Chapter 05 – How to Form a Business
5-41
professional management.
B. Some cooperatives are formed to give members
MORE ECONOMIC POWER than they would have
as individuals (e.g., farm cooperatives).
VIII. WHICH FORM OF OWNERSHIP IS FOR YOU?
Chapter 05 – How to Form a Business
5-42
PPT 5-52
Cooperatives
(See complete PowerPoint slide notes on page 5.62.)
critical thinking
exercise 5-3
CHOOSING A FORM OF
BUSINESS OWNERSHIP
This exercise presents eight types of businesses and asks
the student to consider which form of business ownership
would be right for each one. (See the complete exercise on
page 5.75 of this manual.)
progress
assessment
(Text page 141)
PPT 5-53
Progress Assessment
(See complete PowerPoint slide notes on page 5.62.)
Chapter 05 – How to Form a Business
5-43
PowerPoint slide notes
PPT 5-1
Chapter Title
PPT 5-2
Learning Goals
PPT 5-3
Learning Goals
Chapter 05 – How to Form a Business
5-44
PPT 5-4
Mary Ellen Sheets
PPT 5-5
Name That Company
Company: H&R Block
PPT 5-6
Major Forms of Ownership
More than 600,000 businesses are started each year.
Chapter 05 – How to Form a Business
5-45
PPT 5-7
Forms of Business Ownership
Although corporations make up only 20% of the total
number of businesses, they make up 81% of the total re-
ceipts. Sole proprietorships are the most common form
(72%), but they earn only 6% of the receipts.
PPT 5-8
Ethnic Business Centers
1. This slide presents Forbes’s 2011 top five U.S. cit-
ies for minority-run businesses.
2. Most of these cities are situated in the South. How-
ever, we tend to hear a lot about the high population
numbers of Asians in San Francisco or Hispanics in
Los Angeles.
3. Milwaukee, Wisconsin, was listed last at number 40
in ethnic population growth.
4. To promote discussion ask the students, Why do
you think these cities attract minority-run compa-
nies? Don’t just focus on the businesses, also look
at the total population and customer base.
PPT 5-9
Major Benefits of Sole Proprietorship
This slide helps students understand why sole proprietor-
ships account for the largest number of businesses in the
United States.
Chapter 05 – How to Form a Business
PPT 5-10
Disadvantages of Sole Proprietorships
Since the main advantage of sole proprietorships is the
ease by which they can be started, this slide gives students
the reason why this form of ownership accounts for such a
small percentage of overall total revenue. Special emphasis
should be given to the disadvantage of unlimited liability
(personal assets at risk), and to the time commitment (24
hours, 7 days per week, and 365 days per year).
PPT 5-11
Progress Assessment
1. The primary advantages of sole proprietors are ease
of starting and ending the business, being your own
boss, pride of ownership, leaving a legacy, reten-
tion of company profits, no special taxes. Disad-
vantages include unlimited liability, limited finan-
cial resources, management difficulties, over-
whelming time commitment, few fringe benefits,
limited growth, limited life span.
2. With unlimited liability, the sole proprietor is liable
for all debts and obligations of the business and
must pay them even if it means selling your home,
car, or whatever else you own.
PPT 5-12
Major Types of Partnerships
Each type of partnership has advantages and disad-
vantages. In a general partnership resources are pooled and
liability is spread among all partners. However, in this type
of partnership there is the possibility for disagreement
and/or personality conflicts. A limited partnership is made
up of a mixture of general partners and limited partners.
Limited partners cannot actively take part in business deal-
ings.
Chapter 05 – How to Form a Business
5-47
PPT 5-13
Types of Partners
The limited partner is not able to exercise any manage-
ment control over the partnership, but maintains limited
liability. A limited partner’s liability is limited to the
amount invested in the partnership.
PPT 5-14
Other Forms of Partnerships
There are two less common forms of partnerships out-
lined in this slide: master limited partnership and the lim-
ited liability partnership. The master limited partnership is
unique because it combines the tax benefits of a more tradi-
tional partnership and the liquidity of a publicly traded se-
curity. One example of a master limited partnership is
Kinder Morgan Energy Partners, which is engaged in ener-
gy storage and operates 26,000 miles of pipelines.
