Ch 5 - Business Ownership and Structures
Introduction to Business Ownership
Overview: Explains the various forms of business ownership and their characteristics, advantages, and disadvantages.
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Chapter Overview
Chapter 5: How to Form a Business
Basic Forms of Business Ownership:
Sole Proprietorships
Partnerships
Corporations
Corporate Expansion: Mergers and Acquisitions
Franchises
Cooperatives
Learning Objectives
LO 5-1: Compare the advantages and disadvantages of sole proprietorships.
LO 5-2: Describe the differences between general and limited partners, comparing advantages and disadvantages of partnerships.
LO 5-3: Analyze advantages and disadvantages of corporations and summarize distinctions among C corporations, S corporations, and limited liability companies (LLCs).
LO 5-4: Define three types of corporate mergers, explaining leveraged buyouts and the process of taking a firm private.
LO 5-5: Outline advantages and disadvantages of franchises, discussing opportunities for diversity and challenges of global franchising.
LO 5-6: Explain the function of cooperatives.
Sole Proprietorships
Advantages
Ease of starting and ending the business.
Being your own boss.
Pride of ownership and leaving a legacy.
Retention of company profits without special taxes.
Disadvantages
Unlimited liability, where owners are responsible for all business debts.
Limited financial resources and management challenges.
High time commitment and few fringe benefits.
Limited growth and lifespan parameters.
Work-Life Balance
Data shows business owners' work hours:
20% of small business owners work over 60 hours per week.
51% work over 40 hours per week.
Real-World Example
EvanTubeHD: Evan began making toy unboxing videos as a child, now earns over $1 million yearly from ads and sponsorships.
Partnerships
Types of Partnerships
General Partnership:
All owners share operating responsibilities and liability.
Limited Partnership:
Composed of general partners (with unlimited liability) and limited partners (who invest but do not manage).
Limited Liability
Definition: Owners only liable for losses up to their investment amount.
Advantages
Increased financial resources and pooled knowledge.
Longer survival rates compared to sole proprietorships.
No special taxes applicable to partnerships.
Disadvantages
Unlimited liability for general partners.
Profit sharing which can lead to conflicts.
Possible disputes and difficulties regarding termination.
Polling Question
Students asked which type of partnership they would prefer to enter:
A. General partnership
B. Limited partnership
C. Master limited partnership (MLP)
D. Limited liability partnership (LLP)
Corporations
C Corporations
Definition: State-chartered legal entity distinct from its owners.
Advantages:
Limited liability for owners.
Enhanced fundraising abilities and permanence.
Ease of transfer of ownership and management separation.
Types of Corporations
Alien Corporation: Operates in the U.S. but chartered elsewhere.
Domestic Corporation: Operates in the state it’s chartered.
Foreign Corporation: Operates in one state but chartered in another.
Private Corporation: Stock held by a limited number of people.
Public Corporation: Stock sold to the public.
Nonprofit Corporation: Established for purposes other than profit.
Disadvantages of Corporations
Initial cost and extensive paperwork.
Corporate double taxation and difficulty in termination.
S Corporations
Definition: Corporations taxed like sole proprietorships and partnerships.
Benefits include limited liability with specific conditions like shareholder caps and stock classifications.
Limited Liability Companies (LLCs)
Similar to S corporations without strict eligibility criteria.
Advantages:
Flexible ownership and tax options.
Limited liability protections.
Disadvantages
No stock; ownership transfer restrictions.
Fewer incentives for investors and potential paperwork burdens.
Corporate Mergers and Acquisitions
Types of Mergers
Merger: Union of two firms into one entity.
Acquisition: Purchase of one company by another.
Mergers Types
Vertical Merger: Joining firms in different stages of production.
Horizontal Merger: Joining firms in the same industry.
Conglomerate Merger: Combining companies from unrelated industries.
Franchising
Definition
Franchise agreement: Arrangement that allows a franchisor to sell business rights to franchisees.
More than 733,000 franchises in the U.S. generate 7.6 million jobs.
Advantages
Assistance in management and marketing, affordable entry through recognized branding, and improved chances of success due to a lower failure rate.
Disadvantages
Large startup costs, profit sharing, and strict operational regulations.
E-Commerce Expansion
Traditional franchises are increasingly moving online with challenges arising from potential clashes between franchisor and franchisee interests.
Global Franchising
U.S. franchises expanding to foreign markets, embracing convenience and service consistency.
Home-Based Franchises
Advantages include reduced overhead; however, challenges such as isolation and the need for long hours may arise.
Cooperatives
Definition
A cooperative is a business owned and controlled by users for mutual benefit (e.g., farmers pooling resources).
Significant member-driven control with democratic management structures.
Conclusion
This chapter delineates the multifaceted nature of business ownership, emphasizing the varied structures available and the respective advantages and challenges associated with each form.