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*Chapter Five

How to Form

a Business

Copyri ght © 2010 by the McGraw-Hil l Companies, Inc. All ri ghts reserved. McGraw-Hill/Irwin

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• Bought a used truck and started Rubbish Boys,later changed the name to 1-800-GOT-JUNK?.

• $130 million in annual earnings from locations

across North America and Australia.• Expanded through franchising.

ProfileBRIAN SCUDAMORE1-800-GOT-JUNK?

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http://localhost/var/www/apps/conversion/tmp/scratch_5/1800gotjunk.com








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*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

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*Basic Forms of

Business

Ownership

LG1

FORMS ofBUSINESS OWNERSHIP

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* Advantages of

Sole

Proprietorships

• Ease of starting andending the business

• Being your own boss

• Pride of ownership

• Leaving a legacy

•

Retention of companyprofit

• No special taxes

MAJOR BENEFITS of SOLEPROPRIETORSHIP

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*Disadvantages

of Sole

Proprietorships

• Unlimited Liability -- Any debts or damages

incurred by the business are your debts, even if it

means selling your home, car or anything else.

• Limited financial resources

• Management difficulties

• Overwhelming time commitment

• Few fringe benefits

• Limited growth

• Limited life span

DISADVANTAGES of SOLEPROPRIETORSHIPS

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*Progress

Assessment

• Most people who start businesses in the UnitedStates are sole proprietors. What are the

advantages and disadvantages of soleproprietorships?

• Why would unlimited liability be considered amajor drawback to sole proprietorships?

PROGRESS ASSESSMENT

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*Partnerships

• General Partnership -- All owners share in

operating the business and in assuming liability for

the business’s debts.

• Limited Partnership -- A partnership with one or more general partners and one or more limited

partners.

MAJOR TYPES of PARTNERSHIPSLG2

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*Partnerships

• Master Limited Partnership -- A partnership that

looks much like a corporation but is taxed like a

partnership and thus avoids the corporate income

tax.

• Limited Liability Partnership -- Limits partners’

risk of losing their personal assets to the outcomes

of only their own acts and omissions and those of people under their supervision.

OTHER FORMS ofPARTNERSHIPS

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*Partnerships

• General Partner -- An owner (partner) who has

unlimited liability and is active in managing the firm.

• Limited Partner -- An owner who invests money inthe business but enjoys limited liability. LimitedLiability means that liability for the debts of thebusiness is limited to the amount the limited partner

puts into the company; personal assets are not atrisk.

TYPES OF PARTNERS LG2

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* Advantages &

Disadvantages

of Partnerships

• More financial resources

• Shared management and

pooled skills andknowledge

• Longer survival

• No special taxes

ADVANTAGES ofPARTNERSHIPS

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* Advantages &

Disadvantages

of Partnerships

• Unlimited liability

•

Division of profits• Difficult to terminate

• Disagreements among

partners

DISADVANTAGES ofPARTNERSHIPS

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There is no such thing as a perfect partner butask these questions when you try to find yourbest match:

• Do you share the same goals?

• Do you share the same vision for the company?

• What skills does he/she have? Are yours the same?

•

What can he/she bring to the business?• What type of decision maker is he/she?

• Do you trust each other?

• How does he/she problem solve?

PICK YOUR PARTNER WISELY(Spotlight on Small Business)

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*Progress

Assessment

• What’s the difference between a limited partner

and a general partner?

• What are some of the advantages anddisadvantages of partnerships?

PROGRESS ASSESSMENT

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*Corporations

• Conventional (C)

Corporation -- A state-

chartered legal entity withauthority to act and have

liability separate from its

owners (its stockholders).

CONVENTIONALCORPORATIONS

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* 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 ofCORPORATIONS

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* Advantages of

Corporations

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HOW OWNERS AFFECTMANAGEMENT

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Source: Fortune, www.fortune.com, April 2009.

1. Exxon Mobil

2. Wal-Mart

3. Chevron

4. ConocoPhillips

5. General Electric

Advantages of

CorporationsThe BIG BOYS of BUSINESS

America’s Largest Corporations LG3

6. General Motors

7. Ford

8. AT&T

9. Hewlett-Packard

10. Valero Energy

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Source: Forbes, www.forbes.com, November 2008.

