1. How to Form a Business Chapter 05 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 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 5-2

3. FORMS of BUSINESS OWNERSHIP Basic Forms of Business Ownership 5-3

4. Advantages of Sole Proprietorships 1) Comparative ease of starting and ending the business 2) Being your own boss 3) Pride of ownership 4) Leaving a legacy** 5) Retention of company profit 6) No special taxes** MAJOR BENEFITS of SOLE PROPRIETORSHIP LG1 5-4

5. Disadvantages of Sole Proprietorships 1) Unlimited Liability -- Any debts or damages incurred by the business are your debts, even if it means selling your home, car or anything else. 2) Limited financial resources 3) Management difficulties 4) Overwhelming time commitment 5) Few fringe benefits 6) Limited growth 7) Limited life span DISADVANTAGES of SOLE PROPRIETORSHIPS LG1 5-5

6. Partnerships General Partnership -- All owners share in operating the business and in assuming liability for the business’s debts. MAJOR TYPES of PARTNERSHIPS LG2 Limited Partnership -- A partnership with one or more general partners and one or more limited partners. 5-6

7. 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 Partnerships 5-7

8. Advantages & Disadvantages of Partnerships More financial resources Shared management and pooled/complementary skills and knowledge Longer survival No special taxes ADVANTAGES of PARTNERSHIPS LG2 5-8

9. Unlimited liability Division of profits Disagreements among partners Difficult to terminate DISADVANTAGES of PARTNERSHIPS LG2 Advantages & Disadvantages of Partnerships 5-9

10. 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 5-10

11. 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 5-11

12. HOW OWNERS AFFECT MANAGEMENT LG3 Advantages of Corporations 5-12

13. Disadvantages of Corporations Initial cost Extensive paperwork Double taxation (w dividends) Two tax returns Size Difficulty of termination Possible conflict with stockholders and board of directors DISADVANTAGES of CORPORATIONS LG3 5-13

14. Individuals Can Incorporate Anyone - truckers, doctors, plumbers, athletes and small business owners can incorporate. Normally stock is not issued to outsiders 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 5-14

15. S Corporations S Corporation -- A unique government creation that looks like a corporation, but is taxed like sole proprietorships and partnerships. S corporations have shareholders, directors and employees, plus the benefit of limited liability. Profits are taxed only as the personal income of the shareholder. S CORPORATIONS LG3 5-15

16. Qualifications for S Corporations:  Have no more than 100 shareholders.  Have shareholders that are individuals or estates and are citizens or permanent residents of the U.S.  Have only one class of stock.  Derive no more than 25% of income from passive sources. If an S corporation loses its S status, it may not operate under it again for at least 5 years. WHO CAN FORM S CORPORATIONS? LG3 S Corporations 5-16

17. Limited Liability Companies Limited Liability Company (LLC) -- Similar to an S corporation, but without the eligibility requirements. Advantages of LLCs:  Limited liability  Choice of taxation  Flexible ownership rules  Flexible distribution of profits and losses  Operating flexibility LIMITED LIABILITY COMPANIES LG3 5-17

18. No stock, therefore ownership is nontransferable Limited life span Fewer incentives Taxes Paperwork DISADVANTAGES of LLCs LG3 Limited Liability Companies 5-18

19. 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 825,000 franchised businesses operate in the U.S., employing approximately 17.5 million people. FRANCHISING LG5 5-19

20. Advantages of Franchises Management and marketing assistance Personal ownership Nationally recognized name Financial advice and assistance Lower failure rate ADVANTAGES of FRANCHISING LG5 5-20

21. Large start-up costs Shared profit Management regulation Coattail effects Restrictions on selling Fraudulent franchisors DISADVANTAGES of FRANCHISING LG5 Disadvantages of Franchises 5-21

22. Cooperatives Cooperatives -- Businesses owned and controlled by the people who use them– producers, consumers, or workers with similar needs who pool their resources for mutual gain. Worldwide, 750,000 co-ops 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 5-22

23. Entrepreneurship and Starting a Small Business Chapter 06 McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

24. The Age of the Entrepreneur Entrepreneurship -- Accepting the risk of starting and running a business. WHAT is ENTREPRENEURSHIP? 6-24

