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Copyright © 2016 Pearson Education, Inc.
6 Forms of Business Ownership and Buying an Existing BusinessSection 2: The Entrepreneurial Journey Begins 6 Forms of Business Ownership and Buying an Existing Business Copyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.Learning Objectives Explain the advantages and disadvantages of a sole proprietorship and a partnership. Describe the similarities and differences of the C corporation and the S corporation. Understand the characteristics of the limited liability company. Explain the process of creating a legal entity for a business. Understand the advantages and disadvantages of buying an existing business. Define the steps involved in the right way to buy a business. Understand how the negotiation process works and identify the factors that affect it. Copyright © 2016 Pearson Education, Inc.
Choosing a Form of OwnershipThere is no one “best” form of ownership. The best form of ownership depends on an entrepreneur’s particular situation. Key: Understanding the characteristics of each form of ownership and how well they match an entrepreneur’s business and personal circumstances. Copyright © 2016 Pearson Education, Inc.
Factors Affecting the ChoiceTax considerations Liability exposure Start-up and future capital requirements Control Managerial ability Business goals Management succession plans Cost of formation Copyright © 2016 Pearson Education, Inc.
Major Forms of OwnershipSole Proprietorship General Partnership Limited Partnership Corporation S Corporation Limited Liability Company Copyright © 2016 Pearson Education, Inc.
Percentage of BusinessCopyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.Percentage of Sales Copyright © 2016 Pearson Education, Inc.
Percentage of Net IncomeCopyright © 2016 Pearson Education, Inc.
Advantages of a Sole ProprietorshipSimple to create Least costly form to begin Profit incentive Total decision making authority No special legal restrictions Easy to discontinue Copyright © 2016 Pearson Education, Inc.
Disadvantages of a Sole ProprietorshipUnlimited personal liability The company’s debts are the owner’s debts. Limited skills and capabilities Feelings of isolation Limited access to capital Lack of continuity of the business Copyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.Partnership An association of two or more people who co- own a business for the purpose of making a profit. Always wise to create a partnership agreement: states in writing the terms under which the partners agree to operate the partnership and that protects each partner’s interests in the business. Copyright © 2016 Pearson Education, Inc.
Revised Uniform Partnership ActThree key elements of any partnership under RUPA: Common ownership in a business. Agreement on how the business’s profits and losses will be shared. The right to participate in managing the operation of a partnership. Copyright © 2016 Pearson Education, Inc.
Advantages of the PartnershipEasy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners Copyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.Types of Partners General partners: Take an active role in managing a business. Have unlimited liability for the partnership’s debts. Every partnership must have at least one general partner. Limited partners: Cannot participate in the day-to-day management of a company. Have limited liability for the partnership’s debts. Copyright © 2016 Pearson Education, Inc.
Types of Limited PartnersTwo types of limited partners: Silent partners: Not active in a business but are generally known to be members of the partnership Dormant partners: Neither active nor generally known to be associated with the business Copyright © 2016 Pearson Education, Inc.
Advantages of the Partnership(continued from 6-14) Easy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners Minimal government regulation Flexibility Taxation Copyright © 2016 Pearson Education, Inc.
Disadvantages of the PartnershipUnlimited liability of at least one partner Capital accumulation Difficulty in disposing of partnership interest without dissolving the partnership Potential for personality and authority conflicts Partners bound by law of agency Copyright © 2016 Pearson Education, Inc.
Limited Liability PartnershipsAll partners in a business are limited partners. Gives the advantage of limited liability for the debts of the partnership. Does not pay taxes – income is passed through to the limited partners who pay taxes on their share of the company’s income. Copyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.Corporations Corporation: a separate legal entity from its owners. Types of corporations: Publicly held: a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges. Closely held: a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends. Copyright © 2016 Pearson Education, Inc.
Avoiding Legal TanglesIdentify the company as a corporation by using “Inc.” or “Corporation” in the business name. File all reports and pay all necessary fees required by the state in a timely manner. Hold annual meetings to elect officers and directors. Keep minutes of every meeting (formal and informal) of the officers and directors. Copyright © 2016 Pearson Education, Inc.
