chapt5

112 How to Form a Business L E A R N I N G O B J E C T I V E S   » After you have read and studied this chapter, you should be able to 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 among 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. 5 Part 2  Business Ownership:   Starting a Small Business nic94851_ch05_112-141.indd 113± 09/21/20±±12:08±PM 113 After considering many potential backers, Webb and the team accepted a $16 million investment from Castanea Partners, a Boston-based private equity firm with experience in cosmetics. As Drybar rapidly expanded, Castanea recom- mended that the company hire a CEO who had experience managing large organizations. Although she was reluctant to share control with an outsider, Webb soon changed her mind after meeting John Heffner. With executive positions at major companies like Procter & Gamble and Unilever on his résumé, Heffner has helped Webb expand the scope of Drybar’s brand. Along with its core business of blowout salons, the company also offers an assortment of products from dry shampoo to lightweight blow-dryers. And with more than 3,000 people now employed by Drybar, Webb stresses the importance of making the right connections at all levels of business: “Recognize your strengths and bring in people who know the things you don’t.” Just like Alli Webb, all business owners must decide for themselves which form of business is best for them. Whether you dream of starting a business for yourself, going into busi- ness with a partner, forming a corporation, or someday being a leading franchisor, it’s important to know that each form of ownership has its advantages and disadvantages. You will learn about them all in this chapter. Source: Jane Larkworthy, “Alli Webb Has Opened over a Hundred Drybars,” The Cut, thecut.com, June 26, 2018. GETTING TO KNOW Alli Webb, Founder of Drybar L ike many American adolescents, Alli Webb always seemed to have trouble getting her curly hair under control. “I’d look at Cindy Crawford or Christie Brinkley and think, how is their hair so perfect?” said Webb. “I spent many, many hours in my bathroom trying to figure that out.” Soon she discov- ered a solution to her problem: blowouts, or a salon treatment where the client’s hair is simultaneously styled and blow-dried. Although this relaxing procedure tamed Webb’s hair, she also noticed that upscale salons overcharged for blowouts while low- cost chains did not offer great experiences. This left a gap in the market that Webb eventually filled with Drybar, her $100 million blowout-based business with more than 125 locations. Before she built Drybar, Webb trained as a hairstylist in New York and worked in one of the city’s top salons. After getting mar- ried in 2003, Webb moved to California and planned to become a stay-at-home mother. She never lost her passion for hairstyling, though, and within five years she launched a mobile blowout business in Los Angeles called Straight-at-Home. Webb acted as sole proprietor of the company, visiting every client at home and charging $40 for blowouts. As her reputation grew and her client base expanded beyond a one-woman show, she decided it was time to expand the business and move into her own shop. While Webb had plenty of experience with hair, she didn’t know much about opening a proper store. Fortunately, her hus- band Cameron worked in marketing and provided vital branding expertise. Webb also wanted to bring in her business-savvy brother Michael but feared he would say no after the two had clashed on a previous venture. “We were fighting like cats and dogs, we were both so young and inexperienced and stupid,” said Webb. Rather than scare her brother off, this experience made the siblings realize what things would work and what things wouldn’t with the new business. So with her husband and brother on board as partners, Webb was ready to launch Drybar. “Despite the fact that they are both bald, they got it and were in!” said Webb. The team opened their first Drybar location in the affluent L.A. neighborhood of Brentwood and quickly had a line of cus- tomers stretching out the door. Webb originally estimated that the store would provide about 30 to 40 blowouts a day. Instead, on an average day, Drybar performed as many as 80 blowouts. “For six months, I couldn’t hire stylists fast enough,” said Webb. Not only were customers attracted by the affordable blowouts, but they also loved the store’s unique design that made it seem more like a bar than a salon. The partners realized that they needed to expand soon or else run the risk of losing market share to imitators. To fund this expansion, the trio raised $2.5 million from family and friends and also started to offer franchising opportunities to interested clients. Drybar then became a limited liability company (LLC) and made the decision to take on additional investors. bit.ly/LetsTalkBusiness5 Let’s talk business! Sam Hodgson/The New York Times/Redux Test±File Rev.