chapter 5types of partners 5-14 lo 4-2 •general partner --an owner (partner) who has unlimited...
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CHAPTER 5
McGraw-Hill/Irwin Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.
How to Form a
Business
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LEARNING OBJECTIVES
5-2
1. Compare the advantages and disadvantages of sole
proprietorships.
2. Describe the differences between general and
limited partners, and compare the advantages and
disadvantages of partnerships.
3. Compare the advantages and disadvantages of
corporations and summarize the differences
between C corporations, S corporations and limited
liability companies.
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LEARNING OBJECTIVES
5-3
4. Define and give examples of three types of corporate
mergers, and explain the role of leveraged buyouts
and taking a firm private.
5. Outline the advantages and disadvantages of
franchises, and discuss the opportunities for diversity
in franchising and the challenges of global
franchising.
6. Explain the role of cooperatives.
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ANNE BEILERAuntie Anne’s
5-4
• Started selling pretzels when
her family was living paycheck
to paycheck.
• Now Auntie Anne’s has over
1,200 locations and brings in
over $410 million!
• Beiler sold the company in
2005 to start focusing on
charity work.
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NAME that COMPANY
5-5
In 2013, this company became the largest firm in
terms of revenue to be taken private through a
leveraged buyout. After closing the $25 million
deal, the founder now controls a 75% stake of
the company he started in his dorm room.
Name that company!
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MAJOR FORMS of OWNERSHIP
5-6
• 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.
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FORMS of
BUSINESS OWNERSHIP
5-7
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Source: Forbes, www.forbes.com, accessed November 2014.
ETHNIC BUSINESS CENTERSCities with the Most Minority-Run Firms
5-8
Photo Credit: James Rintamaki
1. Atlanta, GA
2. Baltimore, MD
3. Nashville, TN
4. Houston, TX
5. Miami - Ft.
Lauderdale, FL
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MAJOR BENEFITS of SOLE
PROPRIETORSHIP
5-9
LO 4-1
1) Ease of starting and
ending the business
2) Being your own boss
3) Pride of ownership
4) Leaving a legacy
5) Retention of company
profit
6) No special taxes
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DISADVANTAGES of SOLE
PROPRIETORSHIPS
5-10
LO 4-1
1) Unlimited Liability -- Any debts or damages
incurred by the business are your debts, even if it
means selling your home, car or anything else.
2) Limited financial resources
3) Management difficulties
4) Overwhelming time commitment
5) Few fringe benefits
6) Limited growth
7) Limited life span
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Source: Inc., www.inc.com, accessed November 2014.
WORK-LIFE BALANCING ACT
5-11
% of small business owners
Work over 80 hours per week Work over 40 hours per week
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TEST PREP
5-12
• Most people who start businesses in the U.S. are
sole proprietors. What are the advantages and
disadvantages of sole proprietorships?
• Why would unlimited liability be considered a
major drawback to sole proprietorships?
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• General Partnership -- All owners share in
operating the business and in assuming liability for
the business’s debts.
MAJOR TYPES of PARTNERSHIPS
5-13
LO 4-2
• Limited Partnership --A partnership with one or
more general partners and
one or more limited
partners.
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TYPES OF PARTNERS
5-14
LO 4-2
• General Partner -- An owner (partner) who has
unlimited liability and is active in managing the firm.
• Limited Partner -- An owner who invests money in
the business, but enjoys limited liability. Limited
Liability means that liability for the debts of the
business is limited to the amount the limited partner
puts into the company; personal assets are not at
risk.
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OTHER FORMS of
PARTNERSHIPS
5-15
LO 4-2
• 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.
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ADVANTAGES of
PARTNERSHIPS
5-16
LO 4-2
• More financial
resources
• Shared
management and
pooled/complement
ary skills and
knowledge
• Longer survival
• No special taxes
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DISADVANTAGES of PARTNERSHIPS
5-17
LO 4-2
• Unlimited liability
• Division of profits
• Disagreements among
partners
• Difficult to terminate
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There is no such thing as a perfect partner but
ask these questions when you try to find your
best match:
PICKING YOUR PARTNER
5-18
LO 4-2
• 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?
