What You Need to Know about Forms of Business Ownership

Starting your own business Yes, decide what type you want to be and why… Sole proprietorship – just get started! Partnership – pair up with a friend Corporation - function separate from owners

Sole Proprietorship Advantages Disadvantages Ease of start/end Be your own boss Pride of ownership Leave legacy Retain profit No special taxes Disadvantages Unlimited liability Limited financial resources Difficulty in managment Time commitment Few fringe benefits Limited growth Limited life span

Types of Partnerships General Limited Master Limited Limited Liability

Partnership Advantages Disadvantages More financial resources Shared mgmt. Longer survival No Special Taxes Disadvantages Unlimited liability Division of profits Disagreements among partners Difficult to terminate

Types of Corporations Regular “C” S Corporation Limited Liability Companies

Corporations Private- Not Traded on Any Stock Exchange Public- Shares Are Traded on 1 or More Stock Exchanges Non-Profit- Performs Public Service, Has Special Tax Considerations To Encourage Formation

Corporation Advantages Disadvantages More money for investment Limited liability Separation of ownership/mgmt. Ease of ownership change Perpetual life Size Disadvantages Initial cost Paperwork Two tax returns Termination difficult Stockholder & Board Conflict Double taxation

How Owners Affect Management

S Corporations No more than 75 shareholders Individual or Estates U.S. citizens or residents 1 class of stock <25% of income can be passive Slower-growing companies Benefits change with new tax rules

Limited Liability Companies Disadvantages No Stock Limited Life Span Fewer Incentives Taxes Paperwork Advantages Limited Liability Tax Choice Flexible Ownership Rules Flexible Profit & Loss Distribution Operating Flexibility

Why Mergers Don’t Work Companies Overpay to Acquire Another Firm Acquiring Company Overestimates Cost Savings and Synergies After Merger, Managers Disagree About Integrating Operations After Merger, Cost Cutting Obsession Hurts Business, Costing Top Employees & Customers

GM’s Ownership In: Source: USA TODAY

Types of Mergers Horizontal Vertical Conglomerate

Individual + Loan = Purchase of Company Leveraged Buyout Individual + Loan = Purchase of Company Purchase Loan Company = Collateral

Franchise System Franchise Agreement Franchisor Franchisee

Branded Product/Service Franchise Contract Franchisor, Inc. Branded Product/Service Performance Monitoring $$$$$ Franchisee

Franchisor Provides Training/Support Assigns Territory Business Expansion Using O.P.M. Assigns Territory May Provide Financial Aid/Advice Offers Merchandise/ Supplies at Competitive Price

Franchisee Pays Up-Front Costs Makes Monthly Payment to Franchisor Runs Business by Franchisor’s Rules/Procedures Buys Materials from Franchisor/ Approved Supplier

Fastest Growing Franchises Company Since Type # Stores Curves 1995 Women’s Only Fitness 3,778 Subway 1974 Submarine Sandwich 14,800 7-Eleven 1964 24-Hr. Convenience 3,761 Taco Bell Mexican Fast Food 5,417 Jani-King Commercial Cleaning 7,843 Source: Entrepreneur, 2003

Franchises Advantages Disadvantages High start-up costs Management & marketing assistance Personal ownership Recognized name Financial advice & assistance Lower failure rate Disadvantages High start-up costs Shared Profit Management regulation Coattail effects Restrictions on selling Fraudulent franchisors

Cost of Fast-Food Franchise

How to Avoid a Franchise Lemon Research officers & their business experience Get summary of any bankruptcy & litigation Estimate all costs to set up franchise Review franchise contract & three most recent financial statements

Benefits of a Home-Based Franchise . Flexible work hours Quality lifestyle Doing the work of your choice Opportunity to expand using technology Self-motivation

Franchising & E-Commerce Technology- Faster Customer Service Access to International Markets

Cooperatives Farm Cooperative Owned & Controlled by People Who Use It Pool of Resources Economic Power

