UNIT 1 : Forms of BusinessOwnership
I. BASICFORMS OF BUSINESSOWNERSHIP.
LEARNINGGOAL 1
Compare the advantagesanddisadvantagesof sole proprietorships.
A. About800,000 newbusinessesare startedinthe U.S.each year.
B. How youformyour businesscanmake a difference inyourlong-termsuccess.
C. The THREE MAJOR FORMS OF BUSINESSOWNERSHIPare:
1. A SOLE PROPRIETORSHIPisabusinessthatisowned,andusuallymanaged,byone
person;itis the mostcommonform.
2. A PARTNERSHIPisa legal formof businesswithtwoormore owners.
3. A CORPORATION isa legal entitywithauthoritytoactand have liabilityseparate
fromits owners.
D. Each form of businessownershiphasitsadvantagesanditsdisadvantages.
II. SOLE PROPRIETORSHIPS.
A. ADVANTAGESOFSOLE PROPRIETORSHIPS.
1. EASEOF STARTING ANDENDINGTHE BUSINESS.All youneedisa permitfromthe
local government.
2. BEING YOUR OWN BOSS.Workingforyourself isexciting.
3. PRIDEOF OWNERSHIP.Sole proprietorshave takenthe riskanddeserve the credit.
4. LEAVINGA LEGACY behindforfuture generations.
5. RETENTION OF COMPANYPROFITS.Youdon=t have to share profitswithanyone.
6. NOSPECIALTAXES.Profitsof the businessare taxedasthe personal income of the
owner.
B. DISADVANTAGESOFSOLEPROPRIETORSHIPS.

1. UNLIMITED LIABILITY isthe responsibilityof businessownersforall of the debtsof
the business.
2. LIMITED FINANCIALRESOURCES.Fundsavailable are limitedtothe fundsthatthe
sole ownercangather.
3. MANAGEMENT DIFFICULTIES.Many ownersare not skilledatrecordkeeping.
4. OVERWHELMING TIME COMMITMENT. The ownerhasno one withwhomto share
the burden.
5. FEW FRINGE BENEFITS.Fringe benefitscanaddup to 30% of a worker=sincome.
6. LIMITED GROWTH.
7. LIMITED LIFE SPAN.If the sole proprietordiesorleaves,the businessends.
III. PARTNERSHIPS.
LEARNINGGOAL 2
Describe the differencesbetweengeneral andlimitedpartnerships,andcompare the advantages
and disadvantagesof partnerships.
A. A partnershipisa legal formof businesswithtwoormore owners.
B. TYPES OF PARTNERSHIPS.
1. A GENERAL PARTNERSHIPisa partnershipinwhichall ownersshare inoperatingthe
businessandinassumingliabilityforthe business=sdebts.
2. A LIMITED PARTNERSHIPisa partnershipwithone ormore general partnersand
one or more limitedpartners.
a. A GENERAL PARTNERisan owner(partner) whohasunlimitedliabilityandis
active inmanagingthe firm.
b. A LIMITED PARTNERis an ownerwhoinvestsmoneyinthe businessbutdoes
not have anymanagementresponsibilityorliabilityforlossesbeyondthe investment.
c. LIMITED LIABILITY isthe responsibilityof abusiness’ownersforlossesonlyup
to the amounttheyinvest;limitedpartnersandshareholdershave limitedliability.
3. MASTER LIMITED PARTNERSHIP(MLP) isa partnershipthatlooksmuchlike a
corporation(inthatit acts like a corporationandistraded ona stockexchange) butistaxedlike a
partnershipandthusavoidsthe corporate income tax.

