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Chapter 2
Objectives:
Methods of going into business
Legal forms of business
 1919: J.W. Longaberger took a job with
the Dresden Basket Factory
 Great Depression: The factory closed,
and J.W. got a job at a paper mill, but
kept making baskets nights & weekends
 1936: J.W. and his wife Bonnie
purchased the Dresden Basket Factory,
which they ran with their 12 children.
Longaberger Baskets
 1934: Dave Longaberger born
 Stuttered, had epilepsy, spent 3 years in 5th
grade
 Very ambitious – family called him the “25
cent millionaire”
– worked in a grocery store,
– shoveled snow,
– delivered papers,
– mowed grass,
– hauled trash,
– ran the projectors at the local movie house
Longaberger Baskets
 1963: Dave Longaberger and his
wife bought & ran “Harry’s Dairy Bar”.
 Bought A&P and ran it
 Dave noticed department stores selling
imported baskets, and asked his father,
J.W., to make some baskets–they sold well.
 1971: Opened J.W.’s Handwoven Baskets
 1978: Figured out that the best way to sell
the baskets was home shows
Longaberger Baskets
 1984: Dave’s daughter Tami
joined the family business.
 1994: Tami became president
 Today, 45,000 “home consultants” sell
Longaberger baskets.
Longaberger Baskets
Monty Tech Entrepreneur of the
Week: Josh Miner - Miner Leaks
 LinkedIn
 Plumbing Class of 2002
Methods of Going Into Business
 Buy an existing business
 Start from scratch
 Buy a franchise
 Reminder:
–Entrepreneur interviews due Friday
Advantages of buying an existing
business?
Buy an Existing Business -
Advantages
 Proven record
 Established clientele
 Established location
 Bank and supplier relationships
 Trained employees
 Established facilities
 Low purchase price
Disadvantages of Buying an
Existing Business?
Buy an Existing Business -
Disadvantages
 Poor record?
 Ill will?
 Wrong location?
 Poor physical condition?
How do you find a business to buy?
 Advertised in classified (“Business
opportunities” section)
 Business broker
 Chamber of Commerce
 Small Business Administration
 Bankruptcy announcements
 Word of mouth
Steps to Purchase a Business
 Write specific objectives about the kind
of business you want to buy and identify
businesses for sale that meet your
objectives.
 Meet with brokers to investigate specific
opportunities.
 Visit during business hours.
 Ask for complete financial accounting
for the past 3 years.
Purchase Steps
 Ask for important information in writing
– Complete list of assets to be transferred
– Statement about any past or pending legal action
against the business
– A copy of the business lease or mortgage
– List of all suppliers
 Determine how you would finance the
business.
 Get expert help to determine a price to
offer for the business.
Advantages of Starting From
Scratch?
Start from Scratch - Advantages
 Freedom to make decisions
 Opportunity to develop image
 Choice of location
 Choice of physical facilities
Disadvantages of Starting from
Scratch?
Start from Scratch -
Disadvantages
 No record
 No established clientele
 Time-consuming tasks
– Training new employees
– Installing machinery, display cases,
furniture
– Ordering goods
 Difficulty in obtaining a loan
Buy a Franchise
 Franchise: contract
 Franchisee: person who purchases the
name/concept
 Franchiser: corporation who sells the
name/concept
Advantages of Purchasing a
Franchise?
Advantages of a Franchise
 Start-up help
 Advertising
 Financial assistance
 Established brand name
 Proven method
 Equipment and supplies may be less
expensive
Disadvantages of Purchasing a
Franchise?
Disadvantages of a Franchise
 Limited control
 Franchise fees
– Initial franchise fee
– Royalty fees (weekly or monthly)
 Potential image problem
 The franchisor can terminate the
franchise agreement
Evaluation of a franchise
 What can a franchise do for me that I
can’t do for myself?
 What is the future for this product or
service?
 How is the contract?
 Are there enough potential customers?
 Is this a good fit for me, financially and
the type of business?
Sidelines
 Work full time and run a business
 Advantage: financial security
 Disadvantage: less time to make
business successful
Family Business
 Do you have a business in your family?
 What are advantages of a family
business?
 What are disadvantages of a family
business?