±Confirming±Pages Confirming Pages Revised±Pages First±Pages Design±Pages for more ebook/ testbank/ solution manuals requests: email 960126734@qq.com

114 Basic Forms of Business Ownership Hundreds±of±thousands±of±people±have±started±new±businesses±in±the±United±States.±In±fact,± approximately±400,000±are±started±each±year. 1 ±Chances±are,±you’ve±thought±of±owning±your± own±business±or±know±someone±who±has. 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)±part- nerships,±and±(3)±corporations.±Each±has±advantages±and±disadvantages±that±we’ll±discuss. A±business±owned,±and±usually±managed,±by±one±person±is±called±a± sole proprietorship .± Many±people±do±not±have±the±money,±time,±or±desire±to±run±a±business±on±their±own.±When± two±or±more±people±legally±agree±to±become±co-owners±of±a±business,±the±organization±is± called±a± partnership . Sole± proprietorships± and± partnerships± are± relatively± easy± to± form,± but± there± are± advantages±to±creating±a±business±that±is±separate±and±distinct±from±the±owners.±This±is±a± corporation ,±a±legal±entity±with±authority±to±act±and±have±liability±apart±from±its±owners.± The±almost±5±million±corporations±in±the±United±States±make±up±only±20±percent±of±all±busi- nesses,±but±they±earn±81±percent±of±total±U.S.±business±receipts±(see±Figure±5.1). Keep±in±mind±that±just±because±a±business±starts±in±one±form±of±ownership,±it±doesn’t± have±to±stay±in±that±form.±Many±companies±start±out±in±one±form,±then±add±(or±drop)±a± partner±or±two,±and±eventually±become±corporations,±limited±liability±companies,±or±franchi- sors.±Let’s±begin±our±discussion±by±looking±at±the±most±basic±form±of±ownership—the±sole± proprietorship. sole proprietorship A business that is owned, and usually managed, by one person. partnership A legal form of business with two or more owners. corporation A legal entity with authority to act and have liability separate from its owners. WHEN TWO GIANT MEDIA COMPANIES MERGED  in 2019, this company became an even greater entertainment colossus. The company is now in a stronger position to compete with Netflix. In addition to introducing a new streaming service, this company now owns 60 percent of Hulu. Name that company. (Find the answer in the chapter.) name that company Sole proprietorships 72% Partnerships 8% Corporations 20% Sole proprietorships 6% Percentage of Total Receipts Percentage of Businesses Partnerships 13% Corporations 81% FIGURE 5.1 FORMS OF BUSINESS OWNERSHIP Although corporations make up only 20 percent of the total number of businesses, they earn 81 percent of the total receipts. Sole proprietorships are the most common form (72 percent), but they earn only 6 percent of the receipts. Source: U.S. Census Bureau. iSeeit! Need help understanding forms of business ownership? Visit your Connect eBook to view a video for a brief animated explanation. ® CHAPTER 5 HOW TO FORM A BUSINESS 115 nic94851_ch05_112-141.indd 115± 09/21/20±±12:08±PM LO 5–1 Compare the advantages and disadvantages of sole proprietorships. Sole Proprietorships Advantages of Sole Proprietorships Sole±proprietorships±are±the±easiest±kind±of±businesses±to±explore±in±your± quest±for±an±interesting±career.±Every±town±has±sole±proprietors±you±can±visit± and±talk±with±about±the±joys±and±frustrations±of±being±in±business±on±their± own.±Most±will±mention±the±benefits±of±being±their±own±boss±and±setting±their± own±hours.±Other±advantages±include: ± 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±(a±saw,±a± laptop,±a±tractor,±a±lawn±mower)±and±put±up±some±announcements± saying±you±are±in±business.±You±may±have±to±get±a±permit±or±license± from±the±local±government,±but±often±that±is±no±problem.±It±is±just± as±easy±to±get±out±of±business;±you±simply±stop.±There±is±no±one±to± consult±or±disagree±with±about±such±decisions. ± 2.