Chapter 05 – How to Form a Business
5-1
chapter
.
How to Form a
Business
what’s new in this edition 5.3
brief chapter outline and learning objectives 5.5
lecture outline and lecture notes 5.7
PowerPoint slide notes 5.47
lecture enhancers 5.66
lecture enhancer 5-1: THE FORTUNE LIST OF MOST ADMIRED CORPORATIONS 5.66
lecture enhancer 5-2: BRINGING BUSINESS BACK TO RURAL TOWNS 5.68
lecture enhancer 5-3: THE DEVELOPMENT OF SEARS, ROEBUCK, AND COMPANY 5.68
lecture enhancer 5-4: FORTUNE 500 LARGEST CORPORATIONS 5.69
lecture enhancer 5-5: BENEFIT CORPORATIONS REDEFINE BOTTOM LINE 5.70
lecture enhancer 5-6: QUIZNOS COLLAPSES AS OTHER CHAINS SUCCEED 5.70
lecture enhancer 5-7: EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS) 5.70
lecture enhancer 5–8: FRANCHISING AROUND THE WORLD 5.71
5
Chapter 05 – How to Form a Business
5-2
critical thinking exercises 5.72
critical thinking exercise 5-1: PICKING PARTNERS 5.73
critical thinking exercise 5-2: INDEPENDENT RESEARCH: SMALL-BUSINESS 5.73
OWNERSHIP
critical thinking exercise 5-3: CHOOSING A FORM OF BUSINESS 5.74
OWNERSHIP
bonus cases 5.77
bonus case 5–1: FRANCHISE OR INDEPENDENT? WHAT FITS YOUR MOLD? 5.77
Chapter 05 – How to Form a Business
5-3
what’s new in
this edition
additions to the 11th edition:
• Getting to Know Anne Beiler of Auntie Anne’s
• Name That Company: Dell
• Spotlight on Small Business: The Building Blocks of Franchising
• Seeking Sustainability: B Corporations Let Sustainability Set Sail
• Making Ethical Decisions: Good Business, Bad Karma?
• Adapting to Change: Giving Entrepreneurs Options with Digital Franchising
• Video Case: Sonic
revisions to the 11th edition:
• Statistical data and examples throughout the chapter were updated to reflect current information.
deletions from the 10th edition:
• Getting to Know Mary Ellen Sheets of Two Men and a Truck
• Name That Company: H&R Block
• Spotlight on Small Business
• Legal Briefcase
• Thinking Green
• Social Media in Business
Chapter 05 – How to Form a Business
5-4
Chapter 05 – How to Form a Business
5-5
brief chapter outline
and learning objectives
CHAPTER 5
How to Form a Business
Getting to Know ANNE BEILER of AUNTIE ANNE’S
I. BASIC FORMS OF BUSINESS OWNERSHIP
learning objective 1
Compare the advantages and disadvantages of sole proprietorships.
II. SOLE PROPRIETORSHIPS
A. Advantages of Sole Proprietorships
B. Disadvantages of Sole Proprietorships
learning objective 2
Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
III. PARTNERSHIPS
A. Advantages of Partnerships
B. Disadvantages of Partnerships
learning objective 3
Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
IV. CORPORATIONS
A. Advantages of Corporations
B. Disadvantages of Corporations
C. Individuals Can Incorporate
D. S Corporations
E. Limited Liability Companies
learning objective 4
Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
V. CORPORATE EXPANSION: MERGERS AND ACQUISITIONS
Chapter 05 – How to Form a Business
5-6
learning objective 5
Outline the advantages and disadvantages of franchises, and discuss
the opportunities for diversity in franchising and the challenges of global
franchising.
VI. FRANCHISES
A. Advantages of Franchises
B. Disadvantages of Franchises
C. Diversity in Franchising
D. Home-Based Franchises
E. E-Commerce in Franchising
F. Using Technology in Franchising
G. Franchising in Global Markets
learning objective 6
Explain the role of cooperatives.