Advantages of

Corporations

Company State Industry

Cargill MN Farming

Koch Industries KS Chemicals

Chrysler MI Automobiles GMAC Financial Services MI Financial

PricewaterhouseCoopers NY Business Services

Mars VA Food

Bechtel

CA

Construction

HCA TN Hospitals

Ernst & Young NY Business Services

Publix Supermarkets FL Grocery

PRIVACY PLEASEThe Ten Largest Private Corporations in the U.S.

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*Disadvantages

of Corporations

• Initial cost

• Extensive paperwork

• Double taxation• Two tax returns

• Size

• Difficulty of termination• Possible conflict with stockholders and board of

directors

DISADVANTAGES ofCORPORATIONS

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*Individuals Can

Incorporate

• Anyone - truckers, doctors, plumbers, athletesand small business owners can incorporate.

• Normally, stock is not issued when individualsincorporate so the advantages anddisadvantages are not exactly the same as forlarge corporations.

• Major advantages are limited liability andpossible tax benefits.

WHO CAN INCORPORATE?

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*Individuals Can

Incorporate

Company Year Started Type of Company

J.E. Rhoads & Sons 1702 Conveyer Belts

Covenant Life Insurance 1717 Insurance

Philadelphia Insurance 1752 Insurance

Contributorship

Dexter 1767 Adhesives & Coatings

D. Landreth Seed 1784 Seeds

Bank of New York 1784 Banking

OLDIES BUT GOODIES America’s Oldest Corporations

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*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 andemployees, plus the benefit of limited liability.

• Profits are taxed only as the personal income ofthe shareholder.

S CORPORATIONS

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*S Corporations

• Qualifications for S Corporations:

- Have no more than 100 shareholders.

- Have shareholders that are individuals or estates andare citizens or permanent residents of the U.S.

- Have only one class of stock.

- Derive no more than 25% of income from passivesources.

• If an S corporation loses its S status, it maynot operate under it again for at least 5 years.

WHO CAN FORMS CORPORATIONS?

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*Limited Liability

Companies

• Limited Liability Company (LLC) -- Similar to a

S corporation but without the eligibility requirements.

• Advantages of LLCs:- Limited liability

- Choice of taxation

-

Flexible ownership rules- Flexible distribution of profit and losses

- Operating flexibility

LIMITED LIABILITY COMPANIES

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*Limited Liability

Companies

• No stock, therefore ownership is nontransferable

• Limited life span

• Fewer incentives

• Taxes

• Paperwork

DISADVANTAGES of LLCs

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• Since June 2008, Vermont allows a new kind ofLLC that exist only online.

• Registration documents can be filed online,meetings can be held through onlinecommunication, and relationships can beestablished electronically.

• Virtual companies allow online contributors withdifferent skills, availability and interest to interactand be successful.

VERMONT WANTS to be the HOMEof YOUR NEW VIRTUAL COMPANY

(Legal Briefcase)

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*Progress

Assessment

• What are the major advantages anddisadvantages of incorporating a business?

• What’s the role of owners (stockholders) in the

corporate hierarchy?

• If you buy stock in a corporation and someonegets injured by one of the corporation’s products,

can you be sued? Why or why not?• Why are so many new businesses choosing a

limited liability company (LLC) form ofownership?

PROGRESS ASSESSMENT

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*Corporate

Expansion:

Mergers and

Acquisitions

• Merger -- The result of two firms joining to form one

company.

•

Acquisition -- One company’s purchase of the property and obligations of another company.

MERGERS and AQUISITIONS

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*Corporate

Expansion:

Mergers and

Acquisitions

• Vertical Merger -- Joins two firms in different

stages of related business.

•

Horizontal Merger -- Joins two firms in the sameindustry and allows them to diversify or expand their

products.

• Conglomerate Merger -- Unites firms in

completely unrelated industries in order to diversify

business operations and investments.

TYPES of MERGERS

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*Corporate

Expansion:

Mergers and

Acquisitions

• Leveraged Buyout (LBO) -- An attempt by

employees, management or a group of investors to

buy out the stockholders in a company.• LBOs have ranged in size from $50 million to $31

billion and have involved everything from smallbusinesses to giant corporations.

• In 2007, foreign investors poured $414 billion intoU.S. companies.

LEVERAGED BUYOUTS

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*Franchises

• Franchise Agreement -- An arrangement whereby

someone with a good idea for a business

( f ranchisor ) sells the rights to use the business

name and sell a product or service ( f ranchise ) to

others ( f ranchisees ) in a given territory.