± Ability to be your own boss. ±Working±for±others±simply±does±not±have± the±same±excitement±as±working±for±yourself—at±least,±that’s±the±way± sole±proprietors±feel.±You±may±make±mistakes,±but±they±are±your± mistakes—and±so±are±the±many±small±victories±each±day. ± 3.± Pride of ownership. ±People±who±own±and±manage±their±own±businesses±are±rightfully± proud±of±their±work.±They±deserve±all±the±credit±for±taking±the±risks±and±providing± needed±goods±or±services. ± 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.± However,±owners±do±have±to±pay±the±self-employment±tax±(for±Social±Security±and± Medicare).±They±also±have±to±estimate±their±taxes±and±make±quarterly±payments±to± the±government±or±suffer±penalties±for±nonpayment. Disadvantages of Sole Proprietorships Not±everyone±is±equipped±to±own±and±manage±a±business.±Often±it±is±difficult±to±save±enough± money±to±start±a±business±and±keep±it±going.±The±costs±of±inventory,±supplies,±insurance,± advertising,±rent,±computers,±utilities,±and±so±on±may±be±too±much±to±cover±alone.±There±are± other±disadvantages: ± 1.± Unlimited liability—the risk of personal losses. ±When±you±work±for±others,±it±is±their± problem±if±the±business±is±not±profitable.±When±you±own±your±own±business,±you±and±the± business±are±considered±one.±You±have± unlimited liability ;±that±is,±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.±This±is±a±serious±risk,±and±undertaking± it±requires±not±only±thought±but±also±discussion±with±a±lawyer,±an±insurance±agent,±an± accountant,±and±others. ± 2.± Limited financial resources. ±Funds±available±to±the±business±are±limited±to±what±the± one±owner±can±gather.±Since±there±are±serious±limits±to±how±much±money±one±person± can±raise,±partnerships±and±corporations±have±a±greater±probability±of±obtaining±the± financial±backing±needed±to±start±and±equip±a±business±and±keep±it±going. unlimited liability The responsibility of business owners for all of the debts of the business. Evan, better known as EvanTubeHD, started making toy unboxing videos on YouTube when he was a little kid. Now a teenager with more than 6 million subscribers, Evan creates viral content with his whole family and earns more than $1 million per year from ads and sponsorships. Do you have a passion you would like to pursue as a business? Stuart Ramson/Invision/AP/Shutterstock Test±File Rev.±Confirming±Pages Confirming Pages Revised±Pages First±Pages Design±Pages for more ebook/ testbank/ solution manuals requests: email 960126734@qq.com

118 PART 2 BUSINESS OWNERSHIP: STARTING A SMALL BUSINESS skills±and±perspectives.±Some±people±find±that±the±best±partner±is±a±spouse.±Many± husband-and-wife±teams±manage±restaurants,±service±shops,±and±other±businesses. 4 ± 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. 5 ± 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.± Similarly,±partners±must±estimate±their±taxes±and±make±quarterly±payments±or±suffer± penalties±for±nonpayment. Disadvantages of Partnerships Anytime± two± people± must± agree,± conflict± and± tension± are± possible.± Partnerships± have± caused± splits± between± relatives,± friends,± and± spouses.± Let’s± explore± the± 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.±You±are±liable±for±your±partners’±mistakes±as± well±as±your±own.±Like±sole±proprietors,±general±partners±can±lose±their±homes,±cars,± and±everything±else±they±own±if±the±business±loses±a±lawsuit±or±goes±bankrupt. What type of decision maker is the person? There’s no such thing as a perfect partner, but you should share some common thoughts on the business. Ask yourself: Do you share the same goals? Do you share the same vision for the company’s future? What skills does the person have? Are those skills the same as yours, or do they complement your skills? Is this someone with whom you could happily share authority for all major business decisions? How does the person respond to adversity? Does he or she try to solve the problem or try to defend his or her ego? Can the person accept constructive criticism without getting defensive? To what extent can you build fun and excitement into the partnership? What contacts, resources, or special attributes will the person bring to the business? Do you trust each other? FIGURE 5.2 QUESTIONS TO ASK WHEN CHOOSING A BUSINESS PARTNER CHAPTER 5 HOW TO FORM A BUSINESS 119 nic94851_ch05_112-141.indd 119± 09/21/20±±12:08±PM ± 2.