Entrepreneurship

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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 partnership
2

Net Income by Form of Ownership

3

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
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. 4

Advantages and Disadvantages of Sole
Proprietorships
Advantages: Disadvantages:
 Ease of Formation  Limited Financial
Resources
 Retention of Control  Unlimited Liability
 Pride of Ownership  Limited ability to attract
and maintain talented
© David Gilder/Shutterstock.com

 Retention of Profits employees
 Heavy workload and
 Possible Tax Advantages responsibilities
 Lack of Permanence
5

General Partnerships:
Two Heads Can Be Better Than One

 Pooled Financial Resources  Unlimited Liability
 Shared Responsibilities  Disagreements
 Ease of Formation  Lack of Continuity
 Tax Advantages  Difficulty in
withdrawing from
agreement

6

Limited Partnerships

Limited Partnership –
includes at least one Limited Liability Partnership –
general partner and at All partners are actively
least one limited partner involved but they have some
form of limited liability. The
amount of liability differs
per state.

©Jose Luis Pelaez Inc/Blend Images/Jupiterimages

Limited partners have limited liability. 7

The Name Game
• 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
©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, 8
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

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
9

Stock Ownership in Major
Corporations

10

Corporations:
The Role of Board of Directors
• 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 © Timm Schamberger/AFP/Getty Images

• Responsible for monitoring the performance of the
corporate officers 11

Advantages and Disadvantages of
Corporations

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

12

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

• Congress passed the Dodd-Frank Act which
gives stockholders “some” voice in executive
compensation 14
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.

Corporate Restructuring:
Mergers & Acquisitions

Mergers – two companies Acquisitions – when one
agree to a combination of firm buys another
equals

Large corporations constantly
look for ways to grow and
achieve competitive
advantage.

©Tom Merton/OJO Images/Jupiterimages
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Types of Mergers & Acquisitions

16

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

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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? 18

© The Studio Dog/Photodisc/Getty Images

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

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
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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.


Franchising in Foreign Markets

• Franchising in foreign markets have shown great
opportunities for growth
• Markets are less intense and
less saturated
 McDonald’s 12,693
 Subway 7,235
© Karen Cowled/Alamy

 Curves 2,868
• McDonald’s has slightly more franchises in foreign countries
than the U.S. 20
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.

Advantages and Disadvantages
of Franchising
 Costs
 Less Risk
 Lack of Control
 Training and Support
 Negative Halo Effect
 Brand Recognition
 Growth Challenges
 Access to Funding
 Restriction on Sale
 Poor Execution

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Franchising Costs

22

Some Franchisees Are Quite Happy When
They Don’t Earn Profit
 Many customers like doing
business with nonprofit
franchisees.
 Nonprofit franchising is a good
way for companies to be socially © David Lee/Alamy

responsible and build goodwill.
Ben & Jerry franchises its
 Nonprofits can boost their PartnerShops to nonprofit
corporations.
fundraising efforts.
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
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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 24

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