25. Why People Take the Entrepreneurial Challenge Opportunity Profit Independence Challenge WHY TAKE the RISK? LG1 6-25

26. Self-directed Self-nurturing Action-oriented Highly energetic Tolerant of uncertainty WHAT DOES IT TAKE to be an ENTREPRENEUR? LG1 Why People Take the Entrepreneurial Challenge 6-26

27. Turning Your Passion and Problems into Opportunities It fills customers’ needs. You have the skills and resources to start a business. You can sell the product or service at a reasonable price and still profit. You can get your product or service to customers before the window of opportunity closes. You can keep the business going. An IDEA is a GOOD OPPORTUNITY IF… LG1 6-27

28. Entrepreneurial Teams Entrepreneurial team -- A group of experienced people from different areas of business who join to form a managerial team with the skills to develop, make and market a new product. An entrepreneurial team (Steve Jobs, Steve Wozniak and Mike Markkula) was key to Apple’s success.Apple ENTREPRENEURIAL TEAMS LG1 6-28

29. Entrepreneurship Within Firms Intrapreneur -- A creative person who works as an entrepreneur within a corporation. Intrapreneurs use a company’s existing resources to launch new products for the company. Art Fry of 3M developed Post-Its when he was trying to mark pages of his hymnal without damage.3M INTRAPRENEURS LG1 6-29

30. Source: World Features Syndicate. Tommy Hilfiger – First store went bankrupt Milton Hershey – First confectionery failed H.J. Heinz – Company went bankrupt six years after start THEY DID WHAT? Famous Business Failures Walt Disney – First film company went bankrupt Henry Ford – First two car companies failed L.L. Bean – Almost went bankrupt in first year LG2 Small Business Success & Failure 6-30

31. Learning About Small Business Operations Learn from Others – Investigate your local colleges for classes on small business and entrepreneurship; talk to and work for successful local entrepreneurs. Get Some Experience – Gain three years experience in the field; then start a part-time small business. Take Over a Successful Firm – Serve as an apprentice and eventually take over once the owner steps down. LEARNING ABOUT SMALL BUSINESS LG3 6-31

32. Begin with Planning Business Plan -- A detailed written statement that describes the nature of the business, the target market, the advantages the business will have over competition, and the resources and owners’ qualifications. A business plan forces potential owners to be specific about what they will offer. A business plan is mandatory for talking with bankers or investors. BUSINESS PLANS LG4 6-32

33. Writing a Business Plan A good plan takes a long time to prepare. A good executive summary catches interest and tempts potential investors to read on. WRITING a BUSINESS PLAN Getting the plan into the right hands is almost as important as getting the right information in it. LG4 6-33

34. Getting Money to Fund a Small Business Personal savings Relatives Former employers Banks & finance companies Government agencies Angel investors Venture capitalists -- Individuals or companies that invest in new businesses in exchange for partial ownership. SOURCES of CAPITAL LG4 6-34

35. Source: Inc., October 2010. Getting Money to Fund a Small Business FUNDING YOUR DREAM Getting Cash When Financing Isn’t an Option LG4 1. Get close to your customers. 2. Make clients pay upfront. 3. Outsource tasks on the cheap. 4. Get in front of customers quickly. 5. Become an expert. 6. Ask for help. 7. Be patient. 6-35

36. Kickstarter and Lending Club connect loan seekers to potential lenders.KickstarterLending Club Administrators assign interest rates between 6.78% and 24.95% based on their credit history, how much money is needed, and what the person is using it for. SOCIAL LENDING (Social Media in Business) 6-36

37. Small Business Administration (SBA) -- A U.S. government agency that advises and assists small businesses by providing management training and financial advice. SBA started a microloan program in 1991 that provides very small loans to small business owners.SBA Program judges worthiness based on the borrowers’ integrity and soundness of their business ideas. The SMALL BUSINESS ADMINISTRATION LG4 The Small Business Administration 6-37

38. Source: Inc., October 2010. HELP PLEASE! More SBA Resources and Other Helpful Groups LG4 Small Business Investment CompaniesSmall Business Investment Companies The Office of Innovation & EntrepreneurshipThe Office of Innovation & Entrepreneurship SCORE Entrepreneurship.org The Small Business Administration 6-38