4. A LIMITED LIABILITY PARTNERSHIP(LLP) isa partnershipthatlimitspartners'
riskof losingtheirpersonal assetstoonlytheirownactsand omissionsandthe acts andomissionsof
the people undertheirsupervision.
5. UNIFORMPARTNERSHIPACT (UPA).
a. All statesexceptLouisianahave adoptedthe UniformPartnershipActto
replace lawsrelatingtopartnerships.
b. The UPA definesthe THREEKEY ELEMENTS of anygeneral partnership:
i. Commonownership.
ii. Sharedprofitsandlosses.
iii. The rightto participate inmanagingthe operationsof the business.
C. ADVANTAGESOFPARTNERSHIPS.
1. MORE FINANCIALRESOURCES. Twoor more people pool theirmoneyandcredit.
2. SHAREDMANAGEMENT ANDPOOLED/
COMPLEMENTARY KNOWLEDGE.Partnersprovide differentskillsandperspectives.
3. LONGER SURVIVAL.Partnersare fourtimesaslikelytosucceedassole
proprietorships.
4. NOSPECIALTAXES.All profitsof partnersare taxedas personal income of the
owners.
D. DISADVANTAGESOFPARTNERSHIPS.
1. UNLIMITED LIABILITY.
a. Each general partnerisliable forthe debtsof the firm, nomatter whowas
responsible forcausingthose debts.
b. You are liable foryourpartners'mistakesaswell asyour own.
2. DIVISION OFPROFITS.Sharingprofitscancause conflicts.
3. DISAGREEMENTS AMONGPARTNERS.
a. Disagreementscanarise overdivisionof authority,purchasingdecisions,and
so on.
b. Because of such potential conflicts,all termsof partnershipshouldbe spelled
out IN WRITING to protectall parties.

4. DIFFICULTTO TERMINATE.For example:Whogetswhatand whathappensnext?
E. Many venturesavoidthe disadvantagesof these formsof ownershipbyforming
corporations.
IV. CORPORATIONS.
LEARNINGGOAL 3
Compare the advantagesanddisadvantagesof corporations,andsummarizethe differences
betweenCcorporations,Scorporations,andlimitedliabilitycompanies.
A. A CONVENTIONAL(C) CORPORATION isastate-charteredlegal entitywithauthoritytoact
and have LIABILITYSEPARATEFROM ITS OWNERS.
1. The corporation=sowners(stockholders)are notliable forthe debtsof the
corporationbeyondthe moneytheyinvest.
2. A corporationalsoenablesmanypeople toshare inthe ownershipof abusiness
withoutworkingthere.
B. ADVANTAGESOFCORPORATIONS.
1. LIMITED LIABILITY.
a. Limitedliabilityisprobablythe mostsignificantadvantage of corporations.
b. Limitedliabilitymeansthatthe ownersof abusinessare responsible forlosses
onlyup tothe amounttheyinvest.
2. MORE MONEY FORINVESTMENT.
a. To raise money,a corporationsellsOWNERSHIP(STOCK) toanyone interested.
b. Corporationsmayalsofinditeasiertoobtainloans.
c. Corporationscan alsoraise moneyfrominvestorsthroughissuingbonds.
3. SIZE.
a. Corporationshave the abilitytoraise large amountsof money.
b. Theycan alsohire expertsinall areasof operation.
c. Theycan buyothercorporationsinotherfieldstodiversitytheirrisk.

d. Corporationshave the size andresourcestotake advantage of opportunities
anywhere inthe world.
4. PERPETUAL LIFE: The deathof one or more ownersdoesnotterminate the
corporation.
5. EASEOF OWNERSHIPCHANGE.Sellingstockchangesownership.
6. EASEOF DRAWING TALENTED EMPLOYEES. Corporationscanofferbenefitssuchas
stock options.
7. SEPARATION OFOWNERSHIPFROMMANAGEMENT. Corporationscanraise money
frominvestorswithoutgettingtheminvolvedinmanagement.
C. DISADVANTAGESOFCORPORATIONS.
1. EXTENSIVEPAPERWORK.
a. A corporationmustprove all itsexpensesanddeductionsare legitimate.
b. A corporationmustkeepdetailedrecords.
2. DOUBLE TAXATION.
a. Corporate income istaxedtwice.
b. The CORPORATION PAYSTAXonincome before itcan distribute anyto
stockholders.
c. The STOCKHOLDERSPAY TAXon the income theyreceive fromthe corporation.
d. Statesoftentax corporationsmore harshlythanotherenterprises.
3. TWO TAXRETURNS: A corporate ownermustfile bothacorporate tax returnand an
individualtax return.
4. SIZE:Large corporationssometimesbecome inflexibleandtootieddowninred
tape.
5. DIFFICULTY OFTERMINATION.
6. POSSIBLECONFLICTWITH STOCKHOLDERSAND BOARDOF DIRECTORS.Since the
board choosesthe company=sofficers,anentrepreneurcanbe forcedout of the verycompany he or
she founded.
7. INITIALCOST.