Home-based Businesses
 Advantage:
– cheaper
– More convenient
 Disadvantages:
– Sometimes perceived as less professional
– Lack of privacy
Legal Forms of Business
 Sole Proprietorship
 Partnership
 Corporation
 S Corporation
 Limited Liability Corporation
Advantages of a Sole
Proprietorship
 Easy to start
 All profits to owner
 Complete control & flexibility
 Secrecy
 Single taxation
 Easy dissolution
Disadvantages of a Sole
Proprietorship
 Unlimited liability
 Limited life of business
 Difficulty in obtaining capital
 Little incentive for employees
Advantages of a Partnership
 Easy startup
– Articles of Partnership
– Partnership Agreement (see p. 38)
 Added capital
 Combined management skills
 Single taxation
 Employee incentives
Disadvantages of a Partnership
 Unlimited liability
 Limited life of business
 Divided authority
 Frozen investment
Corporation
 An enterprise that has the legal rights,
duties, and powers of a person
 Charter – written document outlining the
conditions under which the corporation
will operate
 Stockholders – owners of a corporation
 Stock – shares of ownership in a
corporation
Corporation
 Board of Directors – meet several times
a year to elect senior officers, determine
their salaries, set corporation’s rules for
conducting business
 Dividends – distributions of profit to
shareholders by corporations
Advantages of a Corporation
 Limited Liability
 Continuous life
 Easy transfer of ownership
 Ability to attract funds
 Specialized management
Disadvantages of a Corporation
 Government regulation
 Little secrecy
 Charter restrictions
 Complicated and expensive formation
 Double taxation
S Corporation
 A corporation that chooses Subchapter
S status for tax purposes
 Must meet the following requirements:
– No more than 35 shareholders
– Only one class of stock
– All shareholders are U.S. residents
– All shareholders are individuals
– Corporation operates on a calendar year
financial basis
Advantages of an S Corporation
 Limited liability
 Single taxation – income passes
through to individual shareholders and
are reported on their tax returns
Disadvantages of an S
Corporation
 Owners may be required to pay taxes
on earnings even if they have not taken
any money out of the business
Limited Liability Corporation
 Same advantages & disadvantages as
an S Corporation, but easier to set up
 When you’re ready to start a business
for real, SEE A LAWYER and
understand the current situation!!!
Form 2 – Write a paragraph on each question:
 Do you plan to buy an existing
business, start a business from scratch,
or buy a franchise? What are the
advantages and disadvantages of this
choice?
 What legal organization will you choose
for your company? What are the
advantages and disadvantages of this
choice?

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Chapter 2 notes new book

  • 1. Chapter 2 Objectives: Methods of going into business Legal forms of business
  • 2.  1919: J.W. Longaberger took a job with the Dresden Basket Factory  Great Depression: The factory closed, and J.W. got a job at a paper mill, but kept making baskets nights & weekends  1936: J.W. and his wife Bonnie purchased the Dresden Basket Factory, which they ran with their 12 children. Longaberger Baskets
  • 3.  1934: Dave Longaberger born  Stuttered, had epilepsy, spent 3 years in 5th grade  Very ambitious – family called him the “25 cent millionaire” – worked in a grocery store, – shoveled snow, – delivered papers, – mowed grass, – hauled trash, – ran the projectors at the local movie house Longaberger Baskets
  • 4.  1963: Dave Longaberger and his wife bought & ran “Harry’s Dairy Bar”.  Bought A&P and ran it  Dave noticed department stores selling imported baskets, and asked his father, J.W., to make some baskets–they sold well.  1971: Opened J.W.’s Handwoven Baskets  1978: Figured out that the best way to sell the baskets was home shows Longaberger Baskets
  • 5.  1984: Dave’s daughter Tami joined the family business.  1994: Tami became president  Today, 45,000 “home consultants” sell Longaberger baskets. Longaberger Baskets
  • 6. Monty Tech Entrepreneur of the Week: Josh Miner - Miner Leaks  LinkedIn  Plumbing Class of 2002
  • 7. Methods of Going Into Business  Buy an existing business  Start from scratch  Buy a franchise  Reminder: –Entrepreneur interviews due Friday
  • 8. Advantages of buying an existing business?
  • 9. Buy an Existing Business - Advantages  Proven record  Established clientele  Established location  Bank and supplier relationships  Trained employees  Established facilities  Low purchase price
  • 10. Disadvantages of Buying an Existing Business?
  • 11. Buy an Existing Business - Disadvantages  Poor record?  Ill will?  Wrong location?  Poor physical condition?
