1. Chapter 4: Forms of Ownership & Franchising 1 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Forms of Business Ownership and Franchising

2. Chapter 4: Forms of Ownership & Franchising 2 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Factors Affecting the Choice Tax considerations Tax considerations Liability exposure Liability exposure Start-up capital requirements Start-up capital requirements Control Control Business goals Business goals Management succession plans Management succession plans Cost of formation Cost of formation

3. Chapter 4: Forms of Ownership & Franchising 3 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Major Forms of Ownership Sole Proprietorship Sole Proprietorship Partnership Partnership Corporation Corporation S Corporation S Corporation Limited Liability Company Limited Liability Company Joint Venture Joint Venture

4. Source: Statistical Abstract of the United States, 2002, p.471.

7. Chapter 4: Forms of Ownership & Franchising 7 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Advantages of the Sole Proprietorship Simple to create Simple to create Least costly form to begin Least costly form to begin Profit incentive Profit incentive Total decision making authority Total decision making authority No special legal restrictions No special legal restrictions Easy to discontinue Easy to discontinue

8. Chapter 4: Forms of Ownership & Franchising 8 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Disadvantages of the Sole Proprietorship Unlimited personal liability Unlimited personal liability Limited skills and capabilities Limited skills and capabilities Feelings of isolation Feelings of isolation Limited access to capital Limited access to capital Lack of continuity Lack of continuity

9. Chapter 4: Forms of Ownership & Franchising 9 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Advantages of the Partnership Easy to establish Easy to establish Complementary skills of partners Complementary skills of partners Division of profits Division of profits Larger pool of capital Larger pool of capital Ability to attract limited partners Ability to attract limited partners

10. Chapter 4: Forms of Ownership & Franchising 10 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Types of Partners General partners General partners  Take an active role in managing a business.  Have unlimited liability for the partnership’s debts. Limited partners Limited partners  Cannot participate in the day-to-day management of a company.  Have limited liability for the partnership’s debts.

11. Chapter 4: Forms of Ownership & Franchising 11 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Advantages of the Partnership Easy to establish Easy to establish Complementary skills of partners Complementary skills of partners Division of profits Division of profits Larger pool of capital Larger pool of capital Ability to attract limited partners Ability to attract limited partners Little government regulation Little government regulation Flexibility Flexibility Taxation Taxation

12. Chapter 4: Forms of Ownership & Franchising 12 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Disadvantages of the Partnership Unlimited liability of at least one partner Unlimited liability of at least one partner Capital accumulation Capital accumulation Difficulty in disposing of partnership interest Difficulty in disposing of partnership interest Lack of continuity Lack of continuity Potential for personality and authority conflicts Potential for personality and authority conflicts

13. Chapter 4: Forms of Ownership & Franchising 13 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Types of Corporations Domestic – a corporation doing business in the state in which it is incorporated. Domestic – a corporation doing business in the state in which it is incorporated. Foreign – a corporation doing business in a state other than the state in which it is incorporated. Foreign – a corporation doing business in a state other than the state in which it is incorporated. Alien – a corporation formed in another country but doing business in the United States. Alien – a corporation formed in another country but doing business in the United States.

14. Chapter 4: Forms of Ownership & Franchising 14 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Advantages of the Corporation Limited liability of stockholders Limited liability of stockholders Ability to attract capital Ability to attract capital Ability to continue indefinitely Ability to continue indefinitely Transferable ownership Transferable ownership

15. Chapter 4: Forms of Ownership & Franchising 15 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Disadvantages of the Corporation Cost and time of incorporating Cost and time of incorporating Double taxation Double taxation Potential for diminished managerial incentives Potential for diminished managerial incentives Legal requirements and regulatory “red tape” Legal requirements and regulatory “red tape” Potential loss of control by founder(s) Potential loss of control by founder(s)

16. Chapter 4: Forms of Ownership & Franchising 16 Copyright 2005 Prentice Hall Inc. A Pearson Education Company S Corporation No different from any other corporation from a legal perspective. No different from any other corporation from a legal perspective. For tax purposes, however, an S corporation is taxed like a partnership, passing all of its profits (or losses) through to individual shareholders. For tax purposes, however, an S corporation is taxed like a partnership, passing all of its profits (or losses) through to individual shareholders. To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year. To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year.

17. Chapter 4: Forms of Ownership & Franchising 17 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Limited Liability Company (LLC) Resembles an S Corporation but is not subject to the same restrictions. Resembles an S Corporation but is not subject to the same restrictions. Two documents required: the articles of organization and the operating agreement. Two documents required: the articles of organization and the operating agreement. An LLC cannot have more than two of these four corporate characteristics: An LLC cannot have more than two of these four corporate characteristics:  Limited liability  Continuity of life  Free transferability of interest  Centralized management

18. Chapter 4: Forms of Ownership & Franchising 18 Copyright 2005 Prentice Hall Inc. A Pearson Education Company The Franchising Boom!!! Sales of $1 trillion in virtually every product or service imaginable. Sales of $1 trillion in virtually every product or service imaginable. More than 4,500 franchisers operating some 600,000 outlets worldwide. More than 4,500 franchisers operating some 600,000 outlets worldwide. Franchise sales account for 44% of total retail sales. Franchise sales account for 44% of total retail sales. A new franchise opens somewhere in the world every six-and-a-half minutes. A new franchise opens somewhere in the world every six-and-a-half minutes. Boom!