39. Marketing decisions need to be made long before introducing a product or opening a store. A marketing research study can help you:  Determine where to locate.  Whom to select as your target market.  What is an effective strategy for reaching the market. MARKETING RESEARCH LG4 Looking for Help 6-39

40. A commercial loan officer can help: - Design an acceptable business plan. - Give financial advice. - Lend money. An insurance agent can help you: - Know the risks associated with the business. - How to cover risks with insurance. - How to prevent risks with safety devices. Service Corps of Retired Executives -More than 10,500 volunteers from industry, trade associations, and education who counsel small business at no cost. OTHER FORMS OF HELP LG4 Looking for Help 6-40

41. Entrepreneurship and Wealth Building Business -- Any activity that seeks to provide goods and services to others while operating at a profit. Entrepreneur -- A person who risks time and money to start and manage a business. Success in business is often based on the strategy of finding a need and filling it. BUSINESS and ENTREPRENEURSHIP LG1 1-41

42. Matching Risk with Profit Risk -- The chance an entrepreneur takes of losing time and money on a business that may not prove profitable. Not all businesses make the same amount of profit. Businesses take risks, but with great risks could come great profit. RISK LG1 1-42

43. Responding to the Various Business Stakeholders Stakeholders -- All the people who stand to gain or lose by the policies and activities of a business and whose concerns the businesses need to address. Who are Stakeholders?  Customers  Employees  Stockholders  Suppliers  Dealers  Community Members  Media  Elected Officials  Bankers  Environmentalists STAKEHOLDERS LG1 1-43

44. Responding to the Various Business Stakeholders Outsourcing -- Contracting with other companies (often in other countries) to do some of the firm’s functions, like production or accounting. Insourcing -- Foreign companies opening offices and factories in the United States. OUTSOURCING and INSOURCING LG1 1-44

45. Entrepreneurship Versus Working for Others The UPS The freedom to succeed. Make your own decisions. High possibility of wealth. Hire your own staff. The DOWNS The freedom to fail. No paid vacations. No health insurance. No daycare. THE UPS and DOWNS of ENTREPRENEURSHIP LG2 1-45

46. The Importance of Entrepreneurs to the Creation of Wealth 1. Land 2. Labor 3. Capital 4. Entrepreneurship 5. Knowledge Entrepreneurs use what they’ve learned to grow their businesses and increase wealth. FIVE FACTORS of PRODUCTION LG2 1-46

47. Least Corrupt 1. Denmark 2. New Zealand 3. Singapore 4. Finland 5. Sweden Most Corrupt 1. Somalia 2. Myanmar 3. Afghanistan 4. Iraq 5. Uzbekistan Source: Transparency International, June 2011. CORRUPTION WORLDWIDE LG3 The Economic and Legal Environment 1-47

48. The number of employees calling in sick has reached a five-year high. 3/5 of all callers were not even sick. Others conduct personal business at work, play video games and check their Facebook pages while at work. What is the problem with this situation? What are the alternatives? What are the consequences of each alternative? What path would you choose? Is it ethical? ETHICS BEGINS with YOU (Making Ethical Decisions) 1-48

49. The Global Environment 1. Growth of global competition. 2. Increase of free trade among nations. IMPORTANT CHANGES to the GLOBAL ENVIRONMENT LG7 3. Development of efficient distribution systems. 4. Advances in communication systems. 1-49

50. The Evolution of U.S. Business Agriculture Era Manufacturing Era Service Era Information-Based Era The EVOLUTION of BUSINESS LG8 1-50

51. Progress in the Agricultural Industry In the 1800s, the agricultural industry led economic development. Technology, like the harvester and cotton gin, changed the farming industry making it more efficient. This led to fewer farmers with larger farms. The AGRICULTURAL ERA LG8 1-51

52. Progress in the Manufacturing Industry Industrialization in the 19 th and 20 th centuries moved jobs from farms to factories. The MANUFACTURING ERA As technology improved productivity, fewer workers were needed in factories. LG8 1-52

53. Progress in the Service Industry Make up about 70% of the U.S. economy. Since the mid-1980s, the service industry generated almost all the increases in employment. More high-paying jobs in service industries. The SERVICE ERA LG8 1-53

54. Your Future in Business IT affects:  Agriculture  Industry  Service The INFORMATION TECHNOLOGY ERA LG8 1-54