VII. COOPERATIVES
VIII. WHICH FORM OF OWNERSHIP IS FOR YOU?
IX. SUMMARY
Chapter 05 – How to Form a Business
5-7
In 2013, this company became the largest firm in terms of revenue to be taken private
through a leveraged buyout. After closing the $25 billion deal, the founder now controls a
75% stake in the company he started in his dorm room. Name that company.
(Students should read the chapter before guessing the company’s name: Dell.)
Getting to Know ANNE BEILER of Auntie Anne’s
Anne Beiler twisted a small pretzel stand into one of the nation’s most successful snack franchises.
I. BASIC FORMS OF BUSINESS OWNERSHIP
A. About 600,000 new businesses are started in the
U.S. each year.
B. The form of business ownership can make a differ-
ence in the success of the business.
C. The THREE MAJOR FORMS OF BUSINESS OWN-
ERSHIP are:
1. A SOLE PROPRIETORSHIP is a business that is
owned, and usually managed, by one person; it is
the most common form.
2. A PARTNERSHIP is a legal form of business with
two or more owners.
3. A CORPORATION is a legal entity with authority
to act and have liability separate from its owners.
D. Each form of business ownership has its advantages
and its disadvantages.
learning objective 1
Compare the advantages and disadvantages of sole proprietorships.
Chapter 05 – How to Form a Business
5-8
PPT 5-1
Chapter Title
CHAPTER 5
McGraw-Hill/Irwin Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights r eserved.
How to Form a
Business
PPT 5-2
Learning objectives
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.
PPT 5-3
Learning objectives
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.
PPT 5-4
Anne Beiler
ANNE BEILER
Auntie 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.
PPT 5-5
Name That Company
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!
PPT 5-6
Major Forms of Ownership
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.
PPT 5-7
Forms of Business Ownership
TEXT FIGURE 5.1
Forms of Business Ownership
FORMS of
BUSINESS OWNERSHIP
5-7
lecture enhancer 5-1
THE FORTUNE LIST OF MOST
ADMIRED CORPORATIONS
Each year Fortune magazine asks industry experts which cor-
porations it admires. This lecture enhancer gives the Fortune
listing for 2009 to 2014. (See the complete lecture enhancer on
page 5.66 of this manual.)
Chapter 05 – How to Form a Business
5-9
II. SOLE PROPRIETORSHIPS
A. ADVANTAGES OF SOLE PROPRIETORSHIPS
1. Ease of STARTING AND ENDING the busi-
ness.
a. After you rent or buy the equipment, all you
need is a permit from the local government.
b. To get out of business, you just quit.
2. BEING YOUR OWN BOSS. Working for your-
self is exciting.
3. PRIDE OF OWNERSHIP. Sole proprietors take
the risk and deserve the credit.
4. LEAVING A LEGACY behind for future gener-
ations.
5. RETENTION OF COMPANY PROFITS. You
don’t have to share profits with anyone.
6. NO SPECIAL TAXES. Profits of the business
are taxed as the personal income of the owner.
B. DISADVANTAGES OF SOLE PROPRIETOR-
SHIPS
1. Unlimited liability—the risk of personal losses
a. You and the business are one.
b. UNLIMITED LIABILITY is the responsibility
of business owners for all of the debts of
the business.
2. LIMITED FINANCIAL RESOURCES: Financ-
ing is limited to the funds that the sole owner
can gather.
Chapter 05 – How to Form a Business
5-10
PPT 5-8
Ethnic Business Centers
Source:Forbes,www.forbes.com,accessedNovember2014.
ETHNIC BUSINESS CENTERS
Cities 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
PPT 5-9
Major Benefits of Sole
Proprietorship
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
lecture enhancer 5-2
BRINGING BUSINESS BACK TO
RURAL TOWNS
Small farming towns are seeing an increase in new small busi-
nesses as states are making it more enticing for young entre-
preneurs. (See the complete lecture enhancer on page 5.68 of
this manual.)