• More than 900,000 franchised businesses

operate in the U.S., employing approximately 10million people.

FRANCHISING

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* Advantages &

Disadvantages

of Franchises

• Management and marketingassistance

• Personal ownership

• Nationally recognized name

• Financial advice and

assistance• Lower failure rate

ADVANTAGES of FRANCHISING

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* Advantages &

Disadvantages

of Franchises

• Large start-up costs

• Shared profit

• Management regulation

• Coattail effects

• Restrictions on selling

• Fraudulent franchisors

DISADVANTAGES ofFRANCHISING

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*Diversity in

Franchising

• Women own about half of U.S. companies yetreceive less than 4% of venture capital.

• For the past 20 years, firms owned by womenhave grown at twice the rate of all companies.

• More women are becoming franchisors. Auntie

Anne’s, Decorating Den, Jazzercise and TwoMen and a Truck are owned by women.

WOMEN in FRANCHISING

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http://www.auntieannesfranchising.com/


http://www.decoratingden.com/business.shtml

http://www.jazzercise.com/become_franchise.htm

http://www.twomen.com/franchiseopportunities/index.html




http://www.jazzercise.com/become_franchise.htm

http://www.decoratingden.com/business.shtml



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• The Nationals in D.C. have the first sportsstadium to earn the U.S. Green Building Council’s

Leadership in Energy and Environmental Design(LEED) Rating.

• 95% of the stadium’s steel was recycled and low-flow toilets save millions of gallons of water.

• New stadiums of the Mets and Twins also haveearned LEED certifications.

ROOT, ROOT, ROOT for theGREEN TEAM

(Thinking Green)

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http://localhost/var/www/apps/conversion/tmp/scratch_5/nationals.mlb.com

http://localhost/var/www/apps/conversion/tmp/scratch_5/mets.mlb.com

http://localhost/var/www/apps/conversion/tmp/scratch_5/twins.mlb.com

http://localhost/var/www/apps/conversion/tmp/scratch_5/twins.mlb.com

http://localhost/var/www/apps/conversion/tmp/scratch_5/mets.mlb.com

http://localhost/var/www/apps/conversion/tmp/scratch_5/nationals.mlb.com

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*Home-Based

Franchises

Advantages:

• Relief from commuting stress

•

Extra family time• Low overhead expenses

Main Disadvantage:

•

Isolation

HOME-BASED FRANCHISES

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*Franchising in

International

Markets

• Canada is the most popular target for U.S. basedfranchises; South Africa and the Philippines are

becoming popular despite high cost.• Franchising is successful when the product is

convenient, high quality, great service is includedand the franchisee adapts to the region.

• International franchising goes both ways – someforeign franchises have come to the U.S.

GLOBAL FRANCHISING

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Source: Richard Gibson, Wall Street Journal, www.wsj.com, February 12, 2008.

• Focus on tried-and-true name brands.

• Stick to core goods and services.

• Be choosy about the site.

• Don’t pinch pennies.

• Have a fallback choice.

• Don’t assume the franchise will pay off .

Franchising in

International

MarketsWHAT to CHOOSE?

Picking Franchises that May Survive a RecessionLG5

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http://www.wsj.com/

http://www.wsj.com/

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Source: Wall Street Journal, www.wsj.com, February 12, 2008.

1. Arthur Murray Dance Studios2. Banfield Pet Hospitals3. Bojangles’ Famous Chicken ‘n

Biscuits4. Denny’s 5. Friendly’s 6. The Melting Pot7. Nathan’s Famous

8. Servpro9. Stanley Steamer10.Two Men and a Truck

Franchising in

International

MarketsHIGH FLYERS

Ten High-Performing Franchises LG5

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http://www.wsj.com/

http://www.wsj.com/

http://www.wsj.com/

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*Cooperatives

• Cooperatives -- Businesses owned and controlled

by the people who use it – producers, consumers, or

workers with similar needs who pool their resources

for mutual gain.

• Worldwide, 750,000 cooperatives serve 730million members – 120 million in the U.S.

• Members democratically control the business byelecting a board of directors that hiresprofessional management.

COOPERATIVES

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*Progress

Assessment

• What are some of the factors to consider beforebuying a franchise?

• What opportunities are available for starting aglobal franchise?

• What’s a cooperative?

PROGRESS ASSESSMENT

J0712 Pert04

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