Chapter 2

Objectives:

Methods of going into business

Legal forms of business

1919: J.W. Longaberger took a job with the Dresden Basket Factory

Great Depression: The factory closed, and J.W. got a job at a paper mill, but kept making baskets nights & weekends

1936: J.W. and his wife Bonnie purchased the Dresden Basket Factory, which they ran with their 12 children.

Longaberger Baskets

1934: Dave Longaberger born Stuttered, had epilepsy, spent 3 years in 5th

grade Very ambitious – family called him the “25

cent millionaire”– worked in a grocery store, – shoveled snow, – delivered papers, – mowed grass,– hauled trash, – ran the projectors at the local movie house

Longaberger Baskets

1963: Dave Longaberger and his wife bought & ran “Harry’s Dairy Bar”.

Bought A&P and ran it Dave noticed department stores selling

imported baskets, and asked his father, J.W., to make some baskets–they sold well.

1971: Opened J.W.’s Handwoven Baskets 1978: Figured out that the best way to sell

the baskets was home shows

Longaberger Baskets

1984: Dave’s daughter Tami joined the family business.

1994: Tami became president Today, 45,000 “home consultants” sell

Longaberger baskets.

Longaberger Baskets

Monty Tech Entrepreneur of the Week: Josh Miner - Miner Leaks LinkedIn Plumbing Class of 2002

Methods of Going Into Business

Buy an existing business Start from scratch Buy a franchise

Reminder: –Entrepreneur interviews due Friday

Advantages of buying an existing business?

Buy an Existing Business - Advantages Proven record Established clientele Established location Bank and supplier relationships Trained employees Established facilities Low purchase price

Disadvantages of Buying an Existing Business?

Buy an Existing Business - Disadvantages Poor record? Ill will? Wrong location? Poor physical condition?

How do you find a business to buy?

Advertised in classified (“Business opportunities” section)

Business broker Chamber of Commerce Small Business Administration Bankruptcy announcements Word of mouth

Steps to Purchase a Business Write specific objectives about the kind

of business you want to buy and identify businesses for sale that meet your objectives.

Meet with brokers to investigate specific opportunities.

Visit during business hours. Ask for complete financial accounting

for the past 3 years.

Purchase Steps Ask for important information in writing

– Complete list of assets to be transferred– Statement about any past or pending legal action

against the business– A copy of the business lease or mortgage– List of all suppliers

Determine how you would finance the business.

Get expert help to determine a price to offer for the business.

Advantages of Starting From Scratch?

Start from Scratch - Advantages

Freedom to make decisions Opportunity to develop image Choice of location Choice of physical facilities

Disadvantages of Starting from Scratch?

Start from Scratch - Disadvantages No record No established clientele Time-consuming tasks

– Training new employees– Installing machinery, display cases,

furniture– Ordering goods

Difficulty in obtaining a loan

Buy a Franchise

Franchise: contract Franchisee: person who purchases the

name/concept Franchiser: corporation who sells the

name/concept

Advantages of Purchasing a Franchise?

Advantages of a Franchise

Start-up help Advertising Financial assistance Established brand name Proven method Equipment and supplies may be less

expensive

Disadvantages of Purchasing a Franchise?

Disadvantages of a Franchise

Limited control Franchise fees

– Initial franchise fee– Royalty fees (weekly or monthly)

Potential image problem The franchisor can terminate the

franchise agreement

Evaluation of a franchise

What can a franchise do for me that I can’t do for myself?

What is the future for this product or service?

How is the contract? Are there enough potential customers? Is this a good fit for me, financially and

the type of business?

Sidelines

Work full time and run a business Advantage: financial security Disadvantage: less time to make

business successful

Family Business

Do you have a business in your family? What are advantages of a family

business? What are disadvantages of a family

business?

Home-based Businesses

Advantage: – cheaper – More convenient

Disadvantages: – Sometimes perceived as less professional– Lack of privacy

Legal Forms of Business

Sole Proprietorship Partnership Corporation S Corporation Limited Liability Corporation

Advantages of a Sole Proprietorship Easy to start All profits to owner Complete control & flexibility Secrecy Single taxation Easy dissolution

Disadvantages of a Sole Proprietorship Unlimited liability Limited life of business Difficulty in obtaining capital Little incentive for employees

Advantages of a Partnership

Easy startup– Articles of Partnership– Partnership Agreement (see p. 38)

Added capital Combined management skills Single taxation Employee incentives

Disadvantages of a Partnership

Unlimited liability Limited life of business Divided authority Frozen investment

Corporation

An enterprise that has the legal rights, duties, and powers of a person

Charter – written document outlining the conditions under which the corporation will operate

Stockholders – owners of a corporation Stock – shares of ownership in a

corporation

Corporation

Board of Directors – meet several times a year to elect senior officers, determine their salaries, set corporation’s rules for conducting business

Dividends – distributions of profit to shareholders by corporations

Advantages of a Corporation

Limited Liability Continuous life Easy transfer of ownership Ability to attract funds Specialized management

Disadvantages of a Corporation

Government regulation Little secrecy Charter restrictions Complicated and expensive formation Double taxation

S Corporation

A corporation that chooses Subchapter S status for tax purposes

Must meet the following requirements:– No more than 35 shareholders– Only one class of stock– All shareholders are U.S. residents– All shareholders are individuals– Corporation operates on a calendar year

financial basis

Advantages of an S Corporation

Limited liability Single taxation – income passes

through to individual shareholders and are reported on their tax returns

Disadvantages of an S Corporation Owners may be required to pay taxes

on earnings even if they have not taken any money out of the business

Limited Liability Corporation

Same advantages & disadvantages as an S Corporation, but easier to set up

When you’re ready to start a business for real, SEE A LAWYER and understand the current situation!!!

Form 2 – Write a paragraph on each question:

Do you plan to buy an existing business, start a business from scratch, or buy a franchise? What are the advantages and disadvantages of this choice?

What legal organization will you choose for your company? What are the advantages and disadvantages of this choice?