± Division of profits. ±Sharing±risk±means±sharing±profits,±and±that±can±cause±conflicts.± There±is±no±set±system±for±dividing±profits±in±a±partnership,±and±they±are±not±always± divided±evenly.±For±example,±if±one±partner±puts±in±more±money±and±the±other±puts±in± more±hours,±each±may±feel±justified±in±asking±for±a±bigger±share±of±the±profits. ± 3.± Disagreements among partners. ±Disagreements±over±money±are±just±one±example±of± potential±conflict±in±a±partnership.±Who±has±final±authority±over±employees?±Who± hires±and±fires±employees?±Who±works±what±hours?±What±if±one±partner±wants±to± buy±expensive±equipment±for±the±firm±and±the±other±partner±disagrees?±All±terms±of± the±partnership±should±be±spelled±out±in±writing±to±protect±all±parties±and±minimize± misunderstandings. 6 ±The±Making±Ethical±Decisions±box±offers±an±example±of±a± difference±of±opinions±between±partners. ± 4.± Difficulty of termination. ±Once±you±have±committed±yourself±to±a±partnership,±it±is± not±easy±to±get±out±of±it.±Sure,±you±can±just±quit.±However,±questions±about±who±gets± what±and±what±happens±next±are±often±difficult±to±resolve±when±the±partnership± ends.±Surprisingly,±law±firms±often±have±faulty±partnership±agreements±and±find±that± breaking±up±is±hard±to±do.±How±do±you±get±rid±of±a±partner±you±don’t±like?±It±is±best± to±decide±such±questions±up±front±in±the±partnership±agreement.±Figure±5.3±gives±you± ideas±about±what±to±include±in±partnership±agreements. The±best±way±to±learn±about±the±advantages±and±disadvantages±of±partnerships±is±to± interview±several±people±who±have±experience±with±them.±They±will±give±you±insights±and± hints±on±how±to±avoid±problems. One±fear±of±owning±your±own±business±or±having±a±partner±is±the±fear±of±losing±everything± you±own±if±someone±sues±the±business±or±it±loses±a±lot±of±money.±Many±businesspeople±try±to± avoid±this±and±the±other±disadvantages±of±sole±proprietorships±and±partnerships±by±forming± corporations.±We±discuss±this±basic±form±of±business±ownership±in±the±following±section. It’s not hard to form a partnership, but it’s wise for each prospective partner to get the counsel of a lawyer experienced with such agreements. Lawyers’ services are usually expensive, so would-be partners should read all about partnerships and reach some basic agreements before calling a lawyer. For your protection, be sure to put your partnership agreement in writing. The Model Business Corporation Act recommends including the following in a written partnership agreement: • The name of the business. Many states require the firm’s name to be registered with state and/or county officials if the firm’s name is different from the name of any of the partners. • The names and addresses of all partners. • The purpose and nature of the business, the location of the principal offices, and any other locations where business will be conducted. • The date the partnership will start and how long it will last. Will it exist for a specific length of time, or will it stop when one of the partners dies or when the partners agree to discontinue? • The contributions made by each partner. Will some partners contribute money, while others provide real estate, personal property, expertise, or labor? When are the contributions due? • The management responsibilities. Will all partners have equal voices in management, or will there be senior and junior partners? • The duties of each partner. • The salaries and drawing accounts of each partner. • Provision for sharing of profits or losses. • Provision for accounting procedures. Who’ll keep the accounts? What bookkeeping and accounting methods will be used? Where will the books be kept? • The requirements for taking in new partners. • Any special restrictions, rights, or duties of any partner. • Provision for a retiring partner. • Provision for the purchase of a deceased or retiring partner’s share of the business. • Provision for how grievances will be handled. • Provision for how to dissolve the partnership and distribute the assets to the partners. ess, the loca ther locati ed. art nd how long of time, o r wi or when the partn e ot he duties of ea The salarie • Provision for sion for a ccounts? Wha hods will be used req spe l some ovid ertise, or labor? ents for takin est Provision for a r Pro pa ers. • T nership FIGURE 5.3 HOW TO FORM A PARTNERSHIP Background image: Aha-Soft/Shutterstock Test±File Rev.±Confirming±Pages Confirming Pages Revised±Pages First±Pages Design±Pages for more ebook/ testbank/ solution manuals requests: email 960126734@qq.com

