©2015 Cengage Learning. All Rights Reserved. May not … the advantages and disadvantages of a sole proprietorship Evaluate the pros and cons of the partnership as a form of business

©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

©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

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

2

6-1

6-2

6-3


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

3

6-4

6-5

6-6


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



￭ 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



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


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


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

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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


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

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￭ 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


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


Corporations

Board of directors: Individuals elected by

stockholders to represent their interests

14


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


Characteristics of S, Statutory Close, and Nonprofit

Corporations

Type Key Advantages Limitations

S corporation The IRS does not tax earnings

separately, thus avoiding the

problem of double taxation

No more than 100

stockholders

Stockholders have limited liability Each 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


Characteristics of S, Statutory Close, and Nonprofit

Corporations

Type Key Advantages Limitations

Nonprofit

Corporation

Earnings are exempt from

federal and state

income taxes

Has members but

cannot have stockholders

Cannot distribute

dividends to membersMembers 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


Corporate Restructuring

￭ Acquisition: One firm buys another

￭ Merger: Two formerly independent

business entities combine to form a new

organization

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Types of Mergers and Acquisitions

Type Definition Common 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 merger Combination 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

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Web-link: Cadbury Dairy Milk

The link details mergers and acquisitions

of Cadbury Dairy Milk's over the years

20

http://www.mondelezinternational.com/ph/en/Brands/Confectionery/Cadb

uryChocolates.aspx

http://www.mondelezinternational.com/ph/en/Brands/Confectionery/CadburyChocolates.aspx


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


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


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


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


Franchise

￭ Franchisee: Pays for the right to use

resources supplied by the franchisor

25


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


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


Web-link: Franchising at McDonald’s

￭ This link elaborates the franchising

model at McDonald’s

28

http://www.aboutmcdonalds.com/mcd/franchising/us_franchising/aquiring_a_f

ranchise.html

http://www.aboutmcdonalds.com/mcd/franchising/us_franchising/aquiring_a_franchise.html


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


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

30

6-1

6-2

6-3


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

31

6-4

6-5

6-6

Documents

©2015 Cengage Learning. All Rights Reserved. May not … the advantages and disadvantages of a sole proprietorship Evaluate the pros and cons of the partnership as a form of business