1. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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6
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Business
Formation:
Choosing The Form
That Fits
2
LO1 What are the characteristics of the four
basic forms of business ownership?
LO2 What are the advantages and
disadvantages of a sole proprietorship?
LO3 What are the pros and cons of
partnerships?
LO4 Why have corporations become the
dominant form of business ownership?
LO5 Why are limited liability companies
becoming an increasingly popular form of
ownership?
LO6 What are the advantages and
disadvantages of franchising?

3. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Business Ownership Options:
The Big Four
Sole Proprietorship – the business is owned by
a single individual
Partnership – two or more people serve as co-
owners of the business
Corporation – the business is a separate legal
entity
Limited Liability Company – a hybrid with
characteristics of both a corporation and
3

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Net Income by Form of
Ownership
4

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Corporate Profit and Revenue
• Corporate form of ownership reports 66% of
profits; representing only 18.3% of all entities
• Companies like Walmart, Exxon, Apple and
General Electric have annual sales revenues in
the billions (hundreds of billions)
• But, 24% of all corporations report revenue
less than $25,000
5
Source: U.S. Census Bureau. The 2011Statistical Abstract of the United States Tables 743 and 744:
http://www.census.gov/compendia/statab/2011/tables/11s0744.pdf, accessed January 23, 2011.

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Advantages and Disadvantages of
Sole Proprietorships
6
Disadvantages:
 Limited Financial
Resources
 Unlimited Liability
 Limited ability to attract
and maintain talented
employees
 Heavy workload and
responsibilities
 Lack of Permanence
Advantages:
 Ease of Formation
 Retention of Control
 Pride of Ownership
 Retention of Profits
 Possible Tax Advantages
©DavidGilder/Shutterstock.com

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General Partnerships:
Two Heads Can Be Better Than
One
7
Advantages:
 Pooled Financial Resources
 Shared Responsibilities
 Ease of Formation
 Tax Advantages
Disadvantages:
 Unlimited Liability
 Disagreements
 Lack of Continuity
 Difficulty in
withdrawing from
agreement

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Limited Partnerships
8
Limited Partnership –
includes at least one
general partner and at
least one limited partner
Limited Partnership –
includes at least one
general partner and at
least one limited partner
Limited Liability Partnership –
All partners are actively
involved but they have some
form of limited liability. The
amount of liability differs
per state.
Limited Liability Partnership –
All partners are actively
involved but they have some
form of limited liability. The
amount of liability differs
per state.
Limited partners have limited liability.
©Jose Luis Pelaez Inc/Blend Images/Jupiterimages

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The Name Game
9
©Oliver Suckling/Shutterstock.com
Source: Naming Your Business, Business Owner’s Toolkit website, http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P01_4800; Choosing the Right Name for My Corporation or Limited Liability Company, SCORE website,
http://www.score.org/leg_choosing_name.html; Business Name Registration (Doing Business As), Business.gov website, http://www.business.gov/register/business-name/dba.html
• Choosing a name depends on the type of business
• Most sole proprietorships and general partnerships
operate under their names
• Must confirm name (or similar) is not being used
• Many states required a DBA (doing business as) be filed
• Corporations must be filed with the state and use special
wording
 Corporation, incorporated, company, limited or an
abbreviation
 The words bank or cooperative cannot be used unless
approved by a regulatory agency

10. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Corporations: An Artificial Person
• Most common type of corporation is a “C”
corporation
• A corporation is a legal entity, separate from
its owners
• Requirements vary by state, many states are
“corporation-friendly”
• Corporations are owned by stockholders
• Articles of incorporations must be filed and
corporate bylaws adopted
10

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Stock Ownership in Major
Corporations
11

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Corporations:
The Role of Board of Directors
12
• Elected by stockholders to oversee the
operation of their company and protect
their interests
• Oversee the operation of corporation
and protect investors’ interest
• Establish mission and set objectives
• Rarely get involved in day-to-day
management
• Responsible for monitoring the
performance of the corporate officers
© Timm Schamberger/AFP/Getty Images

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Form of Business Aims for
Social Responsibility
• Maryland created new business form: benefit
corporation
• Like a C Corporation but includes provisions
for social/environmental goals
• They are not nonprofits, they are legally
covered to focus on non-financial goals
• Priority to employees, customers,
environmentalists 13
Source: “Maryland Signs Benefit Corporation Law,” by Tasha Petty, Little Green Submarine website, http://www.littlegreensubmarine.com/maryland-signs-benefit-corporation-law/; “Maryland First State in Union to Pass Benefit Corporation Legislation,”
CSR Newswire website, http://www.csrwire.com/press/press_release/29332-Maryland-First-State-in-Union-to-Pass-Benefit-Corporation-Legislation.
©TheStudioDog/Photodisc/GettyImages