a. Incorporationmaycost thousandsof dollarsandinvolve expensive lawyersand
accountants.
b. There are lessexpensive waysof incorporatingincertainstates.
8. Many businesspeoplefeel the hasslesof incorporationoutweighthe advantages.
D. INDIVIDUALSCAN INCORPORATE.
1. By incorporating, individualssuchasdoctorsand lawyerscansave on taxesand
receive otherbenefitsof incorporation.
2. Small corporationsdonotshare all the same advantagesanddisadvantagesof large
corporations.
3. It isusuallywise toconsultalawyerwhenincorporating.
4. The average time neededtoincorporate isapproximately30days.
E. S CORPORATIONS.
1. AnS CORPORATION isa unique governmentcreationthatlookslike acorporation
but istaxedlike sole proprietorshipsandpartnerships.
a. S corporationshave shareholders,directors,andemployees,butthe profitsare
taxedas the personal income of the shareholders.
b. Theyalsohave the benefitof limitedliability.
2. S CORPORATIONSMUST:
a. Have no more than 75 shareholders.
b. Have shareholderswhoare individualsorestatesandare citizensor
permanentresidentsof the U.S.
c. Have onlyone classof outstandingstock.
d. Nothave more than 25% of income derivedfrompassivesources(rents,
royalties,interest,etc.)
3. The TAX STRUCTURE of an S corporationisn'tattractive to all businesses.
a. The toppersonal income tax rate isalmostfour pointshigherthanthe highest
corporationrate.
b. Fast-growingsmall businessesthatdon=tintendtopaydividendstoowners
oftenchoose Ccorporationstatusto avoidthe highertaxes.

c. Many slower-growingbusinesseshave selectedthe Scorporationform.
4. The benefitsof Scorporationschange everytime the tax ruleschange.
F. LIMITED LIABILITYCOMPANIES.
1. A LIMITED‑LIABILITY COMPANY(LLC) isa companysimilartoan S corporationbut
withoutthe special eligibilityrequirements.
2. The UNIFORMLIMITED LIABILITYCOMPANYACT was preparedforthe National
Conference of CommissionersonUniformState Lawsinan efforttoprovide uniformlegislation
regardinglimitedliabilitycompanies.
3. ADVANTAGESOFLLCS:
a. LIMITED LIABILITY.Personal assetsare protected.
b. CHOICEOF TAXATION.LLCscan choose to be taxedaspartnershipsoras
corporations.
c. FLEXIBLE OWNERSHIPRULES. LLCs do nothave to complywithownership
restrictionsasS corporationsdo.
d. FLEXIBLE DISTRIBUTION OF PROFITSANDLOSSES.Profitandlossesdon’thave
to be distributedinproportiontothe moneyeachpersoninvests.
e. OPERATINGFLEXIBILITY.LLCs donot have the same reportingrequirementsas
a corporation.
4. DISADVANTAGESOFLLCS: a. NOSTOCK.LLC ownershipis
nontransferable.
b. LIMITED LIFE SPAN.LLCshave to identifydissolutiondatesinthe articlesof
organization.
c. FEWER INCENTIVES.LLCscan’tdeductthe costof fringe benefits.
d. TAXES.LLC membersmustpayself-employmenttaxesonprofits.
e. PAPERWORK.The paperwork requiredismore thanwhatisrequiredof sole
proprietors.
5. The start-upcost for an LLC is approximately$2,500.
V. CORPORATION EXPANSION:MERGERSAND ACQUISITIONS.

