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DREXEL / Business / BUSN 260 101 / what is a major drawback of sole proprietorships

what is a major drawback of sole proprietorships

what is a major drawback of sole proprietorships

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School: Drexel University
Department: Business
Course: Foundations of Business
Professor: Eric rios
Term: Summer 2016
Tags:
Cost: 25
Name: BUSN 101 Week 1 Notes: Chapter 5
Description: Chapter 5: How to Form a Business
Uploaded: 02/08/2017
13 Pages 174 Views 0 Unlocks
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 What can he/she bring to the business?




 What skills does he/she have?




o Why would unlimited liability be considered a major drawback to sole proprietorships?



Chapter 5: How to Form a Business ∙ Learning Objectives 1. Compare the advantages and disadvantages of sole  proprietorships. 2. Describe the differences between general and limited partners,  and compare the advantages and disadvantages of partnerships. 3. Compare the advantages and disadvantages of cIf you want to learn more check out mucuery
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orporations and  summarize the differences between C corporations, S  corporations and limited liability companies. 4. Define and give examples of three types of corporate mergers,  and explain the role of leveraged buyouts and taking a firm  private. 5. Outline the advantages and disadvantages of franchises, and  discuss the opportunities for diversity in franchising and the  challenges of global franchising. 6. Explain the role of cooperatives. ∙ Annie Beiler: Auntie Anne’s  o Started selling pretzels when her family was living  paycheck to paycheck. o Now Auntie Anne’s has over 1,200 locations and brings in  over $410 million! o Beiler sold the company in 2005 to start focusing on  charity work. ∙ Name that Company o In 2013, this company became the largest firm in terms of  revenue to be taken private through a leveraged buyout.  After closing the $25 million deal, the founder now controls a 75% stake of the company he started in his dorm room. o Name that company! ∙ MajorForms of Ownership o Sole Proprietorship -- A business owned, and usually  managed, by one person. o Partnership -- Two or more people legally agree to  become co-owners of a business. o Corporation -- A legal entity with authority to act and  have liability apart from its owners.  Forms of Business Ownership:∙ Ethnic Business Centers 1. Atlanta, GA 2. Baltimore, MD 3. Nashville, TN 4. Houston, TX 5. Miami - Ft. Lauderdale, FL ∙ Major Benefits of Sole Proprietorship 1. Ease of starting and ending the business 2. Being your own boss 3. Pride of ownership 4. Leaving a legacy 5. Retention of company profit 6. No special taxes ∙ Disadvantages of Sole Proprietorships 1. Unlimited Liability: Any debts or damages incurred by  the business are your debts, even if it means selling your  home, car or anything else. 2. Limited financial resources 3. Management difficulties 4. Overwhelming time commitment 5. Few fringe benefits 6. Limited growth 7. Limited life span ∙ Work—Life Balancing Act∙ Test Prep o Most people who start businesses in the U.S. are sole proprietors. What are the advantages and  disadvantages of sole proprietorships? o Why would unlimited liability be considered a major  drawback to sole proprietorships? ∙ Major Types of Partnerships o General Partnership -- All owners share in  operating the business and in assuming liability for  the business’s debts. o Limited Partnership -- A partnership with one or  more general partners and one or more limited  partners. ∙ Types of Partners o General Partner -- An owner (partner) who has  unlimited liability and is active in managing the firm. o Limited Partner -- An owner who invests money in  the business, but enjoys limited liability. Limited  Liability means that liability for the debts of the  business is limited to the amount the limited partner  puts into the company; personal assets are not at  risk. ∙ Other Forms of Partnerships o Master Limited Partnership -- A partnership that  looks much like a corporation, but is taxed like a partnership and thus avoids the corporate income  tax. o Limited Liability Partnership -- Limits partners’  risk of losing their personal assets to the outcomes  of only their own acts and omissions and those of  people under their supervision. ∙ Advantages of Partnerships o More financial resources o Shared management and pooled/complementary  skills and knowledge o Longer survival o No special taxes ∙ Disadvantages of Partnerships o Unlimited liability o Division of profits o Disagreements among partners o Difficult to terminate ∙ Picking your Partner o There is no such thing as a perfect partner but ask  these questions when you try to find your best  match:  Do you share the same goals?  