Presentation on theme: "Select a Type of Ownership"— Presentation transcript:
1 Select a Type of Ownership Decide to Purchase, Join, or Start a BusinessChoose a Legal Form of BusinessLegal Issues and Business Ownership
2 Is it easier to: Purchase an existing business that is for sale What do you think?Is it easier to:Purchase an existing business that is for saleJoin a family businessStart a new business from scratch
3 Buy an Existing Business or Start Your Own? 3 things to consider:How much experience do you have?What kind of business do you want?What kind of financial risks are you willing to take?
4 Purchase an Existing Business Owners sell businesses for a variety of reasons including:insufficient profitsnew competitionfear of changing economic conditionsretirementdispute among partnersillness of a partner
5 Purchase an Existing Business There are many ways to find a business that is for sale including:advertisements in the newspaperconsulting a business brokernetworking
6 Advantages of Buying an Existing Business The equipment, suppliers, and procedures are in place.Goodwill may already be established.The seller may train the new owner.Established financial records exist.Financial arrangements may be easier.
7 Disadvantages of Buying an Existing Business The business may be for sale because it is not profitable.Serious problems may be inherited.Capital is required.
8 Steps in Purchasing a Business Write specific objectives about the kind of business you want to buyMeet with sellers or brokers to investigate specific opportunitiesVisit during business hours to observe the business in action.Obtain accounting records for the prior three years.
9 Steps in Purchasing a Business Get important information in writing.reviewed by a lawyerreviewed by an accountantDetermine how you would finance the business.Get expert help to determine the price to offer for the business.Valuator – an expert on determining the value of a business
10 Franchise Ownership franchise franchisee franchisor a legal agreement that gives an individual the right to market a company’s products or services in a particular areafranchiseethe person who purchases a franchisefranchisorthe company that offers the franchise for purchase
11 Operating Costs of a Franchise initial franchise feethe amount the local franchise owner pays in return for the right to run the franchisestartup coststhe costs associated with beginning a businessroyalty feesweekly or monthly payments made by the local owner to the franchise companyadvertising feespaid to the franchise company to support television, magazine, or other advertising of the franchise as a whole
12 Investigate the Franchise Opportunity Franchise Disclosure Document (FDD)a regulatory document describing a franchise opportunity that prospective franchisees must receive before they sign a contractmust be provided to franchisee at least 14 days before a contract is signedInformation contained in the FDD includes:background and experience of the business’s key executivescosts of starting and maintaining the businessterms of the franchise agreementacceptable reasons for contract terminationthe responsibilities you and the seller will have once you have invested in the opportunity
13 Evaluate a FranchiseStudy the disclosure document and proposed contract carefully.All costs and royalty fees should be provided.Interview current owners.Beware of “shills” - business references who are paid to give favorable reportsInvestigate the franchisor’s history and profitability.Investigate claims about your potential earnings.Does projected local demand match potential earnings?Have the seller provide, in writing, the number and percentage of owners who have done as well as they claim you will.
14 Evaluate a Franchise Listen carefully to sales presentations. Do not sign up immediately.Do not fall for a promise of easy money.Shop around.Compare to other business opportunities.Get the seller’s promises in writing.Determine what will happen if you want to cancel the franchise agreement.Remember that it is okay to ask for advice from professionals.
15 Advantages of Owning a Franchise An entrepreneur is provided with an established product or service.Franchisors offer management, technical, and other assistance.Equipment and supplies can be less expensive.A guarantee of consistency attracts customers.
16 Disadvantages of Owning a Franchise Franchise fees can be costly and cut down on profits.Owners of franchises have less freedom to make decisions than other entrepreneurs.Franchisees are dependent on the performance of other franchises in the chain.The franchisor can terminate the franchise agreement.
17 Enter a Family Business The U.S. economy is dominated by family businesses.Some estimates indicate 90 percent of businesses are family owned.35% of Fortune 500 companies are family controlled50% of US GDP comes from family businesses60% of US employmentMany large companies are still owned by relatives of the company founder.Wal*martFord Motor Company
18 Advantages of a Family Business Benefits of working at a family business include:pride and a sense of missiona feeling of continuity from keeping the business in the family for another generationenjoyment derived from working with relatives
19 Disadvantages of a Family Business Challenges of working in a family business include:Family members, regardless of their ability, often hold senior management positionspoor business decisions can be madeit is difficult to retain non-family employeesFamily politics often enter into business decision making.Business and private life often affect each other.Independent decision making is difficult.It can be challenging to determine what to do with the business when there is not a family member available to run it.
20 Starting Your Own Business If purchasing a franchise or joining a family business will not work for you, consider starting your own business.