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• What do you think you should do?
• What will be the consequences of your decision?
GOOD BUSINESS,
BAD KARMA?
5-19
Imagine you and your partner own a construction
company. You receive a subcontractor’s bid you
know is 20% too low. This could potentially put the
subcontractor out of business. Accepting the bid
will improve your chances of getting a big job.
Your partner wants to take the bid:
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TEST PREP
5-20
• What’s the difference between a limited partner
and a general partner?
• What are some of the advantages and
disadvantages of partnerships?
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CONVENTIONAL
CORPORATIONS
5-21
LO 4-3
• Conventional (C)
Corporation -- A state-
chartered legal entity with
authority to act and have
liability separate from its
owners (its stockholders).
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ADVANTAGES of CORPORATIONS
5-22
LO 4-3
• 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
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HOW OWNERS AFFECT
MANAGEMENT
5-23
LO 4-3
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Source: Fortune, www.fortune.com, accessed November 2014.
The BIG BOYS of BUSINESSAmerica’s Largest Corporations
5-24
Photo Credit: Walmart Stores
LO 4-3
1. Walmart
2. Exxon Mobil
3. Chevron
4. Berkshire
Hathaway
5. Apple
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Source: Forbes, www.forbes.com, accessed November 2014.
PRIVACY PLEASEThe Ten Largest Private Corporations in the U.S.
Company State Industry
Cargill MN Farming
Koch Industries KS Chemicals
Dell TX Computers
Bechtel CA Construction
PricewaterhouseCoopers NY Business Services
Mars VA Food
Pilot Flying J TN Convenience Stores
Publix Supermarkets FL Grocery
Ernst & Young NY Business Services
C&S Wholesale Grocers NH Food Wholesale
5-25
LO 4-3
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DISADVANTAGES of
CORPORATIONS
5-26
LO 4-3
• Initial cost
• Extensive paperwork
• Double taxation
• Two tax returns
• Size
• Difficulty of termination
• Possible conflict with
stockholders and board of
directors
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Source: Bloomberg Businessweek, www.businessweek.com, accessed November 2014.
EVEN the BIG GUYS
MAKE MISTAKES
Company Bad Move
Atari
The amount of surplus from a bad game was so big,
the copies had to be buried in a New Mexican
landfill.
BlockbusterPassed on a partnership with Netflix and ended up
going bankrupt in 2011.
Coca-ColaNew Coke lasted only 77 days because Coca-Cola
received more than 1,500 complaint calls a day.
Pan American World
Airways
After the bombing of Flight 103, the airline blamed
the government after the victims’ families filed a
$300 million lawsuit.
Pets.com
Debuted with a $3 million Super Bowl ad and a
Macy’s Thanksgiving Day Parade float. Nine months
later, they went bankrupt.
5-27
LO 4-3
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B CORPORATIONS LET
SUSTAINABILITY SET SAIL
5-28
• Michael Dimin saw tons of
fish were left to rot after
fishermen caught too much.
• Registered his company,
Sea2Table as a benefit
corporation.
• B-corporations are judged on
how they meet their own set
of socially or environmentally
beneficial goals.
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WHO CAN INCORPORATE?
5-29
LO 4-3
• Anyone - truckers, doctors, plumbers, athletes
and small business owners can incorporate.
• Normally stock is not issued to outsiders when
individuals incorporate, so the advantages and
disadvantages are not exactly the same as for
large corporations.
• Major advantages are limited liability and possible
tax benefits.
