Unit 4 Types of Businesses and Legal Structures

Unit 4: Types of Businesses and Legal Structures (Intro to Business & Marketing) 1

4 General Types of Businesses Ø There are 4 General Types of Businesses 1. Extractors (extract raw materials) 2. Manufacturers (produce physical products) 3. Merchandising Businesses (sell physical products produced by someone else) 4. Service Businesses (sells an intangible product or a service) 2

4 Types of Businesses: A Closer Look 1. Extractors Ø A company that moves raw materials such as coal, oil, or precious metals from the ground and/or sea in order to sell them. 2. Manufacturers Ø Businesses that make or produce finished products for sale to others. Ø 3 Examples: Apple, Ford, Exxon Mobil, Boeing

4 Types of Businesses 3. Merchandising Businesses Ø The company that actually markets and sells the products. Ø Examples: Target, Wal-Mart, Giant, Nordstrom’s 4. Service Business Ø A Company that sells a service as its primary source of revenue. Ø 4 Examples: Mc. Donald’s, Jiffy Lube, Cleaners 4 Less, Hair Cuttery, Booze Plumbing, etc.

Discussion Questions 1. Which type of Business is the most important? Why? 2. Which type of Businesses would be involved in the production and sale of Louisville Slugger baseball bats? 3. Is a restaurant a merchandising business or a service business? 5

7 Legal Structures of Businesses 1. Sole Proprietorship 2. Partnership 3. Corporation 4. Limited-Liability Partnership (“LLP”) 5. Limited-Liability Company (“LLC”) 6. S-Corporation 7. Franchise 6

1. Sole Proprietorship (SP) Ø Defined: A business owned by a single person Ø Most numerous: 75% of businesses are sole proprietorships Ø Advantages Ø Easy 7 to start. Ø The owner makes all the key decisions. Ø The owner keeps all of the profits. Ø Disadvantages Ø Unlimited Liability: owner is personally responsible for all business debts and wrongful actions of the business. Ø Limited Life: Business dies if owner dies/leaves. Ø Harder to borrow (credit) to grow the business. Ø Owner may not have all the necessary business skills.

2. Partnership Ø Defined: A business owned by 2 or more people. Ø Advantages Ø Easy to start, but harder than a SP. Ø Easier than a SP to obtain credit and/or raise money. Ø More partners mean more skills than a SP. Ø Disadvantages Ø Unlimited Liability: partners are personally responsible for all business debts and wrongful actions of the business. Ø Limited Life: Partnership must legally reorganize (reform) each time a partner dies/leaves. Ø Harder to raise money than a Corporation. Ø May still not have all the necessary business skills 8

3. Corporation Ø Defined: A company that is registered by a state and operates separately from its owners. A separate legal entity that can enter into contracts, sue, and be sued. § To form a corporation, the owners must get a Corporate Charter (license) from the state where their main office is located. § The company must form a Board of Directors, who will run/govern the Company. Ø Advantages 1. 9 Limited Liability: The owners are not personally responsible for the debts and wrongful actions of the company.

3. Corporation (Continued) Ø Advantages (continued) Unlimited Life: Corporations continue to exist even if owners (stockholders) die or change (sell their stock). 3. Financing: Ability to raise large sums of money by selling ownership (stock) to the public. Corporations are “publicly-held” companies owned by the stockholders. Ø Disadvantages 1. Difficult and costly to start (need attorneys) 2. Subject to high regulation by Government 3. Double Taxation: Owners pay taxes twice; once by the company they own (corporation) and a second time when the profits are distributed to them (dividends). Dividends are the distribution of profits to owners. 2. 10

4. Limited Liability Partnership (LLPs) Ø Defined: Similar to a regular Partnership but with some degree of limited liability for partners for business debts and/or wrongful actions. Ø Many LLPs have both a General Partner and Limited Partners. Ø The General Partner(s) does have unlimited liability and is the partner that manages the business. Ø The Limited Partners have limited liability and do not manage the business. They provide money (financing) and are often called “silent partners”. Ø LLPs differ by country law. 11

5. Limited Liability Company (LLCs) Ø Defined: Similar to a corporation in that the owners have limited liability and similar to a Partnership in the way they are taxed (LLC profits are passed through and reported on personal tax return like Partnerships) Ø LLCs can have different types of owners such as other LLCs, individuals, or corporations. Ø Many small businesses form as LLC’s, rather than sole proprietorships, due to the limited liability feature. Ø Primary difference to an LLP is that LLPs must have a managing partner that has unlimited liability. All owners in an LLC have limited liability. 12

6. S-Corporation Ø Defined: An S-Corporation is a corporation with less than 100 owners. Ø An S-Corporation is taxed as a partnership (profits passed through to individual owners’ tax returns) rather than as a corporation. Ø S-Corporations cause owners to avoid the “doubletaxation” of Corporations. Ø Double-Taxation: The Corporation is taxed on its profits (owner’s taxed the first time) and any dividends (profits) paid to the owners is taxed as well (the second taxing). 13

7. Franchise Ø Defined: a franchise is a business opportunity that allows 14 the franchisee to start a business by legally using someone else's (the franchisor's) expertise, ideas, products, trademarks, and processes. Ø Buying a Franchise Ø Prospective owner must pay an initial lump sum and then a fixed percentage of annual revenue. Ø Most franchises cost a one-time payment of $20 K-$50 K, but you need much more money in reserve to start the business. ØMany up-front costs include hiring a franchise attorney, starting inventory, buying insurance, and paying rents. Ø Must operate franchise with the same products, methods, and pricing approved by franchisor.

A Franchise Example: Mc. Donald’s � You will need a minimum of $955, 000 in nonborrowed, personal resources to be considered for a Mc. Donald's franchise. � Most owner/operators enter the franchise system by purchasing an existing restaurant directly from Mc. Donald’s or a Mc. Donald's owner/operator. � Intensive training offered by the corporation addresses all aspects of operating a Mc. Donald's restaurant. � There is also a franchise fee of $45, 000 and a service fee of 4 percent of gross sales. 15

A Franchise Example: Subway �The estimated total investment to open a Subway franchise in the United States is between $100, 000 and $250, 000. �The above estimates include the complete investment in setting up a Subway franchise, and also operating expenses for the first three months. � There is also a one-time franchise fee of $15, 000. �After opening, Subway franchisees pay a royalty fee, which is 8 percent of their overall gross sales. 16

Questions for Review 1. What is unlimited liability? Which forms of business 2. 3. 4. 5. 6. 17 have unlimited liability? What is limited liability? Which forms of business have limited liability? What is limited life? Which forms of business have limited life? What are three advantages of a Corporation? What are two disadvantages? What are the advantages of a partnership over a sole proprietorship? What is the name of a corporation that can be formed if there are less than a 100 owners?

Questions for Review 7. How is an Limited Liability Partnership different than 8. 9. 10. 11. 18 a regular Partnership? Are all the partners in an LLP limited in their liability? What is the most numerous form of business in the USA? Which form of business has the most revenue, employees, and profits? How do Franchisors make their money? True or False: A franchisee can elect to not offer certain products without the approval of the franchisor? How much money might you need to buy and start a Subway franchise? How much is the initial fee to buy?