21 Advantages of Starting Your Own Business Independent business owners enjoy:complete autonomy over all business decisionsthe ability to create their own destinythe challenge of creating something brand newfeeling triumphant when the business turns a profit
22 Disadvantages of Starting Your Own Business Risks to consider when starting your own business include:product demand is uncertainyou must make decisions that other types of entrepreneurs do not need to make
23 Lesson 7.2 Choosing a Legal Form of Business Sole ProprietorshipPartnershipCorporation
26 Sole Proprietorship Sole Proprietorship A business that is owned exclusively by one personEasiest and least expensive way to start a businessNo documents or forms needed UNLESS you operate under a name that is not your own
27 Sole Proprietorship How to Set Up: No legal steps required Except professional certificationsChoose a nameWorkman’s Puppies vs. Pampered PuppiesIf you’re reasonably well-known and well-respected, using your own name is a great marketing toolHOWEVER, if your business fails or you get into financial or legal trouble, it’ll have your name on it and people may associate your name with the earlier troublesProtect your namePick a domain name for your websiteRegister your nameDBA – Doing Business AsTrademark your nameUS Patent and Trademark Office
28 Sole Proprietorship How to Set Up (continued): Keep Finances Separate from your Personal ActivitiesBusiness Bank AccountBusiness Credit CardBusiness Record KeepingWhy is this important?Be Prepared for Paying TaxesIf no employees, can operate under your SSNIf employees, need a federal Employer Identification Number (EIN)If profitable, you will owe self-employment taxesGet InsuranceProperty and liabilityAutoHealthDisability
29 Advantages of a Sole Proprietorship Most common form of US business ownershipOver 17 million in operationEasy to set up; minimal government regulationLow cost method of entering the business worldComplete control over all decisions
30 Disadvantages of a Sole Proprietorship It can be difficult to raise money for the businessYou bear the burden of all the risksIf the business fails, your personal assets can be jeopardized
31 Partnership Partnership A business owned by two or more people Share in the decision-making and management responsibilitiesShare in the risks and rewards
32 Partnership Things to consider: Do you really need a partner to make business successful?Do they have financial resources or vital skills you lack?Can you hire them instead of partner with them?Do you really know the other person?Do you have similar values, communication styles, ethics, etc.Test the partnership out by tackling a small project together firstOutline in advance critical elements such as:CompensationExit ClausesRoles and Responsibilities
33 Partnership Agreement Outlines the rights and responsibilities of each of the owners includingBusiness nameNames of partnersInvestment by each partnerDelegation of management dutiesAccounting methods usedRights to audit accounting documentsProfit and loss distributionSalariesLength of partnershipConditions under which the partnership can be dissolvedAsset distribution upon dissolution of partnershipProcedure for dealing with the death of a partner
34 Advantages of a Partnership Multiple sources of capitalRisks are spread among partnersMinimal government regulation
35 Disadvantages of a Partnership Responsibilities and profits are sharedCan be held liable for errors of partners
37 What Went Wrong?Stan and Pete met while working at a video production company. Stan was in charge of editorial and production. Pete ran the sales force. Stan decided to begin his own company and invited Pete to join him. SP Communications seemed like a perfect partnership. Pete would handle sales and administration while Stan managed clients and directed production.Things seemed to be going well until Pete decided he wanted to be a part of the creative process. He spent most of his time producing videos rather than looking for new business. Because of their friendship, Stan trusted that Pete was taking care of his side of the business.As it turned out, Pete wasn’t very good at the creative tasks he attempted. He made mistakes that reduced expected profits. In addition, he wasn’t making new sales contacts, which was supposed to be his main job.By the time Stan realized what was happening to the business, it was too late. There weren’t any new sales. What Stan thought were profits were the result of Pete not paying their bills. Stan was left with more than $150,000 in unpaid bills and other debts. Pete left the business. It took Stan 3 years to dig out of the financial mess and get his new company up and running successfully.Questions:How might Stan and Pete have avoided the problems that led to the end of their partnership?Why is this situation a good example of the difficulty in maintaining partnerships between friends?What types of things should be spelled out completely between partners at the beginning of the partnership?