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OLDIES BUT GOODIESAmerica’s Oldest Corporations
Company Year Started Type of Company
J.E. Rhoads & Sons 1702 Conveyer Belts
Covenant Life
Insurance1717 Insurance
Philadelphia
Insurance1752
Insurance
Contributorship
Dexter 1767 Adhesives & Coatings
D. Landreth Seed 1784 Seeds
Bank of New York 1784 Banking
5-30
LO 4-3
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S CORPORATIONS
5-31
LO 4-3
• S Corporation -- A unique government creation that
looks like a corporation, but is taxed like sole
proprietorships and partnerships.
• S corporations have shareholders, directors and
employees, plus the benefit of limited liability.
• Profits are taxed only as the personal income of
the shareholder.
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WHO CAN FORM
S CORPORATIONS?
5-32
LO 4-3
• Qualifications for S Corporations:
- Have no more than 100 shareholders.
- Have shareholders that are individuals or estates and
are citizens or permanent residents of the U.S.
- Have only one class of stock.
- Derive no more than 25% of income from passive
sources.
• If an S corporation loses its S status, it may not
operate under it again for at least 5 years.
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LIMITED LIABILITY COMPANIES
5-33
LO 4-3
• Limited Liability Company (LLC) -- Similar to an
S corporation, but without the eligibility requirements.
• Advantages of LLCs:
1. Limited liability
2. Choice of taxation
3. Flexible ownership rules
4. Flexible distribution of profits and losses
5. Operating flexibility
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DISADVANTAGES of LLCs
5-34
LO 4-3
1. No stock, therefore
ownership is
nontransferable
2. Limited life span
3. Fewer incentives
4. Taxes
5. Paperwork
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TEST PREP
5-35
• What are the major advantages and disadvantages
of incorporating a business?
• What’s the role of owners (stockholders) in the
corporate hierarchy?
• If you buy stock in a corporation and someone gets
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 of ownership?
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• Merger -- The result of two firms joining to form one
company.
MERGERS and ACQUISITIONS
5-36
LO 4-4
• Acquisition --One company’s
purchase of the
property and
obligations of
another company.
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TYPES of MERGERS
5-37
LO 4-4
• Vertical Merger -- The joining of two firms in
different stages of related businesses.
• Horizontal Merger -- The joining of two firms in the
same.
• Conglomerate Merger -- The joining of firms in
completely unrelated industries.
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LEVERAGED BUYOUTS
5-38
LO 4-4
• 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 $34
billion and have involved everything from small
businesses to giant corporations.
• In 2012, foreign investors poured $166 billion into
U.S. companies.
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FRANCHISING
5-39
LO 4-5
• Franchise Agreement -- An arrangement whereby
someone with a good idea for a business (franchisor)
sells the rights to use the business name and sell a
product or service (franchise) to others
(franchisees) in a given territory.
• More than 770,000 franchised businesses operate
in the U.S., employing approximately 8.5 million
people.
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Source: Entrepreneur, www.entrepreneur.com, accessed November 2014.
MAKE WAY for the NEWBIESTop New Franchises
Rank Company Industry
1 Mac Tools Automotive tools
2 Bricks 4 Kidz Toys
3 Orange Leaf Frozen Yogurt Frozen yogurt
4 Sears Hometown Appliances
5 Fitness Revolution Personal and group fitness
6 The Grounds Guys LLC Landscape management
7 Paul Davis Emergency Services Restoration
8 Doc Popcorn Food
9 Title Boxing Club Personal and group fitness
10 Fuzzy’s Taco Shop Food
5-40
LO 4-5
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ADVANTAGES of FRANCHISING
5-41
LO 4-5
1. Management and
marketing assistance
2. Personal ownership
3. Nationally recognized
name
4. Financial advice and
assistance
5. Lower failure rate
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DISADVANTAGES of FRANCHISING
5-42
LO 4-5
1. Large start-up costs
2. Shared profit
3. Management regulation
4. Coattail effects
5. Restrictions on selling
6. Fraudulent franchisors
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THE BUILDING BLOCKS of
FRANCHISING
5-43
• Bricks 4 Kidz was created as
a way to help kids
understand engineering and
construction.