PPT 5-10
Disadvantages of Sole
Proprietorship
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
Chapter 05 – How to Form a Business
5-11
3. MANAGEMENT DIFFICULTIES: Many owners
are not skilled at management and with details
such as accounting.
4. OVERWHELMING TIME COMMITMENT
a. The owner has no one with whom to share
the burden.
b. A business owner may work 12 hours a day.
5. FEW FRINGE BENEFITS:
a. You have no paid vacation or health insur-
ance.
b. Fringe benefits can add up to 30% of a
worker’s compensation.
6. LIMITED GROWTH: Expansion is slow.
7. LIMITED LIFE SPAN. If the sole proprietor dies
or leaves, the business ends.
learning objective 2
Describe the differences between general and limited partners, and compare the
advantages and disadvantages of partnerships.
III. PARTNERSHIPS
A. A PARTNERSHIP is a legal form of business with
two or more owners.
B. TYPES OF PARTNERSHIPS
1. A GENERAL PARTNERSHIP is a partnership in
which all owners share in operating the business
and in assuming liability for the business’s
debts.
2. A LIMITED PARTNERSHIP is a partnership with
one or more general partners and one or more
limited partners.
Chapter 05 – How to Form a Business
5-12
PPT 5-11
Work-Life Balancing Act
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
test
prep
PPT 5-12
Test Prep
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?
PPT 5-13
Major Types of Partnerships
• 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.
Chapter 05 – How to Form a Business
5-13
a. A GENERAL PARTNER is an owner (part-
ner) who has unlimited liability and is active
in managing the firm.
b. A LIMITED PARTNER is an owner who in-
vests money in the business but does not
have any management responsibility or lia-
bility for losses beyond the investment.
c. LIMITED LIABILITY is the responsibility of
a business’s owners for losses only up to
the amount they invest; limited partners
and shareholders have limited liability.
3. MASTER LIMITED PARTNERSHIP (MLP) is a
partnership that looks much like a corporation
(in that it acts like a corporation and is traded
on a stock exchange) but is taxed like a part-
nership and thus avoids the corporate income
tax.
4. A LIMITED LIABILITY PARTNERSHIP (LLP)
is a partnership that limits partners’ risk of los-
ing their personal assets to only their own acts
and omissions and the acts and omissions of
the people under their supervision.
a. Your partner’s malpractice will not cost you
your personal assets.
b. In some states, personal protection does
not extend to contract liabilities such as
bank loans.
5. UNIFORM PARTNERSHIP ACT (UPA)
a. All states except Louisiana have adopted
the Uniform Partnership Act to replace laws
Chapter 05 – How to Form a Business
5-14
PPT 5-14
Types of Partners
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.
PPT 5-15
Other Forms of Partnerships
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.
Chapter 05 – How to Form a Business
5-15
relating to partnerships.
b. The UPA defines the THREE KEY ELE-
MENTS of any general partnership:
i. Common ownership
ii. Shared profits and losses
iii. The right to participate in managing the
operations of the business
C. ADVANTAGES OF PARTNERSHIPS
1. MORE FINANCIAL RESOURCES: Two or
more people can pool their money and credit.
2. SHARED MANAGEMENT AND POOLED/
COMPLEMENTARY KNOWLEDGE: Partners
give each other time off and provide different
skills and perspectives.
3. LONGER SURVIVAL: Partners are four times
as likely to succeed as sole proprietorships.
4. NO SPECIAL TAXES: All profits of partners
are taxed as personal income of the owners.
D. DISADVANTAGES OF PARTNERSHIPS
1. UNLIMITED LIABILITY
a. Each GENERAL PARTNER is liable for the
debts of the firm, no matter who was re-
sponsible for causing those debts.
b. You are liable for your partners’ mistakes
as well as your own.
2. DIVISION OF PROFITS: Sharing profits can
cause conflicts.
3. DISAGREEMENTS AMONG PARTNERS