Do you share the same vision for the company?  What skills does he/she have? Are yours the  same?  What can he/she bring to the business?  What type of decision maker is he/she?  Do you trust each other?  How does he/she problem solve? ∙ Good Business, Bad Karma? o Imagine you and your partner own a construction  company. You receive a subcontractor’s bid you know is 20% too low. This could potentially put the  subcontractor out of business. Accepting the bid will  improve your chances of getting a big job. Your  partner wants to take the bid:  What do you think you should do?  What will be the consequences of your  decision? ∙ Test Prep o What’s the difference between a limited partner and  a general partner? o What are some of the advantages and disadvantages of partnerships? ∙ Conventional Corporationso Conventional (C) Corporation -- A state-chartered legal entity with authority to act and have liability  separate from its owners (its stockholders). ∙ Advantages of Corporations o Limited liability o Ability to raise more money for investment o Size  o Perpetual life o Ease of ownership change o Ease of attracting talented employees o Separation of ownership from management How Owners Affect Management ∙ The Big Boys of Business:America’s Largets Corporations 1. Walmart 2. Exxon Mobil 3. Chevron 4. Berkshire Hathaway 5. Apple Privacy Please: The Ten Largest Private Corporations in the US∙ Disadvantages of Corporations: ∙ Initial cost ∙ Extensive paperwork ∙ Double taxation ∙ Two tax returns ∙ Size ∙ Difficulty of termination ∙ Possible conflict with stockholders and board of directors Even the Big Guys Make Mistakes∙ B Corporations Let Sustainability Set Sail o Michael Dimin saw tons of fish were left to rot after  fishermen caught too much. o Registered his company, Sea2Table as a benefit  corporation. o B-corporations are judged on how they meet their own set  of socially or environmentally beneficial goals. ∙ Who Can Incorporate? o Anyone - truckers, doctors, plumbers, athletes and small  business owners can incorporate. o Normally stock is not issued to outsiders when individuals  incorporate, so the advantages and disadvantages are not  exactly the same as for large corporations. o Major advantages are limited liability and possible tax  benefits. Oldies, but goodies: America’s Oldest Corporations∙ S Corporations: o S Corporation -- A unique government creation that looks like a corporation, but is taxed like sole proprietorships and partnerships. o S corporations have shareholders, directors and  employees, plus the benefit of limited liability. o Profits are taxed only as the personal income of the  shareholder. ∙ Who Can Form S Corporations: o Qualifications for S Corporations:  Have no more than 100 shareholders.  Have shareholders that are individuals or estates and are citizens or permanent residents of the U.S.  Have only one class of stock.  Derive no more than 25% of income from passive  sources. o If an S corporation loses its S status, it may not operate  under it again for at least 5 years. ∙ Limited Liability Companies: o Limited Liability Company (LLC) -- Similar to an S  corporation, but without the eligibility requirements. o Advantages of LLCs:  Limited liability  Choice of taxation  Flexible ownership rules  Flexible distribution of profits and losses  Operating flexibility ∙ Disadvantages of LLC’s o No stock, therefore ownership is nontransferable o Limited life span o Fewer incentiveso Taxes o Paperwork ∙ Test Prep o What are the major advantages and disadvantages of  incorporating a business? o What’s the role of owners (stockholders) in the corporate  hierarchy? o If you buy stock in a corporation and someone gets injured  by one of the corporation’s products, can you be sued?  