PPT 5-15
Advantages of Partnerships
Partnerships have some distinct advantages. The key ad-
vantage is that partnerships have access to more resources
such as financial resources, management skills, and
knowledge
Chapter 05 – How to Form a Business
PPT 5-16
Disadvantages of Partnerships
Like the sole proprietorship, a partnership has some seri-
ous disadvantages such as unlimited liability and division
of profits. One disadvantage that students might not consid-
er is disagreement among partners.
PPT 5-17
The Ties That Bind
Successful partnerships start with a shared vision. In or-
der to develop a successful partnership all partners must be
honest with each other and bring a variety of different skills
to the partnership. Suggestions to discuss with students re-
garding partnerships include:
• Partnership agreements must be in writing!
• Each individual’s responsibilities to the company
must be in writing and included as part of the con-
tract.
Make certain that provisions are in place if one or more
partners want to terminate the agreement. (Information out-
lining the terms and conditions of terminating any agree-
ment should be outlined in the original contract.)
PPT 5-18
Progress Assessment
1. A general partner is an owner who has unlimited li-
ability and can be active in managing the firm. A
limited partner is an owner who invests money in
the business, but does not have any management
responsibility or liability for losses beyond his or
her investment.
2. Some of the advantages of partnerships are more
financial resources, shared management and
pooled/complementary skills and knowledge, long-
er survival, no special taxes. Disadvantages of part-
nerships include unlimited liability (for general
partners), division of profits, disagreements among
partners, difficulty of termination.
5-49
PPT 5-19
Conventional Corporations
PPT 5-20
Advantages of Corporations
1. The major advantage of corporate ownership is lim-
ited liability protection (personal assets are protect-
ed).
2. Interesting facts regarding incorporating a business:
the cost for a business to incorporate ranges from
about $50 to over $300, plus states’ fees. Over half
of Fortune 500 companies choose to incorporate in
Delaware because the state’s laws make the process
easier than it is in other states.
PPT 5-21
How Owners Affect Management
Chapter 05 – How to Form a Business
5-50
PPT 5-22
The Big Boys of Business
1. 1. This slide presents Fortune’s 2011 top five U.S.
corporations.
2. Ask the students, Several of the companies in the
top five deal with similar products and services;
how are the products and services these companies
sell similar? (ExxonMobil, Chevron, and Cono-
coPhillips are all oil companies.)
PPT 5-23
Privacy Please
1. This slide presents America’s top ten private com-
panies in 2011.
2. Ask the students to debate why a company may
want to remain private. (Some of the reasons may
be control, privacy, no external pressure, and pref-
erence.)
PPT 5-24
Disadvantages of Corporations
Double taxation is a major disadvantage of corporations.
A corporation is taxed on income earned, and then share-
holders are taxed on any dividends the company may pay.
Chapter 05 – How to Form a Business
5-51
PPT 5-25
Even the Big Boys Make Mistakes
1. This slide presents examples of mistakes made by
big corporations.
2. Sometimes mistakes can be rectified (as in the case
of Coca-Cola withdrawing New Coke), but some-
times they contribute to the company going out of
business.
PPT 5-26
Who Can Incorporate?
Chapter 05 – How to Form a Business
PPT 5-27
Oldies But Goodies
1. A few facts you may wish to address with the stu-
dents are:
• JE Rhoads & Sons is the oldest company in the
United States and started off tanning leather
for Buggy Whips.
• Philadelphia Contributorship Insurance was
formed based on a suggestion by Benjamin
Franklin regarding the establishment of a vol-
unteer fire brigade, which eventually devel-
oped into an insurance company.
2. Environmental changes in the business world will
always happen; those companies that embrace
change and provide quality goods and services will
continue to profit.
3. Discuss with the students the significant amount of
commitment a company must be prepared to make
to stay in business. (Some areas that must continu-
ally be addressed are changes in societal culture,
competition, economy, laws/politics, and technolo-
gy changes.)
PPT 5-28
S Corporations
An S corporation looks like a corporation, but is taxed
like a sole proprietorship or partnership. The primary ad-
vantage of an S corporation is that it avoids the double taxa-
tion of a C corporation. Approximately 3 million U.S. com-
panies operate as S corporations.