Avoiding Legal Tangles(continued) Be sure that the corporation’s board makes all major decisions. Make it clear that the business is a corporation – officers should sign all documents in the corporation’s name. Keep corporate assets and the personal assets of the owners separate. Copyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.C Corporation Traditional form of incorporation. Pays taxes at the corporate tax rate and stockholders also pay taxes on dividends they receive at their individual tax rates. Double taxation: a disadvantage of the corporate form of ownership in which the corporation’s profits are taxed twice, once at the corporate rate and again at the individual rate on the portion of profits distributed to shareholders as dividends. Copyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.S Corporation No different from any other corporation from a legal perspective. 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. Follow 1/3, 1/3, 1/3 rule of thumb. Copyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.Tax Rate Comparison Copyright © 2016 Pearson Education, Inc.
Limited Liability Company (LLC)Resembles an S Corporation but is not subject to the same restrictions. Two documents required: Articles of organization: creates an LLC by establishing its name and address, method of management, its duration, etc. Operating agreement: establishes for an LLC the provisions governing the way it will conduct business. Copyright © 2016 Pearson Education, Inc.
Creating a Legal Business EntityThe average cost to create a legal business entity is about $1,000, but it can range from $500 to $5,000. Can use Web sites like MyCorporation and BizFilings and incorporate for just $100. But, be careful! The cost of filing incorrectly can be high. States have different regulations on forming business entities. Copyright © 2016 Pearson Education, Inc.
Key Questions to Consider Before Buying a BusinessIs the right type of business for sale in the market in which you want to operate? What experience do you have in this particular business and the industry in which it operates? How critical is experience in the business to your ultimate success? What is the company’s potential for success? What changes will you have to make – and how extensive will they have to be – to realize the business’s full potential? Copyright © 2016 Pearson Education, Inc.
Key Questions to Consider Before Buying a Business(continued) What price and payment method are reasonable for you and acceptable to the seller? Is the seller willing to finance part of the purchase price? Will the company generate sufficient cash to pay for itself and leave you with a suitable rate of return on your investment? Should you be starting a business and building it from the ground up rather than buying an existing one? Copyright © 2016 Pearson Education, Inc.
Types of Business BuyersCopyright © 2016 Pearson Education, Inc.
Advantages of Buying an Existing BusinessIt may continue to be successful It may already have the best location Employees and suppliers are established Equipment is already installed Inventory is in place and trade credit is established It’s turnkey New owners can “hit the ground running” New owners can use the previous owner’s experience Financing is easier to obtain It’s a bargain! Copyright © 2016 Pearson Education, Inc.
Disadvantages of Buying an Existing BusinessThe financial costs are high It’s a “loser” Previous owner may have created ill will “Inherited” employees may be unsuitable The location may have become unsatisfactory Equipment and facilities may be obsolete or inefficient Change and innovation can be difficult to implement Inventory may be outdated or obsolete Accounts receivable may be worth less than face value The business may be overpriced Copyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.Acquiring a Business Study: 50 to 75% of all business sales that are initiated fall through. The right way: Analyze your skills, abilities, and interests. Develop a list of criteria Prepare a list of potential candidates. Investigate and evaluate candidate businesses and select the best one. Copyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.Acquiring a Business Explore financing options Potential source: the seller Negotiate a reasonable deal Ensure a smooth transition Communicate with employees Be honest Listen Consider asking the seller to serve as a consultant through the transition Copyright © 2016 Pearson Education, Inc.
The Acquisition ProcessCopyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.Negotiating the Deal Go into negotiations with a list of objectives ranked in order of priority. Try to understand what the seller’s priorities are. Work to establish a cooperative relationship based on honesty and trust. Avoid an “if you win, then I lose” mentality Look for areas of mutual benefit Copyright © 2016 Pearson Education, Inc.
Copyright © 2016 Pearson Education, Inc.
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