1. * * Chapter Five How to Form a Business Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. * * Bought a used truck and started Rubbish Boys, later changed the name to http://www.1800gotjunk.com. http://www.1800gotjunk.com $130 million in annual earnings from locations across North America and Australia. Expanded through franchising. Profile BRIAN SCUDAMORE 1-800-GOT-JUNK? 5-2

3. * * 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 LG1 5-3

4. * * 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 LG1 5-4

5. * * 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 LG1 5-5

6. * * 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 5-6

7. * * 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 PARTNERSHIPS LG2 5-7

8. * * 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 PARTNERS LG2 5-8

9. * * Advantages & Disadvantages of Partnerships More financial resources Shared management and pooled skills and knowledge Longer survival No special taxes ADVANTAGES of PARTNERSHIPS LG2 5-9

10. * * Advantages & Disadvantages of Partnerships Unlimited liability Division of profits Difficult to terminate Disagreements among partners DISADVANTAGES of PARTNERSHIPS LG2 5-10

11. * * 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) 5-11

12. * * 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 5-12

13. * * Corporations Conventional (C) Corporation -- A state- chartered legal entity with authority to act and have liability separate from its owners (its stockholders). CONVENTIONAL CORPORATIONS LG3 5-13

14. * * 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 5-14

15. * * Advantages of Corporations LG3 HOW OWNERS AFFECT MANAGEMENT 5-15

16. * * Source: Forbes, www.forbes.com, November 2008.www.forbes.com Advantages of Corporations CompanyStateIndustry CargillMNFarming Koch IndustriesKSChemicals ChryslerMIAutomobiles GMAC Financial ServicesMIFinancial PricewaterhouseCoopersNYBusiness Services MarsVAFood BechtelCAConstruction HCATNHospitals Ernst & YoungNYBusiness Services Publix SupermarketsFLGrocery PRIVACY PLEASE The Ten Largest Private Corporations in the U.S. LG3 5-16

17. * * 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 5-17

18. * * 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? LG3 5-18

19. * * Individuals Can Incorporate CompanyYear StartedType of Company J.E. Rhoads & Sons1702Conveyer Belts Covenant Life Insurance1717Insurance Philadelphia Insurance1752 Insurance Contributorship Dexter1767Adhesives & Coatings D. Landreth Seed1784Seeds Bank of New York1784Banking OLDIES BUT GOODIES America’s Oldest Corporations LG3 5-19

20. * * 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) 5-20

21. * * 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 5-21

22. * * 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 LG4 5-22

23. * * 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 LG4 5-23

24. * * 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 LG5 5-24

25. * * Advantages & Disadvantages of Franchises Management and marketing assistance Personal ownership Nationally recognized name Financial advice and assistance Lower failure rate ADVANTAGES of FRANCHISING LG5 5-25

26. * * Advantages & Disadvantages of Franchises Large start-up costs Shared profit Management regulation Coattail effects Restrictions on selling Fraudulent franchisors DISADVANTAGES of FRANCHISING LG5 5-26

27. * * 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 LG5 5-27

28. * * Source: Richard Gibson, Wall Street Journal, www.wsj.com, February 12, 2008.www.wsj.com 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 LG5 5-28

29. * * Source: Wall Street Journal, www.wsj.com, February 12, 2008.www.wsj.com 1. Arthur Murray Dance Studios 2. Banfield Pet Hospitals 3. Bojangles’ Famous Chicken ‘n Biscuits 4. Denny’s 5. Friendly’s 6. The Melting Pot 7. Nathan’s Famous 8. Servpro 9. Stanley Steamer 10. Two Men and a Truck Franchising in International Markets HIGH FLYERS Ten High-Performing Franchises LG5 5-29

30. * * 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 5-30

31. * * 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 5-31