Chapter 05 – How to Form a Business
PPT 5-29
Who Can Form S Corporations?
Originally to qualify as an S Corporation, the number of
shareholders was limited to 75. This has now been amended
to no more than 100.
PPT 5-30
Limited Liability Companies
Advantages and disadvantages of LLCs are listed in this
slide. The biggest advantages of LLCs are limited liability
and flexibility.
Chapter 05 – How to Form a Business
5-54
Chapter 05 – How to Form a Business
PPT 5-33
Progress Assessment
1. Advantages of incorporating a business include
limited liability, ability to raise more money for in-
vestment, size, perpetual life, ease of ownership
change, ease of attracting talented employees, sepa-
ration of ownership from management. Disad-
vantages of incorporating are initial cost, extensive
paperwork, double taxation, two tax returns, size,
difficulty to terminate, possible conflict with stock-
holders and board of directors.
2. Stockholders do not have to be employees of the
corporation. They are investors who have limited
liability. Stockholders elect the board of directors
of a company who select the management to con-
trol the company.
3. Stockholders in a corporation have limited liability,
meaning as owners they are responsible for its loss-
es only up to the amount they invested. The corpo-
ration could be sued and forced out of business but
the stockholder would lose only what he or she in-
vested.
PPT 5-33
PROGRESS ASSESSMENT
(continued)
4. Limited liability companies have become a popular
way to form a business since all 50 states now rec-
ognize LLCs. Some of the advantages of LLCs are
limited liability, choice of taxation (can be taxed as
a partnership or corporation), flexible ownership
rules, flexible distribution of profit and losses, op-
erating flexibility.
PPT 5-34
Mergers and Acquisitions
Merger mania of the late 1990s reached its peak in 2000.
By 2009, the U.S. economy caused the volume of mergers
and acquisitions to plummet 86%! In 2010, mergers in-
creased 14%.
Chapter 05 – How to Form a Business
5-56
PPT 5-35
Keep Growing …
1. This slide covers the amount spent on acquisitions
by big businesses and the number of completed or
pending deals since 2005.
2. Much of corporate growth relies on acquisitions.
PPT 5-36
Types of Mergers
There are three types of mergers. Horizontal mergers take
place in the same industry (i.e., one competitor merging
with another). An example of this would be Daimler Mer-
cedes-Benz merging with Chrysler to create DaimlerChrys-
ler in the 1990s. Vertical merger takes place between com-
panies in a value chain—for example, a supplier and a dis-
tributor merging. Conglomerate merger has no relationship
between companies; both Tyco and General Electric oper-
ate as conglomerates.
PPT 5-37
Leveraged Buyouts
Chapter 05 – How to Form a Business
PPT 5-38
Franchising
PPT 5-39
Make Way for the Newbies
1. New franchise opportunities pop up all the time and
this slide shows the top ten new companies from
Entrepreneur’s Franchise 500.
2. Take notice that all the listed companies here are in
the service sector. This can promote discussion on
the evolution of American business.
3. Ask the students, Why do you think there is growth
in these service franchises, such as senior in-home
care and health?
PPT 5-43
Women in Franchising
PPT 5-44
Minority-Owned Franchises
Franchising has a lower failure rate because the franchi-
see has support from the franchisor. This support can range
from marketing to financial.
PPT 5-45
Home-Based Franchises
Home-based businesses are growing at an enormous rate.
This slide helps clarify some of the reasons why. Share with
the class some tips on getting started:
• Decide on a business idea.
• Set goals for the business.
• Determine how many hours you want to work.
• Decide how many employees you want to hire.
• Decide how much money you will need to get
started.
Visit www.e-myth.com for more online information re-
garding start-ups.
Chapter 05 – How to Form a Business
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PPT 5-46
Home Sweet Home
1. Many franchisees are looking toward home-based
businesses.
2. These 10 franchises have held their own despite the
recent economic crisis.
3. Some of these companies, like Jazzercise, require
franchisees to rent space for client-based activities.
However, the businesses can be run from the home
PPT 5-47
E-Commerce in Franchising
PPT 5-48
Franchise Expansion on Facebook