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How to Form a *

CHAPTE
Business

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5
Nickels
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McHugh
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McHugh

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BASIC FORMS OF BUSINESS
OWNERSHIP
◼ Sole Proprietorship: A business that is owned and
usually managed by one person. Example: if someone
starts a tea stall by himself only.

◼ Partnership: A legal form of business with two or

more owners. Example: Mr. Karim and his friend starts
a business together where both of them have
contributed.

◼ Corporation: A legal entity with authority to act and

have liability apart from its owners. Example:
Microsoft.
SOLE PROPRIETORSHIPS ADVANTAGES
Ease of starting and ending the business
Being your own boss
Pride of ownership
Retention of company profit
No special taxes
SOLE PROPRIETORSHIP DISADVANTAGES
Unlimited liability
Limited financial resources available
Management difficulties
time commitment
Limited growth
ADVANTAGES OF PARTNERSHIPS

More financial resources

Shared management, skills and knowledge
Longer survival
No special taxes
DISADVANTAGES OF PARTNERSHIPS
Unlimited liability
Division of profits
Disagreements among partners
Difficulty in termination
ADVANTAGES OF CORPORATIONS

Limited liability
Ability to raise more money for investment
Size
Perpetual life
Ease of ownership change
Separation of ownership from management
DISADVANTAGES OF CORPORATIONS
Initial cost
Extensive paperwork
Double taxation
Size
Difficulty of termination
CORPORATE EXPANSION: MERGERS
AND ACQUISITIONS
Merger: The results of two firms forming one new
company.

Acquisition: One company’s purchase of the property

and obligations of another company.
3 TYPES OF CORPORATE MERGERS
Vertical merger: The joining
of two companies involved in
different stages of related
businesses.

Horizontal merger: The

joining of two firms in the
same industry.

Conglomerate merger: The

joining of firms in completely
unrelated industries.
FRANCHISE AGREEMENT

An arrangement whereby someone with a good

idea for a business sells the rights to use the
business name and sell a product or service to
others in a given territory.

Franchisor: A company that develops a product

concept and sells others the rights to make and sell
the products.

Franchisee: A person who buys a franchise.

ADVANTAGES OF FRANCHISES
Management and marketing assistance
Personal ownership
Nationally recognized name
Financial advice and assistance
Lower failure rate
DISADVANTAGES OF FRANCHISES
Large start-up costs
Shared profit
Management regulation
Coattail effects
Restrictions on selling
Fraudulent franchisors