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Chapter 6: BUSINESS FORMATION

Chapter 6: BUSINESS FORMATION. Choosing the Form that Fits. LOOKING AHEAD. How are sole proprietorships and partnerships different? How are they different than corporations? Why are corporations the most dominant form of business?

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Chapter 6: BUSINESS FORMATION

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  1. Chapter 6: BUSINESS FORMATION Choosing the Form that Fits © 2009 South-Western, a division of Cengage Learning

  2. LOOKING AHEAD • How are sole proprietorships and partnerships different? How are they different than corporations? • Why are corporations the most dominant form of business? • What are the different types of corporations and how are they different? • What are mergers & acquisitions? • What is the goal of mergers and acquisitions? • Why have limited liability companies become popular? • What are the advantages and disadvantages of franchising? © 2009 South-Western, a division of Cengage Learning

  3. CHOICES, CHOICES, CHOICES • Form of ownership affects: • Operation • Start-up Costs • Profit Distribution • Taxes The form of ownership of a business is a big decision. • The “Big Three” is Becoming the “Big Four”: • Sole Proprietorship • Partnership • Corporation • Limited Liability Company © 2009 South-Western, a division of Cengage Learning

  4. Advantages: Ease of Formation Retention of Control Pride of Ownership Retention of Profits Possible Tax Advantages Disadvantages: Limited Financial Resources Unlimited Liability Limited ability to attract and maintain talented employees Lack of Permanence SOLE PROPRIETORSHIP: BUSINESS AT ITS MOST BASIC © 2009 South-Western, a division of Cengage Learning

  5. MOST COMMON TYPES OF SOLE PROPRIETORSHIPS © 2009 South-Western, a division of Cengage Learning Source for Table: “Sole Proprietorship Returns”, by Kevin Pierce Statistics of Income Bulletin, Summer, 2005, Figure A, p.9; website: http://www.irs.gov/pub/irs-soi/03solp.pdf )

  6. BUSINESS FORMS: COMPARING THE NUMBERS Total Number of Businesses by Form of Ownership (Millions) Total Net Income by Form of Ownership ($Billions) © 2009 South-Western, a division of Cengage Learning

  7. Advantages: Pooled Financial Resources Shared Responsibilities Ease of Formation Tax Advantages Disadvantages: Unlimited Liability Disagreements Difficulty in withdrawing from agreement Lack of Continuity PARTNERSHIPS: TWO HEADS CAN BE BETTER THAN ONE © 2009 South-Western, a division of Cengage Learning

  8. LIMITED PARTNERSHIPS Limited Partnership – includes at least one general partner and at least one limited partner Limited Liability Partnership – All partners are actively involved but they have some form of limited liability. The amount of liability differs per state. Limited partners have limited liability. © 2009 South-Western, a division of Cengage Learning

  9. GENERAL VS LIMITED PARTNERSHIPS • General Partnerships • All partners have the right to participate in the management of the firm and share in any profits/losses. • Limited Partnerships • All partners contribute financially and share in the profits but the limited partner(s) cannot actively participate in management. © 2009 South-Western, a division of Cengage Learning

  10. FAMILY LIMITED PARTNERSHIPS • Parents as general partners • Children as limited partners • Parents transfer assets to limited partners while still maintaining control, this strategy: • Reduces gift and inheritance taxes • Protects family assets from creditors and lawsuits • But watch out for the IRS – Family Limited Partnerships can attract tax auditors! © 2009 South-Western, a division of Cengage Learning

  11. CORPORATIONS: AN ARTIFICIAL REALITY • A corporation is a legal entity, separate and distinct from its owners. • Corporations are owned by stockholders. • The Board of Directors establishes the mission and objectives. • The Board is elected by the stockholders to represent their interests. © 2009 South-Western, a division of Cengage Learning

  12. Advantages: Limited Liability Permanence Easy to Transfer Ownership Ability to Raise Capital Specialized Management Disadvantages: Expense/complexity of formation and operation Double Taxation Paperwork and Regulation Conflicts of Interest CORPORATIONS © 2009 South-Western, a division of Cengage Learning

  13. OTHER TYPES OF CORPORATIONS: SAME BUT DIFFERENT • S Corporation • Closed Corporation • Non-profit Corporation © 2009 South-Western, a division of Cengage Learning

  14. COMPARING TYPES OF CORPORATIONS © 2009 South-Western, a division of Cengage Learning

  15. Advantages: Limited Liability Tax Pass-Through Simplified Management and Operation Flexible Ownership Disadvantages: Franchise Taxes Foreign Status in other States State Law Differences Limited to Select Industries LIMITED LIABILITY COMPANY: THE NEW KID ON THE BLOCK © 2009 South-Western, a division of Cengage Learning

  16. COMPARING BUSINESS FORMS HIGH DEGREE OF PERSONAL LIABILITY LOW Sole Proprietorships Partnerships Corporations LOW DEGREE OF COMPLEXITY AND PERPETUITY HIGH © 2009 South-Western, a division of Cengage Learning

  17. CORPORATE RESTRUCTURING Corporations look for: • Growth opportunities • Operational efficiencies • Competitive advantages Acquisitions – when one firm buys another. Mergers – two companies agree to a combination of equals. © 2009 South-Western, a division of Cengage Learning

  18. TYPES OF MERGERS AND ACQUISITIONS © 2009 South-Western, a division of Cengage Learning

  19. FRANCHISING: PROVEN METHODS FOR A PRICE • Not a form of ownership but an operation option. • Subway • Jiffy Lube • 7-Eleven • McDonalds • The franchisee uses the brand name, trademark and practices of the franchisor. © 2009 South-Western, a division of Cengage Learning

  20. Advantages: Less Risk Training and Support Brand Recognition Access to Funding Disadvantages: Costs Lack of Control Negative Halo Effect Growth Challenges Restriction on Sale Poor Execution FRANCHISING Ben & Jerry franchises its PartnerShops to non-profit corporations. © 2009 South-Western, a division of Cengage Learning

  21. LOOKING BACK • What are the pros and cons of operating a business as a sole proprietorship? • What are the basic features of general partnerships, limited partnerships, and limited liability partnerships? • Why have corporations become the dominant form of business ownership? • How do S corporations, statutory closed corporations and nonprofit corporations differ from general corporations, and from each other? • How does a corporation restructure through mergers and acquisitions? • Why have limited liability companies become increasingly popular? • What are the advantages and disadvantages of franchising? © 2009 South-Western, a division of Cengage Learning

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