©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1

6 Business Formation: Choosing the Form that Fits Describe the characteristics of the four basic forms of business ownership Discuss the advantages and disadvantages of a sole proprietorship Evaluate the pros and cons of the partnership as a form of business ownership

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 Business Formation: Choosing the Form that Fits Explain why corporations have become the dominant form of business ownership Explain why limited liability companies are becoming an increasingly popular form of business ownership Evaluate the advantages and disadvantages of franchising

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms of Business Ownership ￭ Sole proprietorship: Single owner actively manages the company ￭ Partnership: Two or more people act as co-owners of a business for profit  General partnership: All partners actively manage business and have unlimited liability for any claims against firm 4

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms of Business Ownership ￭ Corporation: Business is considered a legal entity that is separate and distinct from its owners  Articles of incorporation: Document filed with a state government to establish the existence of a new corporation 5

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms of Business Ownership  Limited liability: Owners: Are not personally liable for claims against firm Lose investment in the company, but other personal assets are protected ￭ Limited liability company (LLC): Offers both limited liability to its owners and flexible tax treatment 6

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages and Disadvantages of Sole Proprietorships Advantages Ease of formation Retention of control Pride of ownership Retention of profits Possible tax advantage Disadvantages Limited financial resources Unlimited liability Limited ability to attract and maintain talent Heavy workload and responsibilities Lack of permanence 7

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Formation of General Partnerships ￭ No limit to the number of partners ￭ Verbal or written agreement details out:  Initial financial contributions  Specific duties and responsibilities  How profits and losses will be shared  How disagreements will be settled  How a partner’s death or withdrawal will be dealt with 8

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages and Disadvantages of General Partnerships 9 Advantages Ability to: Pool financial resources Share responsibilities Capitalize on complementary skills Ease of formation Possible tax advantages Disadvantages Unlimited liability Potential for disagreements Lack of continuity Difficulty in withdrawing from a partnership

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Other Forms of Partnership ￭ Limited partnership:  General partners - Participate fully and assume unlimited personal liability  Limited partners - Cannot actively participate and are protected by limited liability ￭ Limited liability partnership: All partners participate in management and have limited liability for company debts 10

Reality TV Video Slide 11 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 06wemeanbusiness.html

© iStockphoto.com / DNY59 ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ￭ What form of ownership characterizes Berry Elegance? ￭ What advantages might Todd Jones and Amy Stipa enjoy with respect to their business partnership in the firm, Berry Elegance? ￭ What disadvantages might Todd Jones and Amy Stipa enjoy with respect to their business partnership in the firm, Berry Elegance? 12

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Corporations ￭ C corporation: Legal business entity that offers limited liability to all of its owners  Corporate bylaws: Govern how a corporation is organized and how it conducts its business ￭ Stockholder: Owner of a corporation  Institutional investor: Pool contributions from investors, clients, or depositors and use them to buy stocks and securities 13

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Corporations  Board of directors: Individuals elected by stockholders to represent their interests 14

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages and Disadvantages of C corporations Advantages Limited liability Permanence Ease of transfer of ownership Ability to raise large amounts of financial capital Ability to make use of specialized management Disadvantages Expense and complexity of formation and operation Complications when operating in more than one state Double taxation of earnings and additional taxes More paperwork, more regulation, and less secrecy Possible conflicts of interest 15

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Characteristics of S, Statutory Close, and Nonprofit Corporations TypeKey AdvantagesLimitations S corporationThe IRS does not tax earnings separately, thus avoiding the problem of double taxation No more than 100 stockholders Stockholders have limited liabilityEach stockholder must be a U.S. citizen or permanent resident Statutory close or closed corporation Operate under simpler arrangements than conventional corporations Number of stockholders is limited Shares cannot be sold without first offering the shares to existing owners All owners can actively participate in management while still having limited liability Not all states allow this type of formation 16

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Characteristics of S, Statutory Close, and Nonprofit Corporations TypeKey AdvantagesLimitations Nonprofit Corporation Earnings are exempt from federal and state income taxes Has members but cannot have stockholders Cannot distribute dividends to members Members and directors have limited liability Individuals who contribute money or property to the nonprofit can take a tax deduction, making it easier for these organizations to raise funds from donations Cannot contribute funds to a political campaign Keep accurate records and file paperwork to document tax-exempt status 17

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Corporate Restructuring ￭ Acquisition: One firm buys another ￭ Merger: Two formerly independent business entities combine to form a new organization 18

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Mergers and Acquisitions TypeDefinitionCommon objective Horizontal merger Combination of firms in the same industry Increases size and market power within the industry Improves efficiency by eliminating duplication of facilities and personnel Vertical mergerCombination of firms that are at different stages in the production of a good or service, creating a buyer- seller relationship Provides tighter integration of production and increased control over the supply of crucial inputs Conglomerate merger Combination of firms in unrelated industries Reduces risk by making the firm less vulnerable to adverse conditions in any single market 19

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Web-link: Cadbury Dairy Milk The link details mergers and acquisitions of Cadbury Dairy Milk's over the years 20 uryChocolates.aspx

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Divestiture ￭ Transfer of total or partial ownership of firm’s operations to investors or to another company ￭ Spin-off - Company issues stock in one of its own divisions and sets it up as a separate company ￭ Carve-out - Company sells the stock to outside investors, thus raising additional financial capital 21

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Limited Liability Company (LLC) ￭ Formed by filing a document and paying filing fees to the respective state ￭ LLC organizers draft an operating agreement ￭ Neither a corporation nor a partnership  Owners are called members and manage their own company under an agreement  Hire professional managers 22

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages and Disadvantages of LLCs 23 Advantages Limited liability Tax pass-through Simplicity and flexibility in management and operation Flexible ownership Disadvantages Complexity of formation Annual franchise tax Foreign status in other states Limits on types of firms that can form LLCs Differences in state laws

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise ￭ Is a licensing arrangement ￭ Franchisor allows franchisees to use its name, trademark, products, business methods, and other property ￭ Franchisor: Supplies resources in exchange for money and other considerations 24

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise ￭ Franchisee: Pays for the right to use resources supplied by the franchisor 25

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Advantages and Disadvantages of Franchising Advantages Less risk Training and support Brand recognition Easier access to funding Disadvantages Costs Lack of control Negative halo effect Growth challenges Restrictions on sale Poor execution 26

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise Agreement ￭ Contractual arrangement specifying duties and responsibilities of parties involved  Terms and conditions  Fees and other payments  Training and support  Specific operational requirements  Conflict resolution  Assigned territory 27

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Web-link: Franchising at McDonald’s ￭This link elaborates the franchising model at McDonald’s 28 ranchise.html

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise Disclosure Document (FDD) ￭ Detailed description of all aspects of a franchise ￭ Should be provided to franchisee at least fourteen calendar days before franchise agreement is signed 29

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Describe the characteristics of the four basic forms of business ownership Discuss the advantages and disadvantages of a sole proprietorship Evaluate the pros and cons of the partnership as a form of business ownership

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Explain why corporations have become the dominant form of business ownership Explain why limited liability companies are becoming an increasingly popular form of business ownership Evaluate the advantages and disadvantages of franchising