LEARNINGGOAL 4
Define andgive examplesof three typesof corporate mergers,andexplainthe role of leveraged
buyoutsandtakinga firmprivate.
A. The 1990s mergermaniareacheditspeakin2000.
1. In1998 there was the $1.75 billionWorldCom/MCImerger.
2. The 1999 $75 billionExxon/Mobil mergerwastoppedbythe $270 billionmergerof
AOL andTime Warner in2000.
3. Most of the newdealsinvolve companiestryingtoexpandwithintheirownfields.
4. A MERGER isthe resultof two firmsformingone company.
5. AnACQUISITION isone company’spurchase of the propertyandobligationsof
anothercompany.
B. THREE MAJOR TYPES of corporate mergers.
1. VERTICALMERGER is the joiningof twocompaniesinvolvedindifferentstagesof
relatedbusinesses.
2. HORIZONTALMERGER joinstwofirmsinthe same industryandallowsthemto
diversifyorexpandtheirproducts.
3. CONGLOMERATE MERGER isthe joiningof firmsincompletelyunrelatedindustries
therebydiversifyingbusinessoperations.
C. Ratherthan merge or sell toanothercompany,some corporationsdecidetoMAINTAIN
CONTROLof the firminternally.
1. TAKINGA FIRM PRIVATEinvolvesthe effortsof agroup of stockholdersor
managementtoobtainall the firm=sstockfor themselves.
2. A LEVERAGED BUYOUT isan attemptby employees,management,oragroup of
investorstopurchase anorganizationprimarilythroughborrowing.
a. The fundsborrowedare usedtobuyout the stockholdersinthe company.
b. Employees,managers,orgroupof investorsthenbecome the ownersof the
firm.
3. Mergermaniahas alsoinvolvedforeigncompaniespurchasingU.S.companies.
VI. SPECIALFORMS OF BUSINESSOWNERSHIP.

In additiontothe three basicformsof businessownership,the textdiscussestwospecial formsof
ownership:franchisesandcooperatives.
VII. FRANCHISES.
LEARNINGGOAL 5
Outline the advantagesanddisadvantagesof franchisesanddiscussthe opportunitiesfordiversity
infranchisingandthe challengesof international franchising.
A. A FRANCHISEAGREEMENT isan arrangementwherebysomeonewithagoodideafora
business(the FRANCHISOR) sellsthe rightstouse the businessname andtosell a productor service (the
FRANCHISE) to others(the FRANCHISEE) inagiventerritory.
1. Some people wouldliketoowntheirownbusinessesbutwantmore assurance of
successCFranchisingmaybe an alternative.
2. Franchisingaccountsfor50% of the national retail sales.
3. The most popularbusinessesforfranchisingare restaurants,retailstores,hotels
and motels,andautomotive partsandservice centers.
B. ADVANTAGESOFFRANCHISES:
1. MANAGEMENT ANDMARKETING ASSISTANCE,includinganestablishedproduct,
helpinchoosinga location,andassistance inall phasesof operation.
2. PERSONALOWNERSHIP:Youare still yourownboss,althoughyoumustfollowthe
rules,regulations,andproceduresof the franchise.
3. NATIONALLYRECOGNIZEDNAME:You get instantrecognitionandsupport.
4. FINANCIALADVICEANDASSISTANCE.
a. Franchiseesgetassistance arrangingfinancingandlearningtokeeprecords.
b. Some franchisorswill evenprovide financingtopotential franchisees.
5. LOWER FAILURE RATE.
a. Historically,the failure rate forfranchiseshasbeenlowerthanthatof other
businessventures.
b. You shouldcarefullyresearchanyfranchise before investing.
C. DISADVANTAGESOFFRANCHISES.