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Advantages and Disadvantages of
Corporations
14
Disadvantages:
• Expense/complexity of
formation and operation
• Double Taxation
• Paperwork and Regulation
• Complications when
operating in more than
one state
• Conflicts of Interest
Advantages:
• Limited Liability
• Permanence
• Easy to Transfer Ownership
• Ability to Raise Capital
• Specialized Management

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Other Types of Corporations:
Same but Different
15
TYPETYPE KEY ADVANTAGEKEY ADVANTAGE LIMITATIONSLIMITATIONS
S Corp. •IRS does not tax earnings separately
•Stockholders have limited liability
•No more than 100 stockholders
•Stockholders must be U.S. citizens or
permanent residents
Statutory
Close
Corp.
•Not require to have a board or hold
annual meetings
•Owners can participate in management
while maintaining limited liability
•Limited number of stockholders
•Stockholders must offer shares to
owner first before selling publicly
•Not all states allow this corporation
type
Nonprofit
Corp.
•Earnings are exempt from federal and
state income taxes
•Members/directors have limited liability
•Contributions made by individuals are tax-
deductible
•May have dues paying members but
no stockholders
•Can’t distribute dividends
•Can’t make political donations
•Must keep accurate records to
document tax-exemption

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Stockholders Get “Say on Pay”
• Board of Directors’ job is to protect the
voice of the stockholders
• The Recession of 2008/2009 brought that
oversight into question regarding
CEO Pay
• CEOs were enjoying high salaries
and perks while laying off workers
• Congress passed the Dodd-Frank Act
which gives stockholders “some” voice in
executive compensation 16
©Arcady/ Shutterstock.com
Source: “New Law Has Effect on Pay for Executives” by David Nicklaus, St. Louis Post Dispatch, page B1, January 7, 2007; Dodd-Frank's 'say on pay' could impact executive pay by Ronald D. Orol, Marketwatch Website: http://www.marketwatch.com/story/new-say-on-
pay-law-could-temper-ceo-pay-2010-08-26; Dodd-Frank: What it Means for Comp and Governance by Daniel J. Ryterband, Bloomberg BusinessWeek website: http://www.businessweek.com/managing/content/jul2010/ca20100716_567635.htm.

17. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Corporate Restructuring:
Mergers & Acquisitions
17
Large corporations constantly
look for ways to grow and
achieve competitive
advantage.
Mergers – two companies
agree to a combination of
equals
Acquisitions – when one
firm buys another
©Tom Merton/OJO Images/Jupiterimages

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Murray’s Cheese
Video HereVideo Here
18

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Gather Around the Water Cooler:
Let’s Talk
•
• Why would a retail giant like Kroger
pursue a partnership with a small New
York cheese shop?
• What are the benefits of the
partnership to Murray’s?
• What challenges does the partnership
create for Murray’s?
• Why would a retail giant like Kroger
pursue a partnership with a small New
York cheese shop?
• What are the benefits of the
partnership to Murray’s?
• What challenges does the partnership
create for Murray’s?
19
©iStockphoto.com/DNY59

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Types of Mergers & Acquisitions
20

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Divestitures: When Less is More
Divestitures allow the firm to streamline their
operations and focus
•Spin-off – setting up the division or part of
the business as a separate company
Sell stock to existing stockholders
•Carve-out – setting up a separate business
from an operation
Sell stock to outside investors
21

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The Limited Liability Company:
The New Kid on the Block
22
Advantages:
• Limited Liability
• Tax Pass-Through
• Simplified Management and
Operation
• Flexible Ownership
Disadvantages:
• Complexity of Formation
• Franchise Taxes
• Foreign Status in other States
• Limited to Select Industries
• State Law Differences

23. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Which Would You Choose?
• Which business form would be best for each of the
following businesses types?
 T-Shirt/Screen Printing
 Restaurant
 Beauty Salon
 Landscaping
 Home/Office Cleaning
• What if the business expanded, would you change
the form?
• Would you consider a franchise for any of these
businesses?
 What business form would you choose for a franchise?23

24. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Franchising: Proven
Methods for a Price
• The franchisee uses the brand name,
trademark and practices of the franchisor
• Growth in women franchises
• Minority participation has increased under new
initiatives
• A well-established method for operating a
business 24
Source: Fit for Franchising, by Taylor Mallory, Pink Magazine June/July 2007, pinkmagazine.com website: http://www.pinkmagazine.com/franchise/women/2007/burzynski.html; Franchising Attracts More Women, Minorities by Julie Bennett, Startup Journal, accessed through Entrepreneur.com website:
http://www.entrepreneur.com/franchises/franchisezone/startupjournal/article61324.html; Female Franchisors Few and Far Between by Julie M. Young, e-magnify.com website: https://www.e-magnify.com/resources_articlearchiveresults.asp?categoryID=18; Fit to Be a Franchisee: Many Businesswomen Choose Franchises that Connect With Personal Interests by Nancy Lacewell,
June 7, 2006 Business First of Louisville website: http://www.bizjournals.com/louisville/stories/2006/05/22/story2.html.. Boosting Diversity in Franchising by Joan Szabo, December 5, 2006, Franchise Update website: http://www.franchise-update.com/article/188/. Bridging the Gap Between the Minority Community and the Franchising Industry, Minority Franchising website:
http://www.minorityfranchising.com/, accessed January 20, 2011; MinorityFran, International Franchise Association website: http://www.franchise.org/files/MinorityFran%20Broch%20by%20page.pdf, accessed January 20, 2011.
©TheStudioDog/Photodisc/GettyImages

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Franchising in Foreign Markets
© Karen Cowled/Alamy
• Franchising in foreign markets have shown great
opportunities for growth
• Markets are less intense and
less saturated
 McDonald’s 12,693
 Subway 7,235
 Curves 2,868
• McDonald’s has slightly more franchises in foreign
countries than the U.S. 25
Source: Entrepreneur.com website pages for individual franchisors: http://www.entrepreneur.com/franchises/mcdonalds/282570-0.html; http://www.entrepreneur.com/franchises/subway/282839-0.html; http://www.entrepreneur.com/franchises/curves/282265-
0.html, accessed January 22, 2011.

26. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advantages and Disadvantages
of Franchising
26
Disadvantages:
Costs
Lack of Control
Negative Halo Effect
Growth Challenges
Restriction on Sale
Poor Execution
Advantages:
Less Risk
Training and Support
Brand Recognition
Access to Funding

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Franchising Costs
27

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Some Franchisees Are Quite Happy
When They Don’t Earn Profit
28
 Many customers like doing
business with nonprofit
franchisees.
 Nonprofit franchising is a
good way for companies to
be socially responsible and
build goodwill.
 Nonprofits can boost their
fundraising efforts.
Ben & Jerry franchises its
PartnerShops to nonprofit
corporations.
Source: “The Ben & Jerry’s Law: Principles Before Profit,” by John Tozzi, Bloomberg Business Week, April 26, 2010, pp. 65-66. Ben & Jerry’s website, http://www.benjerry.com/scoop_shops/partnershops/, accessed August 2, 2009; Nonprofit Owned Franchises:
A Strategic Business Approach, prepared by Community Wealth Ventures and IFA Educational Foundation, March 2004
© David Lee/Alamy

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Entering Into A Franchise Agreement
• Know all the facts before signing the dotted line:
 Terms and Conditions
 Fees and Other Payments
 Training and Support
 Specific Operational Requirements
 Conflict Resolution
 Assigned Territory
• Franchisors must provide a Franchise Disclosure Document
(FDD)
• The Federal Trade Commission (FTC) require:
 The FDD must be written in plain English
 The franchisor must be given 14 days to review the FDD
 The Franchisee should have a lawyer review the document
29

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Reality TV: We Mean Business
Video HereVideo Here
30

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Gather Around the Water Cooler:
Let’s Talk
•
31
©iStockphoto.com/DNY59
• What form of ownership characterizes Berry
Elegance?
• What advantages might Todd Jones and Amy
Stipa enjoy with respect to their business
partnership in the firm, Berry Elegance?
• What disadvantages might Todd Jones and Amy
Stipa enjoy with respect to their business
partnership in the firm, Berry Elegance?

32. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Looking Back
• What are the characteristics of the four basic forms of business
ownership?
• What are the advantages and disadvantages of a sole
proprietorship?
• What are the pros and cons of partnerships?
• Why have corporations become the dominant form of business
ownership?
• Why are limited liability companies becoming an increasingly
popular form of ownership? 32