Why or why not? o Why are so many new businesses choosing a limited  liability company (LLC) form of ownership? ∙ Mergers and Acquisitions o Merger -- The result of two firms joining to form one  company. o Acquisition -- One company’s purchase of the property  and obligations of another company. ∙ Types of Mergers o Vertical Merger -- The joining of two firms in different  stages of related businesses. o Horizontal Merger -- The joining of two firms in the  same. o Conglomerate Merger -- The joining of firms in  completely unrelated industries.  ∙ Leveraged Buyouts o Leveraged Buyout (LBO) -- An attempt by employees,  management or a group of investors to buy out the  stockholders in a company. o LBOs have ranged in size from $50 million to $34 billion  and have involved everything from small businesses to  giant corporations. o In 2012, foreign investors poured $166 billion into U.S.  companies. ∙ Franchising o Franchise Agreement -- An arrangement whereby  someone with a good idea for a business (franchisor) sells the rights to use the business name and sell a product or  service (franchise) to others (franchisees) in a given  territory. o More than 770,000 franchised businesses operate in the  U.S., employing approximately 8.5 million people. ∙ Make Way for the Newbies: Top New Franchises∙ Adv ant age s of  Franchising 1. Management and marketing assistance 2. Personal ownership 3. Nationally recognized name 4. Financial advice and assistance 5. Lower failure rate ∙ Disadvantages of Franchising 1. Large start-up costs 2. Shared profit 3. Management regulation 4. Coattail effects 5. Restrictions on selling 6. Fraudulent franchisors ∙ The Building Blocks of Franchising o Bricks 4 Kidz was created as a way to help kids understand engineering and construction. o Since the business was low cost and easily reproduced, this led to over 200 franchises in the U.S. and 11 other  countries. ∙ Women in Franchising  o Women own about half of U.S. companies, yet ownership of franchises is about 21%. o More women are becoming franchisors. Auntie Anne’s and  Jazzercise and are owned by women. ∙ Minority-Owned Franchises o DiversityFran is an initiative to build awareness of  franchising opportunities within minority communities. o Domino’s Pizza launched a minority franchise recruitment  program called Delivering the Dream. o Over 20% of franchises are minority-owned. ∙ Home Based Franchises:o Advantages:  Relief from commuting stress  Extra family time  Low overhead expenses o Main Disadvantages:  Isolation  Long hours  Home Sweet Home∙ E-Commerce in Franchising o Most brick-and-mortar franchises have expanded online. o Many franchisors prohibit franchisee-sponsored sites  because conflicts can erupt. o Sometimes “reverse royalties” are sent to franchisees who  believe their sales were hurt by the franchisor’s site. o Other franchises are solely based online. ∙ Giving Entrepreneurs Options with Digital Franchising  o Chris Jeffrey created OrderUp shortly after graduating  college. o OrderUp links up restaurants with hungry patrons and  allows people to order online while OrderUp takes a small  commission o For a startup fee of $42,000 franchisees receive software  and training to launch OrderUp in their area. ∙ Global Franchising  o Canada is the most popular target for U.S.-based  franchises.  o China, South Africa, the Philippines and the Middle East are becoming popular despite high cost. o International franchising goes both ways – some foreign  franchises have come to the U.S.  ∙ What to Choose: Picking Franchises that May Survive a  Recession o Focus on tried-and-true name brands. o Stick to core goods and services. o Be choosy about the site. o Don’t pinch pennies. o Have a fallback choice. o Don’t assume the franchise will pay off. ∙ High Flyers: Ten Hihg-Performing Franchises 1. Anytime Fitness 2. Hampton Hotels 3. Subway 4. Supercuts5. Jimmy John’s 6. 7-Eleven 7. Servpro 8. Denny’s 9. Pizza Hut 10. Dunkin Donuts ∙ Cooperatives o Cooperatives -- Businesses owned and controlled by the  people who use them– producers, consumers, or workers  with similar needs who pool their resources for mutual  gain.  o Worldwide, co-ops serve one billion members! o Members democratically control the business by electing a  board of directors that hires professional management. ∙ TEST PREP o What are some of the factors to consider before buying a  franchise? o What opportunities are available for starting a global  franchise? o What is a cooperative?

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