What You Need to Know about Forms of Business Ownership
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Transcript of What You Need to Know about Forms of Business Ownership
What You Need to Know about Forms of Business Ownership
Starting your own business
Yes, decide what type you want to be and why… Sole proprietorship – just get started! Partnership – pair up with a friend Corporation - function separate from owners
Sole Proprietorship
Advantages
Ease of start/end
Be your own boss
Pride of ownership
Leave legacy
Retain profit
No special taxes
Disadvantages Unlimited liability Limited financial
resources Difficulty in managment Time commitment Few fringe benefits Limited growth Limited life span
Types of Partnerships General Limited Master Limited Limited Liability
Partnership
Advantages More financial
resources Shared mgmt. Longer survival No Special Taxes
Disadvantages Unlimited liability Division of profits Disagreements
among partners Difficult to
terminate
Types of Corporations Regular “C” S Corporation Limited Liability Companies
Corporations
Private- Not Traded on Any Stock Exchange Public- Shares Are Traded on 1 or More
Stock Exchanges Non-Profit- Performs Public Service, Has
Special Tax Considerations To Encourage Formation
Corporation
Advantages More money for
investment Limited liability Separation of
ownership/mgmt. Ease of ownership
change Perpetual life Size
Disadvantages Initial cost Paperwork Two tax returns Termination difficult Stockholder & Board
Conflict Double taxation
How Owners Affect Management
S Corporations
No more than 75 shareholders
Individual or Estates
U.S. citizens or residents
1 class of stock
<25% of income can be passive
Slower-growing companies
Benefits change with new tax rules
Limited Liability Companies
AdvantagesLimited Liability
Tax Choice
Flexible Ownership Rules
Flexible Profit & Loss Distribution
Operating Flexibility
Disadvantages
No Stock
Limited Life Span
Fewer Incentives
Taxes
Paperwork
Why Mergers Don’t Work
Companies Overpay to Acquire Another Firm Acquiring Company Overestimates Cost Savings
and Synergies After Merger, Managers Disagree About
Integrating Operations After Merger, Cost Cutting Obsession Hurts
Business, Costing Top Employees & Customers
GM’s Ownership In:
Source: USA TODAY
Types of Mergers
Horizontal Vertical Conglomerate
Leveraged Buyout
Individual + LoanIndividual + Loan = Purchase of = Purchase of CompanyCompany
Purchase LoanPurchase Loan
Company = Company = CollateralCollateral
Franchise System
Franchise Agreement
Franchisor Franchisee
Franchise ContractFranchisor, Inc.
FranchiseeFranchisee
Branded Branded Product/ServicProduct/Servic
eePerformancPerformanc
ee
MonitoringMonitoring$$$$$$$$$$
Franchisor
Assigns TerritoryAssigns Territory
May Provide Financial May Provide Financial Aid/AdviceAid/Advice
Offers Merchandise/ Offers Merchandise/ Supplies at Supplies at Competitive PriceCompetitive Price
Provides Provides
Training/SupportTraining/Support
Business Expansion Business Expansion
Using O.P.M.Using O.P.M.
Franchisee Pays Up-Front Costs Makes Monthly Payment to
Franchisor Runs Business by Franchisor’s
Rules/Procedures Buys Materials from Franchisor/
Approved Supplier
Company Since Type # Stores
Curves 1995 Women’s Only Fitness
3,778
Subway 1974 Submarine Sandwich 14,800
7-Eleven 1964 24-Hr. Convenience 3,761
Taco Bell 1964 Mexican Fast Food 5,417
Jani-King 1974 Commercial Cleaning 7,843
Fastest Growing Franchises
Source: Entrepreneur, 2003
Franchises
+Advantages
+Management &
marketing assistance
+Personal ownership
+Recognized name
+Financial advice &
assistance
+Lower failure rate
- Disadvantages
- High start-up costs
- Shared Profit
- Management regulation
- Coattail effects
- Restrictions on selling
- Fraudulent franchisors
Cost of Fast-Food Franchise
How to Avoid aFranchise Lemon
1) Research officers & their business experience
2) Get summary of any bankruptcy & litigation
3) Estimate all costs to set up franchise
4) Review franchise contract & three most recent financial statements
Benefits of aHome-Based Franchise
Flexible work hours Quality lifestyle Doing the work of your
choice Opportunity to expand
using technology Self-motivation
.
Franchising & E-Commerce
Technology- Faster Customer Service
Access to International Markets
Cooperatives Farm Cooperative
Owned &
Controlled by
People Who Use It
Pool of Resources
Economic Power
Small Business Revival
Shift to Services CAD/CAM Lessening
Advantages of Big Manufacturing
Maturation of Baby Boomers
More Women in Workforce
19719700
19819800
19901990 20002000
EntrepreneurshipDefinitionCharacteristics of
Successful Entrepreneurs
IntrapreneurMicropreneur vs.
