institutional investors • Institutional investor: Organization that pools contributions from investors, clients, or depositors Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 13

LO 4 C Corporation (continued) �Uses pooled funds to buy stocks and securities • Issues common stock as the basic ownership interest • Some corporations issue preferred stock as well Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 14

LO 4 Board of Directors • Elected by stockholders to represent their interests • Oversee the operation of their company and protect their interests • Appoint a chief executive officer (CEO) and other corporate officers to manage the company on a daily basis Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 15

LO 4 Advantages of C Corporations • • • Limited liability Permanence Ease of transfer of ownership Ability to raise financial capital Ability to make use of specialized management Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 16

LO 4 Disadvantages of C Corporations • Expense and complexity of formation and operation • Complications when operating in multiple states • Double taxation of earnings and additional taxes • More paperwork and regulation and less secrecy • Possible conflicts of interest Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 17

LO 4 Corporate Restructuring • Acquisition: One firm buys another firm • Merger: Two formerly independent business entities combine to form a new organization • Types - Horizontal merger, vertical merger, and conglomerate merger • Divestiture: Transfer of total or partial ownership of some of a firm’s operations to investors or to another company Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 18

LO 4 Forming and Managing an LLC • Created by filing a document and paying filing fees in the state where the business is organized • Organizers draft an operating agreement, which is similar to the bylaws of a corporation • LLCs are neither partnerships nor corporations • Owners are known as members rather than stockholders or partners Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 19

LO 5 Advantages and Disadvantages of Limited Liability Companies (LLCs) 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 © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 20

LO 6 Franchise • Licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, and business methods • Arrangement is in exchange for monetary payments Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 21

LO 6 Franchise (continued) • Types of arrangements • 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 Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 22

Franchises: Franchise. com Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 24

LO 6 Franchising in Today's Economy • Expansion into foreign markets is greater because competition is less intense and less saturated • Business methods must be adjusted because of differences in culture and other factors • Women own about 45 percent of all franchises • Minority participation in franchises has been relatively low Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 25

LO 6 Advantages and Disadvantages of Franchising Advantages Disadvantages • Less risk • Training and support • Brand recognition • Easier access to funding • Costs • Lack of control • Negative halo effect • Growth challenges • Restrictions on sale • Poor execution Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 26

LO 6 Franchise Agreement • Contractual arrangement between a franchisor and franchisee • Spells out the duties and responsibilities of both parties • Franchise Disclosure Document (FDD): Description of all aspects of a franchise that the franchisor must provide to the franchisee �Should be provided at least 14 calendar days before the franchise agreement is signed Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 27

LO 6 Terms Included under Franchise Agreements Terms and conditions • Rights to use a franchisor’s trademarks, patents, and signage, and any restrictions on those rights Fees and other payments • Fees that a franchisee must pay for the right to use a franchisor’s products and methods Training and support • Training that should be provided by the franchisor to the franchisee Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 28

LO 6 Terms Included under Franchise Agreements (continued) Specific operational requirements • Methods and standards that a franchisee is required to follow Conflict resolution • Manner in which a franchisor and franchisee handle their disputes Assigned territory • Geographic area in which a franchisee will operate and exclusivity of the rights to that area Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 29

Lecture Journal Question Why do many entrepreneurs initially set up their businesses as sole proprietorships? Why do many successful entrepreneurs eventually decide to convert their sole proprietorship to some other form of ownership such as a corporation or LLC? For an extra credit point, provide an example of a company that has done this. Copyright © 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or BUSN 11 | CH 6 posted to a publicly accessible website, in whole or in part. 30