RECAP of the previous chapter
What is the “invisible hand”?
The place where quantity demanded and quantity
supplied meet is called __________?
In the long run, that price will become __________?
4 phases of the business cycle?
Chapter 5
HOW TO FORM
A BUSINESS
Introduction to Business Administration – Instructor: Phuoc Van Hanh
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and
discuss the opportunities for diversity in franchising and the challenges of
global franchising.
LO 5-6 Explain the role of cooperatives.
GETTING TO KNOW
Alli Webb, Founder of Drybar
Basic Forms of Business Ownership
● How you form your business can make a tremendous difference
in your long-term success.
● The three major forms of business ownership are:
(1) Sole proprietorships
(2) Partnerships
(3) Corporations
And other forms to expand the businesses like:
(4) Mergers and Acquisition (M&A)
(5) Franchise
(6) Cooperatives
IN-CLASS DISCUSSION (10 points)
Discuss the definition, and the advantages & disadvantages of each
form.
30 minutes.
Group 1 + 2: Franchise. Group 3 + 4: Sole proprietorship.
Group 5 + 6: Partnership. Group 7 + 8: Corporation.
Group 9 + 10: Cooperative.
Group 11 + 12: Merger and Acquisition (M&A).
Do research & note:
- Definition of each business ownership form.
- 1 real-life example, with clear description why you think that firm of
your choice represents that specific business ownership form.
- 2 advantages and 2 disadvantages.
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and
discuss the opportunities for diversity in franchising and the challenges of
global franchising.
LO 5-6 Explain the role of cooperatives.
Sole proprietorship: A business that is owned, and usually managed,
by one person.
Advantages of sole proprietorships:
1. Ease of starting and ending the business.
All you have to do to start a sole proprietorship is buy or lease the needed equipment and
put up some announcements saying you are in business.
2. Being your own boss.
3. Pride of ownership.
4. Leaving a legacy.
Owners can leave an ongoing business for future generations.
5. Retention of company profits.
Owners not only keep the profits earned but also benefit from the increasing value as the
business grows.
6. No special taxes.
All the profits of a sole proprietorship are taxed as the personal income of the owner, and the
owner pays the normal income tax on that money.
Disadvantages of sole proprietorships:
1. Unlimited liability—the risk of personal losses.
Any debts or damages incurred by the business are your debts and you must pay them,
even if it means selling your home, your car, or whatever else you own.
2. Limited financial resources.
Funds available to the business are limited to what the one owner can gather.
3. Management difficulties.
4. Overwhelming time commitment.
It’s hard to own a business, manage it, train people, and have time for anything else in life
when there is no one with whom to share the burden.
5. Few fringe benefits.
6. Limited growth.
7. Limited life span.
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and
discuss the opportunities for diversity in franchising and the challenges of
global franchising.
LO 5-6 Explain the role of cooperatives.
Partnership: A legal form of business with two or more owners.
General partnership: A partnership in which all owners share
in operating the business and in assuming liability for the
business’s debts.
Limited partnership: A partnership with one or more general
partners and one or more limited partners.
Limited partnership: A partnership with one or more general
partners and one or more limited partners.
General partner: An owner (partner) who has unlimited liability
and is active in managing the firm.
Limited partner: An owner who invests money in the business
but does not have any management responsibility or liability for
losses beyond the investment.
Limited liability means that the limited partners’ liability for the debts
of the business is limited to the amount they put into the company;
their personal assets are not at risk.
Limited partners and shareholders (stockholders) have limited liability.
Another type of partnership was created to limit the disadvantage of
unlimited liability.
Limited liability partnership (LLP): A 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.
Advantages of partnerships:
1. More financial resources.
A limited partnership is specially designed to help raise money.
2. Shared management and pooled/complementary skills and
knowledge.
Partners give each other free time from the business and provide different skills and
perspectives.
3. Longer survival.
Partnerships are more likely to succeed than sole proprietorships because being watched
by a partner can help a businessperson become more disciplined.
4. No special taxes.
As with sole proprietorships, all profits of partnerships are taxed as the personal income of
the owners, who pay the normal income tax on that money.
Disadvantages of partnerships:
1. Unlimited liability.
Each general partner is liable for the debts of the firm, no matter who was responsible
for causing them. Like sole proprietors, general partners can lose their homes, cars,
and everything else they own if the business goes bankrupt.