  • 12. How do you find a business to buy?  Advertised in classified (“Business opportunities” section)  Business broker  Chamber of Commerce  Small Business Administration  Bankruptcy announcements  Word of mouth
  • 13. Steps to Purchase a Business  Write specific objectives about the kind of business you want to buy and identify businesses for sale that meet your objectives.  Meet with brokers to investigate specific opportunities.  Visit during business hours.  Ask for complete financial accounting for the past 3 years.
  • 14. Purchase Steps  Ask for important information in writing – Complete list of assets to be transferred – Statement about any past or pending legal action against the business – A copy of the business lease or mortgage – List of all suppliers  Determine how you would finance the business.  Get expert help to determine a price to offer for the business.
  • 15. Advantages of Starting From Scratch?
  • 16. Start from Scratch - Advantages  Freedom to make decisions  Opportunity to develop image  Choice of location  Choice of physical facilities
  • 17. Disadvantages of Starting from Scratch?
  • 18. Start from Scratch - Disadvantages  No record  No established clientele  Time-consuming tasks – Training new employees – Installing machinery, display cases, furniture – Ordering goods  Difficulty in obtaining a loan
  • 19. Buy a Franchise  Franchise: contract  Franchisee: person who purchases the name/concept  Franchiser: corporation who sells the name/concept
  • 20. Advantages of Purchasing a Franchise?
  • 21. Advantages of a Franchise  Start-up help  Advertising  Financial assistance  Established brand name  Proven method  Equipment and supplies may be less expensive
  • 23. Disadvantages of a Franchise  Limited control  Franchise fees – Initial franchise fee – Royalty fees (weekly or monthly)  Potential image problem  The franchisor can terminate the franchise agreement
  • 24. Evaluation of a franchise  What can a franchise do for me that I can’t do for myself?  What is the future for this product or service?  How is the contract?  Are there enough potential customers?  Is this a good fit for me, financially and the type of business?
  • 25. Sidelines  Work full time and run a business  Advantage: financial security  Disadvantage: less time to make business successful
  • 26. Family Business  Do you have a business in your family?  What are advantages of a family business?  What are disadvantages of a family business?
  • 27. Home-based Businesses  Advantage: – cheaper – More convenient  Disadvantages: – Sometimes perceived as less professional – Lack of privacy
  • 28. Legal Forms of Business  Sole Proprietorship  Partnership  Corporation  S Corporation  Limited Liability Corporation
  • 29. Advantages of a Sole Proprietorship  Easy to start  All profits to owner  Complete control & flexibility  Secrecy  Single taxation  Easy dissolution
  • 30. Disadvantages of a Sole Proprietorship  Unlimited liability  Limited life of business  Difficulty in obtaining capital  Little incentive for employees
  • 31. Advantages of a Partnership  Easy startup – Articles of Partnership – Partnership Agreement (see p. 38)  Added capital  Combined management skills  Single taxation  Employee incentives
  • 32. Disadvantages of a Partnership  Unlimited liability  Limited life of business  Divided authority  Frozen investment
  • 33. Corporation  An enterprise that has the legal rights, duties, and powers of a person  Charter – written document outlining the conditions under which the corporation will operate  Stockholders – owners of a corporation  Stock – shares of ownership in a corporation
  • 34. Corporation  Board of Directors – meet several times a year to elect senior officers, determine their salaries, set corporation’s rules for conducting business  Dividends – distributions of profit to shareholders by corporations
  • 35. Advantages of a Corporation  Limited Liability  Continuous life  Easy transfer of ownership  Ability to attract funds  Specialized management
  • 36. Disadvantages of a Corporation  Government regulation  Little secrecy  Charter restrictions  Complicated and expensive formation  Double taxation
  • 37. S Corporation  A corporation that chooses Subchapter S status for tax purposes  Must meet the following requirements: – No more than 35 shareholders – Only one class of stock – All shareholders are U.S. residents – All shareholders are individuals – Corporation operates on a calendar year financial basis
  • 38. Advantages of an S Corporation  Limited liability  Single taxation – income passes through to individual shareholders and are reported on their tax returns
  • 39. Disadvantages of an S Corporation  Owners may be required to pay taxes on earnings even if they have not taken any money out of the business
  • 40. Limited Liability Corporation  Same advantages & disadvantages as an S Corporation, but easier to set up  When you’re ready to start a business for real, SEE A LAWYER and understand the current situation!!!
  • 41. Form 2 – Write a paragraph on each question:  Do you plan to buy an existing business, start a business from scratch, or buy a franchise? What are the advantages and disadvantages of this choice?  What legal organization will you choose for your company? What are the advantages and disadvantages of this choice?