Small Business Revival Shift to Services CAD/CAM Lessening Advantages of Big Manufacturing Maturation of Baby Boomers More Women in Workforce 1970 1980 1990 2000

Entrepreneurship Definition Characteristics of Successful Entrepreneurs Intrapreneur Micropreneur vs. Home-Based Corporation Entrepreneur

Small Business- Advantages Personalized Service/ Personal Contact Flexibility Lower Costs Innovation Opportunities

Small Business-Disadvantages Limited Experience Long Hours Insufficient Capital High Failure Rate

Why People Start Their Own Businesses Source: BFIB/VISA Card Primer

Reasons Women Leave Jobs in Big Companies to Start Business Source: FSB, March 2001

Self- Perception of Small Business Owners Source: USA Today, 5/20/03

Who Starts New Businesses? AGE AT START-UP 18 - 24 8% 25 - 34 71% 35 - 44 13% 45 - 54 6% 55+ 2%

Entrepreneurial Attributes Self-Directed & Self-Disciplined Self-Nurturing Action-Oriented Highly Energetic Tolerant of Uncertainty

Hours per Week Entrepreneurs Worked 1st Year

Reasons for Growth of Home-Based Businesses Technology Downsizing Attitudes Tax Advantages

Most Common Types of Home-Based Businesses Source: Independent Insurance Agents of America

Home Office Owners Challenges Focus New Customers Find Opportunity Time Management Work vs. Family City Ordinances Risk Focus Find Opportunity Results vs. Routine Profit vs. Paycheck New Ideas Long Term vs. Short Term

Government Efforts Enterprise Zones Incubators Immigration Act of 1990- Investor Visa Enterprise Zones Incubators

What Is Small Business? Independent Not Dominant < 500 Employees

U.S. Small Businesses 20 Million Full/Part-Time Businesses 75% of New Jobs 45% of Gross Domestic Product Jobs 80% of Americans = 1st Job in Small Business 75% of New Jobs = Small Business Women-Owned Growing Rapidly

Small Business Success Learn from Others Get Experience Take Over Successful Firm

Successful Business Management Requirements Business Plan Adequate Funding Lenders/Investors “Angels” Venture Capitalists Professional Advice/Help Know Your Customer Manage Human Resources Keep Good Records

Small Business Strategies Examine Marketing & ID Areas for Growth Profile Best Customers & Market to Similar Prospects Invest in Sales Training & Technology Refresh Business Perspective With Outside Views Streamline Business & Eliminate Waste

Saving a Business in Trouble React/Not Overreact Understand Financial Situation Find Professional Help Develop “Recovery Plan” Be Visible Confident Leader Remind Employees of Stake in Business Don’t Get Stung By Killer “Bankruptcy”

Capital Sources of Successful Entrepreneurs SOURCE: FSB, March 2001

Reasons for a Banker to Say “No” I don’t know enough about you or your business. You haven’t clearly stated why you need the money. Your numbers don’t support the loan request. Your collateral is lacking. Your business does not support the loan on its own merits.

Small Business Collaborators Small Business Administration (SBA) Microloan program SBICs SBDCs Service Corps of Retired Executives (SCORE) Active Corps of Executives (ACE)

Ways to Improve Banking Relationships Provide Bank With Business Plan, Brochures, Business Cards, etc. Describe Business, Financial Situation, Plans Ask About Scope of Bank Services Express Interest In Banker’s Background- Family, Hobbies, etc. Follow Up With Phone Calls, Visits Source: St. Louis Business Monthly, August 2002

Small Business & International Prospects Positives World Market Absorb Excess Inventory Soften U.S. Downturns Extend Product Life Negatives Financing Difficult How to Get Started? Lack of Cultural Understanding Paperwork

International Small Business Advantages Deal With Individuals Faster Shipping Variety of Suppliers Professional Service Information Dept. of Commerce- www.bxa.doc.gov SBA- International- www.sba.gov/hotlist/internat.html