1. LARGE START‑UP COSTS.
a. Most franchiseswill demandafee toobtainthe rightsto the franchise.
b. Start-upcostscan be as highas $2 millionforaKrispyKreme franchise.
2. SHAREDPROFIT: The franchisoroftendemandsalarge share of the profits,or
royalty,basedonsalesnotprofit.
3. MANAGEMENT REGULATION. a. Some franchiseesmay
feel burdenedbythe company=srulesandregulations.
b. Inrecentyearsfranchiseeshave beenbandingtogethertoresolve their
grievanceswithfranchisors.
4. COATTAILEFFECTS.
a. The actionsof otherfranchiseeshave animpactonthe franchise=sfuture
growthand level of profitability,aphenomenaknownasaCOATTAILEFFECT.
b. Franchiseesmustalsolookoutforcompetitionfromfellow franchisees.
5. RESTRICTIONSON SELLING.
a. Many franchiseesface restrictionsinthe resellingof theirfranchises.
b. Franchisorsofteninsistonapprovingthe new owner,whomustmeettheir
standards.
6. FRAUDULENT FRANCHISORS.
a. Most franchisorsare not large systems;manyare small,obscure companies.
b. There hasbeenan increase incomplaintstothe FTCabout franchisorsthat
deliveredlittle ornothingthattheypromised.
D. DIVERSITYIN FRANCHISING.
1. Only24% of franchise ownersare women.
2. The mainfactor restrictingwomen’sownershipisMONEY.
3. Some franchisors,suchasChurch=s Chicken,activelyrecruitwomentobe owners.
4. Womenare becomingFRANCHISORSaswell.
5. Whenwomenfinditdifficulttoobtainfinancingtoexpandingtheirbusinesses,they
oftenturnto findingfranchiseestosidestepexpansioncosts.

6. Franchisingopportunitiesfitthe needsof manyaspiringminoritybusinesspersons.
7. Minorityfranchise ownershipisnotgrowingasfast as franchise ownershipin
general.
8. The Commerce Department=sFederalMinorityBusinessDevelopmentAgency
providesminoritieswithtraininginhowtorun franchises.
E. HOME‑BASED FRANCHISES.
1. Home-basedbusinessesofferadvantagesbutmayleave ownerswithafeelingof
isolation.
2. Home-basedfranchiseesfeel lessisolated.
F. E-COMMERCE IN FRANCHISING.
1. TodayInternetusersworldwide are able toobtainfranchisestoopenonline retail
stores.
2. Before signingup,however,youshouldcheckoutthe factsfully.
3. Many franchiseeswithexistingbrick-and-mortarstoresare expandingonline.
4. Many franchisorsprohibitfranchisee-sponsoredwebsites,however,whichcanlead
to conflictsbetweenfranchisorsandfranchisees. G. USING TECHNOLOGY IN FRANCHISING.
1. Franchisorsare usingtechnologytomeetthe needsof customersandfranchisees.
2. Franchise websitescanstreamline communicationwithemployees,customers,and
vendors.
3. Usinga website everyfranchiseehasimmediate accesstoeverysubjectthat
involvesthe franchise operation.
H. FRANCHISINGIN INTERNATIONALMARKETS.
1. More than450 of the 3,000 franchisorshave outletsoverseas.Canadaisbyfar the
mostpopulartarget because of proximityandlanguage.
2. Franchisorsfindthe costsof franchisinghighinthese markets,butthe costsare
counterbalancedbylesscompetitionandrapidlyexpandingconsumerbase.
3. Newer,smallerfranchises,suchasRugDoctor Pro and Merry Maid, are going
international aswell.
4. What makesinternational franchisingsuccessful are convenienceanda predictable
level of service andquality.

5. Franchisorsmustbe careful toadapt to the region.
6. Foreignfranchisesare alsoexpandingtothe U.S.
VIII. COOPERATIVES.
LEARNINGGOAL 6
Explainthe role of cooperatives.
A. A COOPERATIVEisa businessownedandcontrolledbythe peoplewhouse it—producers,
consumers,orworkerswithsimilarneedswhopool theirresourcesformutual gain.
1. There are 47,000 cooperativesinthe U.S.
2. Membersdemocraticallycontrol these businessesbyelectingaboardof directors
that hiresprofessional management.
B. Some cooperativesare formedtogive membersMOREECONOMICPOWER than they
wouldhave asindividuals(i.e.farmcooperatives.)
1. The FARMCOOPERATIVEstartedwithfarmersjoiningtogethertogetbetterprices
for theirfoodproducts.
2. The organizationsexpandedsothatfarmcooperativesnow buyandsell other
productsneededonthe farm.
3. Inspite of debtand mergers,cooperativesare still amajorforce inagriculture
today.
IX. WHICH FORM OFOWNERSHIPIS FOR YOU?
A. There are RISKSTO EVERY FORMof businessownership.
B. The miracle of free enterprise isthatthe freedomandincentivesof capitalismmake risks
acceptable tomanypeople.