19. Chapter 4: Forms of Ownership & Franchising 19 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Types of Franchising Trade-name Trade-name Product distribution Product distribution Pure (or Comprehensive or Business Format) Pure (or Comprehensive or Business Format)

20. Chapter 4: Forms of Ownership & Franchising 20 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Benefits of Franchising Management training and support Management training and support Brand name appeal Brand name appeal Standardized quality of goods and services Standardized quality of goods and services National advertising program National advertising program Financial assistance Financial assistance

21. Chapter 4: Forms of Ownership & Franchising 21 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Benefits of Franchising (continued) Proven products and business formats Proven products and business formats Centralized buying power Centralized buying power Site selection and territorial protection Site selection and territorial protection Greater chance for success Greater chance for success

22. Chapter 4: Forms of Ownership & Franchising 22 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Drawbacks of Franchising Franchise fees and profit sharing Franchise fees and profit sharing Strict adherence to standardized operations Strict adherence to standardized operations Restrictions on purchasing Restrictions on purchasing Limited product line Limited product line Unsatisfactory training programs Unsatisfactory training programs Market saturation Market saturation Less freedom Less freedom

23. Chapter 4: Forms of Ownership & Franchising 23 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Ten Myths of Franchising 1. Franchising is the safest way to go into business because franchises never fail. 2. I’ll be able to open my franchise for less money than the franchiser estimates. 3. The bigger the franchise organization, the more successful I’ll be. 4. I’ll use 80 percent of the franchiser’s business system, but I’ll improve upon by substituting my experience and know-how.

24. Chapter 4: Forms of Ownership & Franchising 24 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Ten Myths of Franchising 5. All franchises are the same. 6. I don’t have to be a hands-on manager. I can be an absentee owner and still be very successful. 7. Anyone can be a satisfied, successful franchise owner. (continued)

25. Chapter 4: Forms of Ownership & Franchising 25 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Ten Myths of Franchising 8. Franchising is the cheapest way to get into business for yourself. 9. The franchiser will solve my business problems for me; after all, that’s why I pay an ongoing royalty fee. 10. Once I open my franchise, I’ll be able to run things the way I want to. (continued)

26. Chapter 4: Forms of Ownership & Franchising 26 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Detecting Dishonest Franchisers Claims that the contract is “standard; no need to read it.” Claims that the contract is “standard; no need to read it.” Failure to provide a copy of the required disclosure documents. Failure to provide a copy of the required disclosure documents. Marginally successful prototype or no prototype. Marginally successful prototype or no prototype. Poorly prepared operations manual. Poorly prepared operations manual. Promises of future earnings with no documentation. Promises of future earnings with no documentation. High franchisee turnover or termination rate. High franchisee turnover or termination rate. Unusual amount of litigation by franchisees. Unusual amount of litigation by franchisees.

27. Chapter 4: Forms of Ownership & Franchising 27 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Detecting Dishonest Franchisers Attempts to discourage your attorney from evaluating the contract before signing it. Attempts to discourage your attorney from evaluating the contract before signing it. No written documentation. No written documentation. A high pressure sale. A high pressure sale. Claims to be exempt from federal disclosure laws. Claims to be exempt from federal disclosure laws. “Get rich quick” schemes, promising huge profits with minimal effort. “Get rich quick” schemes, promising huge profits with minimal effort. Reluctance to provide a list of existing franchisees. Reluctance to provide a list of existing franchisees. Evasive, vague answers to your questions. Evasive, vague answers to your questions. (continued)

28. Chapter 4: Forms of Ownership & Franchising 28 Copyright 2005 Prentice Hall Inc. A Pearson Education Company The Right Way to Buy a Franchise Evaluate yourself - What do you like and dislike? Evaluate yourself - What do you like and dislike? Research your market. Research your market. Consider your franchise options. Consider your franchise options. Get a copy of the franchiser’s Uniform Franchise Offering Circular (UFOC) and read it. Get a copy of the franchiser’s Uniform Franchise Offering Circular (UFOC) and read it. Talk to existing franchisees. Talk to existing franchisees. Ask the franchiser some tough questions. Ask the franchiser some tough questions. Make your choice. Make your choice.

29. Chapter 4: Forms of Ownership & Franchising 29 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Factors That Make a Franchise Appealing Unique concept or marketing approach Unique concept or marketing approach Profitability Profitability Registered trademark Registered trademark Business system that works Business system that works Solid training program Solid training program Affordability Affordability Positive relationship with franchisees Positive relationship with franchisees

30. Chapter 4: Forms of Ownership & Franchising 30 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Trends Shaping Franchising Changing face of franchisees Changing face of franchisees International opportunities International opportunities Smaller, nontraditional locations Smaller, nontraditional locations Conversion franchising Conversion franchising Multiple-unit franchising Multiple-unit franchising Master franchising Master franchising Piggybacking (Combination franchising) Piggybacking (Combination franchising) Serving baby boomers Serving baby boomers