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Forms of Business
Ownership
Chapter 5:
How to Form a Business
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Overview
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Forms of Business Ownership
Mergers and Acquisitions
Franchising

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Forms of Business
Ownership
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Major Forms of Ownership
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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

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Forms of Business
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Major Benefits of Sole
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Ease of starting and ending the business
Being your own boss
Pride of ownership
Leaving a legacy
Retention of company profit
No special taxes

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Disadvantages of Sole
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to Proprietorship
s Unlimited Liability: Any debts or damages
incurred by the business are your debts, even if
it means selling your home, car or anything else
Limited financial resources
Management difficulties
Overwhelming time commitment
Few fringe benefits
Limited growth
Limited life span

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Partnerships
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Businesses owned by two or more people
General partner: an owner who is actively
involved in running the business with
unlimited liability
Limited partner: an owner who is not
actively involved in the business and
whose exposure is limited to the
investment in the business (limited
liability)

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Major Types of Partnerships
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General Partnership: All owners share in
operating the business and in assuming
liability for the businesss debts
Limited Partnership: A partnership with
one or more general partners and one or
more limited partners

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Other Forms of Partnership
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Master Limited Partnership (MLP): A
partnership that looks much like a
corporation but is taxed like a partnership
and thus avoids the corporate income tax
Limited Liability Partnership (LLP): 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

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Advantages of Partnerships
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More financial resources
Shared management and pooled skills
and knowledge
Longer survival
No special taxes

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Disadvantages of
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Unlimited liability (for general partners)
Division of profits
Disagreements among partners
Difficult to terminate

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Choose Wisely
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starting a partnership
Choose your partner(s) wisely
Can you trust them?
What do they contribute?
Do you get along?
Draw up a legally binding partnership agreement
Name, address, etc. of partnership
Responsibilities
Decision making
Financial issues

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Corporation
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Conventional (C) corporation: legal entity
separate from its owners (stockholders)
Basically has the status of a person
under the law
Is chartered within a state
Can be big or small
Can be public or private

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How to Incorporate
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Articles of Incorporation are filed with
secretary of state (of a given state)
Name of corporation
Names of founders
Purpose and duration (usually perpetual)
Address of office
Details of ownership (stock), directors
meetings, duties of officers

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Terms
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Domestic corporation: does business in
the state where it is incorporated
Foreign corporation: does business in one
state but is incorporated in another
Alien corporation: does business in U.S.
but is incorporated in different country
Closed/private corporation
Open/public corporation

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Advantages of a
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to Corporation
s Limited liability: personal assets of
owners/stockholders are not at risk
Ability to raise substantial amounts of money
(through joint ownership)
Easier to borrow money (bonds, loans)
Size (lots of resources, power)
Perpetual life
Ease of ownership change
Ease of attracting talented employees
Separation of ownership from management

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Disadvantages of
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Complicated and costly to start
Paperwork
Double taxation
Two tax returns for owners
Size (inflexibility, bureaucracy)
Difficult to terminate
Separation of ownership from
management

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How Owners Affect
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Principal-Agent Problem
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1 Exxon Mobil United States
2 JPMorgan Chase United States
3 General Electric United States
4 Royal Dutch Shell Netherlands
5 ICBC China
6 HSBC Holdings United Kingdom
7 PetroChina China
8 Berkshire United States
Hathaway
9 Wells Fargo United States
10 Petrobras-Petroleo Brazil
Brasil
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Worlds Most Valuable
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to Corporations (2012)
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Rank Name Country
1 Apple United States
2 Exxon Mobil United States
3 Wal-Mart United States
4 Google United States
5 Microsoft United States
6 General Electric United States
7 IBM United States
8 PetroChina China
9 Chevron United States
Corporation
10 Berkshire United States
Hathaway
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Who Can Incorporate?
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Anyone - truckers, doctors, plumbers,
athlete and small business owners can
incorporate
Normally, stock is not issued when
individuals incorporate so the advantages
and disadvantages are not exactly the
same as for large corporations
Major advantages are limited liability and
possible tax benefits

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S Corporation
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A special corporation
With all benefits of a corporation (especially
limited liability)
No corporate tax
Qualifications:
No more than 100 shareholders
Shareholders are individuals or estates that
are U.S. citizens or permanent residents
Only one class of stock
No more than 25% of income from passive
sources (e.g., interest, royalties)
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Limited Liability Companies
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Similar to S corporations
First introduced in Wyoming
Very popular because of:
Limited liability
Choice of taxation
Flexibility
Disadvantages:
No stock
Limited life span

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Mergers and
Acquisitions,
Franchising,
Cooperatives
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Mergers And Acquisitions
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Merger: The result of two firms joining to
form one company
Acquisition: One companys purchase of
the property and obligations of another
company

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Not That American Any
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Types of Mergers
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Vertical Merger: Joins two firms in
different stages of related business
Horizontal Merger: Joins two firms in the
same industry and allows them to
diversify or expand their products
Conglomerate Merger: Unites firms in
completely unrelated industries in order
to diversify business operations and
investments

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Illustration of Types of
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Leveraged Buyouts
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Leveraged buyout: managers, employees
or private investors buy back all stock,
usually by borrowing the necessary funds
This is an example of taking a company
private
Examples:
Hertz Corporation
Dell (Michael Dell controls 75%)

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Franchising
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Franchise: a franchisor grants a
franchisee the right to sell a product in a
given territory (for a fee)
A franchise can be set up as a sole
proprietorship, partnership or corporation
Popular types of franchises:
Restaurants
Convenience stores
Gas stations

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Some Popular Franchises
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Advantages of Franchises
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Management and marketing assistance
Personal ownership
Recognized brand name
Financial advice and assistance
Lower failure rate

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Disadvantages of
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High start-up cost
Shared profit
Regulations and restrictions
Coattail effects

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Other Aspects of
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More diversity in franchisees (women,
minorities)
Home-based franchises
Online franchises
International franchising

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Cooperatives
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A cooperative (co-op) is a business
owned and managed by its users
(producers, customers, workers)
Often found in rural areas:
Food cooperatives
Farm cooperatives

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Summary
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Forms of Business Ownership
Mergers and Acquisitions
Franchising
Cooperatives

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So?
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Each form of business ownership has
advantages and disadvantages
Which one is the best depends on the
situation
Form of business ownership can be
changed
Franchising is a great entrepreneurial
opportunity with higher chance of
success
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