38 Corporation Corporation Most common form of business organizationMust be chartered by a stateHas many legal rights as an entity separate from its ownersOwnership determined by how many shares of stock you haveBoard of Directors – elected group of individuals who make important decisions about companyCompany Officers – responsible for the day-to-day management of the businessThe corporation, not the owners, transacts business
39 How to Form a Corporation Choose an available business name that complies with your state’s corporation rulesAppoint the initial Directors of your corporationFile formal paperwork, or Articles of Incorporation, and pay filing feeCreate corporate “bylaws”, which lay out the operating rules for your corporationHold the first meeting of the Board of DirectorsIssue Stock Certificates to the initial owners (shareholders)Obtain licenses and permits that may be required for your business
40 Disadvantages of a Corporation A lawyer is required to establish a corporation because a corporation is complexCostlyArticles of incorporation must be filedCorporations are subject to more government regulation than other types of businessesIncome is taxed twiceCorporate incomeIndividual income
41 Advantages of a Corporation Personal liability is limited to the amount of money each shareholder invested in the companyPersonal assets of shareholders are protectedCorporations can raise money by selling stockReputation and backing of recognized name
42 S CorporationA corporation organized under Subchapter S of the Internal Revenue CodeUsed for smaller businessesMany new businesses lose money in the first yearsS Corporation not taxed as a businessPay taxes if make a profit, but if the business looses money, owners can use the losses to offset other sources of personal incometax break
43 Limited Liability Company Limited Liability Company (LLC)Provides the benefits of partnership taxation and limited personal liabilityNot subjected to the rules of an S corporationMembers can participate in business managementLLCs have restrictionsLimited by state lawSingle owner cannot establish an LLCSome states limit the life of an LLC
45 Lesson 7.3 Legal Issues and Business Ownership GoalsRecognize how laws promote competitionDescribe how entrepreneurs protect intellectual propertyIdentify regulations that protect the public and how they affect businessesDescribe when and how a business owner should seek legal advice
46 Regulations That Promote Competition The government has enacted various laws to help protect businesses.Antitrust LegislationConsumer ProtectionFinancial Accuracy
47 Antitrust Legislation Antitrust laws ban business activities that do not promote competition.Sherman ActClayton ActRobinson-Patman ActWheeler-Lea Act
48 Antitrust Legislation Sherman ActCompetitors can not get together to set prices at a certain level.Discussing pricing with competitors is illegal.Clayton ActIt is illegal for a business to:require a customer to buy exclusively from itforce a customer to purchase one good in order to be able to purchase another good
49 Antitrust Legislation Robinson-Patman ActIt is illegal to discriminate by charging different prices to different customers.Some economically sound reasons that allow for different prices include:volume discountsspecial distributionlegal requirements that vary by locationWheeler-Lea ActUnfair or deceptive actions or practices by businesses that may cause an unfair competitive advantage are banned.false advertisingBusinesses are required to warn consumers about possible negative features of their product.potential side effects of medication
56 Consumer Protection Legislation Laws and organizations designed to ensure the rights of consumers as well as fair trade competition and the free flow of truthful informationThese laws protect the public from harmful productsFERPAHIPPAOther Laws that Protect Consumers
57 FERPA Federal Educational Rights and Privacy Act Established in 1974 Gives students access to their education recordsThe opportunity to seek to have the records amendedControl over the disclosure of information from the recordsOnly applies to educational institutions that receive funding from the U.S. Department of EducationWhy would this apply to business?
58 HIPAA Health Insurance Portability and Accountability Act Established in 1996Privacy of individuals health informationIncludes information on:Medical recordsMedical billingClinical or research databasesWhy would this apply to business?
59 Other Laws that Protect Consumers LicensesState and local governments require some businesses to have licenses.training may be requiredinspections may be requiredZoning LawsLocal governments often establish zoning regulations that control what types of buildings can be built in specific areas.
60 Other Laws that Protect Consumers The Federal Food, Drug, and Cosmetic Act of 1938Covering food, drugs, and cosmetics, this law bans selling products that are:impureimproperly labeledfalsely guaranteedUnhealthfulThe Consumer Product Safety Act of 1972sets safety standards for products other than food and drugsThe Truth-In-Lending Act of 1968requires all banks to calculate credit costs in the same way
61 Laws Concerning Financial Accuracy Sarbanes-Oxely ActIntroduced in 2002 as a direct result of Enron scandalImproved the accuracy and reliability of corporate disclosures made pursuant to the securities lawsCreated new standards for corporate accountability as well as new penalties for acts of wrongdoing
62 Government Agencies that Protect Competition Justice DepartmentThe Antitrust Division takes legal action against any business it believes has tried to monopolize an industryProsecutes businesses that violate antitrust lawsFederal Trade CommissionThe FTC administers most of the laws dealing with fair competitionfalse advertisingprice setting by competitorsprice discriminationproduct misrepresentation
63 How to Protect Business Intellectual PropertyThe original creative work of an artist or inventorsongs, novels, artistic designs, inventionsNo one can use someone else’s original work to make money.PatentThe grant of a property right to an inventor to exclude others from making, using, or selling his or her inventionLasts for 20 yearsProvisional patent applicationAllows inventor one year to research details of an idea prior to filing a patent
64 How to Protect Business Copyrightan intellectual property lawprotects works of authorshipremains in effect for 70 years after the death of an authorTrademarkname, symbol, or special mark used to identify a business or brand of product
65 Legal Issues Affecting Business Learning some basics about the laws affecting businesses will help you handle minor legal issues independently.Sometimes you will need to hire a lawyer.
66 ContractsContract - a legally binding agreement between two or more persons or partiesOffer and Acceptanceone party offers or agrees to something and the other party acceptsConsiderationwhat is exchanged for the promiseCapacitythe parties are legally able to enter into a binding agreementLegalitya contract cannot have anything in it that is illegal or that would result in illegal activitiesGenuine Assentthe agreement is not based on deceit, mistakes, or unfair pressure
67 Torts Relating to Business Enterprises a wrong against people or organizations for which the law grants a remedyliability can be established throughdutybreachinjurycausation
68 Hire a LawyerAt some point, you will probably need to hire a lawyer to assist you with legal issues affecting your business.