11 14 13 Chapter 5 Notes How to Form a Business Sole proprietorship business owned and managed by one person o Advantages Ease of starting and ending the business Being your own boss Pride of ownership Leaving a legacy Retention of company profits No special taxes o Disadvantages personal losses Unlimited liability you are responsible for all debts and damages risk of Limited financial resources Management difficulties Overwhelming time commitment Few fringe benefits no paid health insurance no paid disability insurance no pension plan no sick leave no vacation pay Limited growth Limited life span partners managing the firm Partnership two or more people legally agree to become co owners of a business o General partnership owners hare in operating the business and in assuming liability for the business s debts o Limited partnership one or more general partners and one or more limited o General partner an owner who has unlimited liability and is active in o Limited partner owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment o Limited liability responsibility of a business s owners for losses only up to the amount they invest limited partners and shareholders have limited liability o Master limited partnership a partnership that looks like a corporation in that it looks like a corporation and is traded on a stock exchange but is taxed like a partnership and thus avoids the corporate income tax o Limited liability partnership partnership that limits partners risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision o Advantages More financial resources Shared management and pooled complementary skills and knowledge Longer survival No special taxes o Disadvantages Unlimited liability each general partner is liable for the debts of the firm no matter who is responsible for causing them Division of profits Disagreements among partners Difficulty of termination Corporation legal entity with authority to act and have liability apart from its owners o Conventional corporations state chartered legal entity with authority to act and have liability separate from its owners its stockholders Stockholders don t have to worry about losing anything other than the money they invested o Advantages Limited liability Ability to raise more money for investment sell shares of their stock to anyone interested Can also borrow money by obtaining loans from financial institutions like banks Size Perpetual life Ease of ownership change Ease of attracting talented employees Separation of ownership from management o Disadvantages Initial cost Extensive paperwork Double taxation corporate income is taxed twice Two tax returns corporate and individual tax return Size Difficulty of termination Possible conflict with stockholders and board of directors S corporation unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships o Have no more than 100 shareholders o Have shareholders that are individuals or estates and who are citizens or permanent residents of the US o Have only one class of stock o Derive no more than 25 percent of income from passive sources rents royalties Limited liability company similar to and S corporation but without the special interest eligibility requirements o Advantages Limited liability Choice of taxation Flexible ownership rules Flexible distribution of profits and losses Operating flexibility o Disadvantages No stock Limited life span Fewer incentives Taxes pay self employment taxes on their profits Paperwork mineral water drinks buys snack food company Corporate Expansion Mergers and Acquisitions Merger the result of two firms forming one company o Vertical merger joining of two companies involved in different stages of related business soft drinks buys artificial sweeteners o Horizontal merger joining of two firms in the same industry soft drinks buys o Conglomerate merger joining of firms in completely unrelated industries soft Acquisition one company s purchase of the property and obligations of another Leverage buyout attempt by employees management or a group of private investors to buy out the stockholders in a company primarily by borrowing the necessary funds o Employees managers or investors now become the owners of the firm Franchises 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 company that develops a product concept and sells others the rights to make and sell the products Franchise the right to use a specific business s name and sell its products or services in a given territory Franchisee a person who buys a franchise Advantages of franchises o Management and marketing assistance o Personal ownership o Nationally recognized name o Financial advise and assistance o Lower failure rate Disadvantages o Large start up costs o Shared profit o Management regulation o Coattail effects the actions of other franchises have an impact on your future growth and profitability o Restrictions on selling o Fraudulent franchisors Cooperatives Cooperatives business owned and controlled by the people who use it producers consumers or workers with similar needs who pool their resources for mutual gain Also formed to give members more economic power as a group than they have as individuals
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