• Since the business was low
cost and easily reproduced,
this led to over 200
franchises in the U.S. and 11
other countries.
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• Women own about half of U.S. companies, yet
ownership of franchises is about 21%.
WOMEN in FRANCHISING
5-44
LO 4-5
• More women are
becoming
franchisors. Auntie
Anne’s and
Jazzercise and are
owned by women.
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MINORITY-OWNED
FRANCHISES
5-45
Photo Credit: Tom Magliery
LO 4-5
• DiversityFran is an initiative to
build awareness of
franchising opportunities
within minority communities.
• Domino’s Pizza launched a
minority franchise recruitment
program called Delivering the
Dream.
• Over 20% of franchises are
minority-owned.
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HOME-BASED FRANCHISES
5-46
LO 4-5
Advantages:
• Relief from
commuting stress
• Extra family time
• Low overhead
expenses
Main Disadvantages:
• Isolation
• Long hours
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Source: Entrepreneur, www.entrepreneur.com, accessed November 2014.
HOME SWEET HOMETop Home-Based Franchises
Rank Company Industry
1 Jan-Pro Disaster Restoration
2 Cruise Planners Travel
3 Vanguard Cleaning Systems Commercial Cleaning
4 Snap-on Tools Professional Tools
5 Matco Tools Professional Tools
6 Jazzercise Fitness
7 CleanNet USA Commercial Cleaning
8 Budget Blinds Home Décor
9 Coverall Health-Based Cleaning Commercial Cleaning
10Chem-Dry Carpet & Upholstery
Cleaning
Commercial and
Residential Cleaning
5-47
LO 4-5
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E-COMMERCE
in FRANCHISHING
5-48
LO 4-5
• Most brick-and-mortar franchises have expanded
online.
• Many franchisors prohibit franchisee-sponsored
sites because conflicts can erupt.
• Sometimes “reverse royalties” are sent to
franchisees who believe their sales were hurt by
the franchisor’s site.
• Other franchises are solely based online.
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GIVING ENTREPRENEURS OPTIONS
with DIGITAL FRANCHISING
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• Chris Jeffrey created OrderUp shortly after
graduating college.
• OrderUp links up restaurants with hungry patrons
and allows people to order online while OrderUp
takes a small commission.
• For a startup fee of
$42,000 franchisees
receive software and
training to launch OrderUp
in their area.
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GLOBAL FRANCHISING
5-50
LO 4-5
• Canada is the most popular target for U.S.-based
franchises.
• China, South Africa, the Philippines and the
Middle East are becoming popular despite high
cost.
• International franchising goes both ways – some
foreign franchises have come to the U.S.
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Source: Richard Gibson, Wall Street Journal, www.wsj.com, accessed November 2014.
WHAT to CHOOSE?Picking Franchises that May Survive a Recession
5-51
LO 4-5
• 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.
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Source: Entrepreneur, www.entrepreneur,com, accessed November 2014.
HIGH FLYERSTen High-Performing Franchises
5-52
Photo Credit: Innisfree Hotels
LO 4-5
1. Anytime Fitness
2. Hampton Hotels
3. Subway
4. Supercuts
5. Jimmy John’s
6. 7-Eleven
7. Servpro
8. Denny’s
9. Pizza Hut
10. Dunkin Donuts
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COOPERATIVES
5-53
LO 4-6
• Cooperatives -- Businesses owned and controlled
by the people who use them– producers, consumers,
or workers with similar needs who pool their
resources for mutual gain.
• Worldwide, co-ops serve one billion members!
• Members democratically control the business by
electing a board of directors that hires
professional management.
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TEST PREP
5-54
• What are some of the factors to consider before
buying a franchise?
• What opportunities are available for starting a
global franchise?
• What is a cooperative?