Chapter 5 Types of Businesses

1. Chapter 5Types of Businesses Starting a Business Choosing an Organizational Form

2. Who are the Entrepreneurs? • Mark Zuckerburg – Facebook • Mitchell and Mollie Murphree – • Five Senses Restaurant • Mark Davis • Insert Therapeutics

3. Setting Up Your Small Business • Choose a legal form of business and register it with the government. • Make a business plan • Especially if you plan to go for a loan or attract an investor. • Visit your local TSBDC and SCORE offices.

4. What Is a Form of Business, and Why Do We Need to Choose One? • Our government does keep tabs on businesses, for the consumer’s sake. • A legal form of business is a way of describing how the business is treated for tax and legal purposes. • Getting some tax and legal benefits means you give up others – you decide which form is best.

5. Option 1: Sole Proprietor • The most common form of ownership • You are the business. • Only one owner is allowed. • With 2, you become a partnership. • No limitation of liability. • People can sue you for everything you own. • Net income from the business is treated as your personal income. • Goes into line on the 1040. • Must file for business license inTN.

6. Option 2: Partnerships • 2 or more owners • No limited liability • Exception: General vs. limited partnerships • More likely to survive than sole prop. • Why? • Division of profits, liability, and conflicts are the downside • Partnership agreements can help with this.

7. Special Types of Partnerships • Limited Partnerships • General and limited partners • Limited partners cannot manage • “Silent partners” – cannot work over 500 hours per year in the business • MLP • Master Limited Partnership • Can be publicly traded • LLP • Limited Liability Partnership • Only liable for your own mistakes and those under your supervision

8. Review Questions • What is the main difference between a sole proprietorship and a partnership? • What is unlimited liability? • How are sole proprietorships and partnerships taxed?

9. Option 3: Corporations • Exist separately from owner • Represent over 70% of U.S. revenues • Should tell you something about sole proprietorships! • S and C – different tax treatment and ownership allowances • Perpetual life • More red tape and money to start up ($100 extra just in fees from TN)

10. Option 4: Limited Liability Companies (LLCs) • Very much like S-corporation • Can be taxed as self-employment • Usually for professionals • Flexible distribution of profit • Must have approval of other owners to sell out • Must dissolve by deadline; dies with owners

11. Growing a Corporation • Could be done through public offering • Could be done through • Merger (two companies form a new legal entity, combining into one) • Acquisition (one company buys the other’s stock)

12. Types of Mergers • Vertical mergers: • Mergers between suppliers and purchasers • Horizontal mergers: • Mergers between companies in the same industry (AOL-Time Warner) • Conglomerate mergers: • Unite firms in different industries (Walt Disney and ABC) • Don’t usually generate extra value for investors!

13. Franchises • One firm already has a successful product or service • Offers its trademarks and patented business processes to another for… • Initial franchise fee and ongoing royalties • Still have to pick a legal form • Franchise Opportunities

14. Pros and Cons of Franchises • Pros • Assistance with operations • Motivation to excel vs. being an employee • Instant brand image • Lower failure • Cons • Larger start-up costs • Royalties • Control of parent company • No control over other franchise locations

15. Cooperatives • Formed for increased purchasing or marketing power • MTEMC is a cooperative • Owned by the users of the electricity • Farm cooperatives • Farmers band together to get better pricing • Each member has one vote • Other examples? Ace Hardware, Ocean Spray, True Value Hardware

16. Ways that Companies Grow • Mergers • Vertical • Horizontal • Conglomerate • Acquisitions • Leveraged Buyout (not growth, but ownership change)