2. Division of profits.
Sharing risk means sharing profits, and that can cause conflicts.
3. Disagreements among partners.
*All terms of the partnership should be spelled out in writing to protect all parties and
minimize misunderstandings.
4. Difficulty of termination.
You can quit. However, questions about who gets what and what happens next are
often difficult to resolve when the partnership ends.
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and
discuss the opportunities for diversity in franchising and the challenges of
global franchising.
LO 5-6 Explain the role of cooperatives.
Corporation: A legal entity with authority to act and have
liability apart from its owners.
It is like an artificial being and exists only in the eyes of the law.
Fig 5.4 Corporate types
Corporations can fit in more than one category.
A conventional (C) corporation is a state-chartered legal entity with
authority to act and have liability separate from its owners—its stockholders.
A corporation not only limits the liability of owners but often enables many
people to share in the ownership (and profits) of a business without working
there or having other commitments to it.
*Corporations may choose whether to offer ownership to outside investors
or remain privately held.
Advantages of corporations:
1. Limited liability.
2. Ability to raise more money for investment.
To raise money, a corporation can sell shares of its stock to anyone who is interested.
Corporations can also borrow money …
3. Size.
A large corporation with numerous resources can take advantage of opportunities anywhere
in the world.
4. Perpetual life.
5. Ease of ownership change.
6. Ease of attracting talented employees.
7. Separation of ownership from management.
The owners/stockholders have some say in who runs the corporation but have no real control
over the daily operations.
Disadvantages of corporations:
1. Initial cost.
Incorporation may cost thousands of dollars and require expensive lawyers and accountants.
2. Extensive paperwork.
3. Double taxation.
Corporate income is taxed twice.
4. Two tax returns.
5. Size.
Large corporations sometimes become too inflexible and tied down in red tape to respond
quickly to market changes, and their profitability can suffer.
6. Difficulty of termination.
7. Possible conflict with stockholders and board of directors.
Conflict may brew if the stockholders elect a board of directors who disagree with management.
Fig 5.5 How owners affect management.
Owners have an influence on how a business is managed
by electing a board of directors.
The board hires the top officers (and fires them if
necessary). It also sets the pay for those officers.
The officers then select managers and employees with the
help of the human resource development.
Fig 5.7 Comparisons of
forms of business
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and
discuss the opportunities for diversity in franchising and the challenges of
global franchising.
LO 5-6 Explain the role of cooperatives.
Corporate Expansion: Mergers and Acquisitions (M&A)
A merger is the result of two firms joining to form one company.
An acquisition is one company’s purchase of the property and
obligations of another company.
A leveraged buyout (LBO) is an attempt by employees, management,
or a group of private investors to buy out the stockholders in a
company, primarily by borrowing the necessary funds.
Fig 5.8 Types of mergers.
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and
discuss the opportunities for diversity in franchising and the challenges of
global franchising.
LO 5-6 Explain the role of cooperatives.
Advantages of franchises:
1. Management and marketing assistance.
A franchisee usually has a much greater chance of succeeding because he or she has an
established product to sell, help choosing a location, and assistance in all phases of
promotion and operation.
2. Personal ownership.
A franchise operation is still your business, and you enjoy as much of the incentives and
profit as any sole proprietor would.
3. Nationally recognized name.
With an established franchise, you get instant recognition and support from a product
group with established customers around the world.
4. Financial advice and assistance.
Franchisees often get valuable assistance and periodic advice from people with expertise
in these areas.
5. Lower failure rate.
Disadvantages of franchises:
1. Large start-up costs.
Most franchises demand a fee for the rights to the franchise.
2. Shared profit.
The franchisor often demands either a large share of the profits in addition to the start-up
fees or a percentage commission based on sales, not profit. This share is called a royalty.
3. Management regulation.
Management “assistance” has a way of becoming managerial orders, directives, and
limitations. Franchisees feeling burdened by the company’s rules and regulations may
lose the drive to run their own business.
4. Coattail effects.
5. Restrictions on selling.
6. Fraudulent franchisors.
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and
discuss the opportunities for diversity in franchising and the challenges of
global franchising.
LO 5-6 Explain the role of cooperatives.
Cooperatives (co-op) (Hợp tác xã)
A business owned and controlled by the people who use it -
producers, consumers, or workers with similar needs who pool
their resources for mutual gain.
THE END