Home-Based
CorporatioCorporationn
EntrepreneuEntrepreneurr
Small Business- Advantages
Personalized Service/ Personal Contact
Flexibility Lower Costs Innovation Opportunities
Small Business-Disadvantages
- Limited Experience
- Long Hours
- Insufficient Capital
- High Failure Rate
Why People Start Their Own Businesses
0 10 20 30 40 50 60
Use My Abilities
Control My Life
Build For Family
Like The Challenge
Live Where/How I Like
Source: BFIB/VISA Card Primer
Reasons Women Leave Jobs in Big Companies to Start Business
0%10%20%30%40%50%60%70%80%90%
Bette
r Ben
efits
More
Fam
ily T
ime
Recogniti
on
Less P
olitic
s
Partn
ers/C
olleagues
Influ
ence S
trate
gy
More
Money
Risk-T
aking
Source: FSB, March 2001
Self- Perception of Small Business Owners
0% 5% 10% 15% 20% 25% 30% 35%
Managers
Heroes
Rainmakers
Artists
Mavericks
Source: USA Today, 5/20/03
Who Starts New Businesses?
18 - 24 8%25 - 34 71%35 - 44 13%45 - 54 6%55+ 2%
AGE AT START-AGE AT START-UPUP
Entrepreneurial Attributes
A. Self-Directed & Self-Disciplined
B. Self-Nurturing
C. Action-Oriented
D. Highly Energetic
E. Tolerant of Uncertainty
Hours per Week Entrepreneurs Worked 1st Year
1 - 39 hours 8%
40 - 49 hours 15%
50 - 59 hours 23%
60 - 69 hours 28%
70 - 79 hours 13%
80 + hours 12%
Reasons for Growth of Home-Based Businesses
Technology
Downsizing
Attitudes
Tax Advantages
Most Common Types ofHome-Based Businesses
Personal Svcs.14%
Bus. Services
27%
Bldg. Trades31%
Financial & Real Estate
5%Sales &
Distribution10%
Arts/ Design Creative
13%
Source: Independent Insurance Agents of America
Home Office Owners
Challenges
New Customers
Time Management
Work vs. Family
City Ordinances
Risk
Focus
Find Opportunity Results vs. Routine Profit vs. Paycheck New Ideas Long Term vs. Short
Term
Government Efforts
Immigration Act of 1990- Investor Visa
Enterprise Zones
Incubators
What Is Small Business?
Independent
Not Dominant
< 500 Employees
U.S. Small Businesses
20 Million Full/Part-Time Businesses 75% of New Jobs 45% of Gross Domestic Product Jobs
80% of Americans = 1st Job in Small Business 75% of New Jobs = Small Business
Women-Owned Growing Rapidly
Small Business Success
Learn from Others
Get Experience
Take Over Successful Firm
Successful Business Management Requirements
Business Plan Adequate Funding
Lenders/Investors “Angels” Venture Capitalists
Professional Advice/Help Know Your Customer Manage Human Resources Keep Good Records
Small Business Strategies
Examine Marketing & ID Areas for Growth Profile Best Customers & Market to Similar
Prospects Invest in Sales Training & Technology Refresh Business Perspective With Outside
Views Streamline Business & Eliminate Waste
Saving a Business in Trouble
React/Not Overreact
Understand Financial Situation
Find Professional Help
Develop “Recovery Plan”
Be Visible Confident Leader
Remind Employees of Stake in Business
Don’t Get Stung By Killer “Bankruptcy”
Capital Sources of Successful Entrepreneurs
0%
20%
40%
60%
80%
100%
VentureCapital
Family BankLoan
CreditCards
PersonalFunds
By Company Age
< 3 Years6+ YearsSOURCE: FSB, March 2001
Reasons for aBanker to Say “No”
$ I don’t know enough about you or your business.
$ You haven’t clearly stated why you need the money.
$ Your numbers don’t support the loan request.
$ Your collateral is lacking.
$ Your business does not support the loan on its own merits.
Small Business Collaborators Small Business Administration (SBA)
Microloan program SBICs SBDCs
Service Corps of Retired Executives (SCORE)
Active Corps of Executives (ACE)
Ways to Improve Banking Relationships
1) Provide Bank With Business Plan, Brochures, Business Cards, etc.
2) Describe Business, Financial Situation, Plans
3) Ask About Scope of Bank Services
4) Express Interest In Banker’s Background- Family, Hobbies, etc.
5) Follow Up With Phone Calls, Visits
Source: St. Louis Business Monthly, August 2002
Small Business & International Prospects
Positives1. World Market
2. Absorb Excess Inventory
3. Soften U.S. Downturns
4. Extend Product Life
Negatives1. Financing Difficult
2. How to Get Started?
3. Lack of Cultural Understanding
4. Paperwork
International Small Business
Advantages Deal With Individuals Faster Shipping Variety of Suppliers Professional Service
Information
Dept. of Commerce- www.bxa.doc.gov
SBA- International- www.sba.gov/hotlist/internat.html