120 LO 5–3 Compare the advantages and disadvantages of corporations, and summarize the differences among C corporations, S corporations, and limited liability companies. Corporations Many±corporations—like±General±Electric,±Microsoft,±and±Walmart—are±big±and±contribute± substantially±to±the±U.S.±economy.±However,±it’s±not±necessary±to±be±big±to±incorporate.± Incorporating±may±be±beneficial±for±small±businesses±as±well. A± conventional (C) corporation ±is±a±state-chartered±legal±entity±with±authority±to±act±and± have±liability±separate±from±its±owners—its± stockholders. ±Stockholders±are±not±liable±for±the±debts± or±other±problems±of±the±corporation±beyond±the±money±they±invest±in±it±by±buying±ownership± shares,±or±stock,±in±the±company.±They±don’t±have±to±worry±about±losing±their±house,±car,±or± other±property±because±of±some±business±problem—a±significant±benefit.±A±corporation±not±only± limits±the±liability±of±owners±but±often±enables±many±people±to±share±in±the±ownership±(and±prof- its)±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.±(We±discuss± stocks±in±Chapter±19.)±Figure±5.4±describes±various±types±of±corporations.± Advantages of Corporations Most±people±are±not±willing±to±risk±everything±to±go±into±business.±Yet±for±a±business±to±grow,± prosper,±and±create±economic±opportunity,±many±people±have±to±be±willing±to±invest±money± in±it.±One±way±to±solve±this±problem±is±to±create±an±artificial±being,±an±entity±that±exists±only± in±the±eyes±of±the±law—a±corporation.±Let’s±explore±some±of±the±advantages±of±corporations: ± 1.± Limited liability. ±A±major±advantage±of±corporations±is±the±limited±liability±of± their±owners.±Remember,±limited±liability±means±that±the±owners±of±a±business±are± responsible±for±its±losses±only±up±to±the±amount±they±invest±in±it. ± 2.± Ability to raise more money for investment. ±To±raise±money,±a±corporation±can±sell±shares±of± its±stock±to±anyone±who±is±interested.±This±means±that±millions±of±people±can±own±part±of± MAKING ETHICAL DECISIONS Good Business, Bad Karma? I magine that you and your partner own a construction company. You receive a bid from a subcontractor that you know is 20 percent too low. Such a loss to the subcontractor could put him out of business. Accepting the bid will certainly improve your chances of winning the contract for a big shopping center project. Your partner wants to take the bid and let the subcontractor suffer the con- sequences of his bad estimate. What do you think you should do? What will be the conse- quences of your decision? What is the difference between a limited partner and a general partner? What are some of the advantages and disadvantages of partnerships? TEST PREP conventional (C) corporation A state-chartered legal entity with authority to act and have liability separate from its owners. CHAPTER 5 HOW TO FORM A BUSINESS 121 nic94851_ch05_112-141.indd 121± 09/21/20±±12:08±PM major±companies±like±IBM,±Apple,±and±Coca-Cola,±and±smaller±corporations±as±well.±If±a± company±sells±10±million±shares±of±stock±for±$50±a±share,±it±will±have±$500±million±available± to±build±plants,±buy±materials,±hire±people,±manufacture±products,±and±so±on.±Such±a±large± amount±of±money±would±be±difficult±to±raise±any±other±way.±Corporations±can±also±borrow± money±by±obtaining±loans±from±financial±institutions±like±banks.±They±can±also±borrow± from±individual±investors±by±issuing±bonds,±which±involves±paying±investors±interest±until± the±bonds±are±repaid±sometime±in±the±future.±You±can±read±about±how±corporations±raise± funds±through±the±sale±of±stocks±and±bonds±in±Chapter±19. ± 3.± Size. ±“Size”±summarizes±many±of±the±advantages±of±some±corporations.±Because±they±can± raise±large±amounts±of±money±to±work±with,±big±corporations±can±build±modern±factories± or±software±development±facilities±with±the±latest±equipment.±They±can±hire±experts±or± specialists±in±all±areas±of±operation.±They±can±buy±other±corporations±in±different±fields±to± diversify±their±business±risks.±In±short,±a±large±corporation±with±numerous±resources±can± take±advantage±of±opportunities±anywhere±in±the±world.±But±corporations±do±not±have±to± be±large±to±enjoy±the±benefits±of±incorporating.±Many±doctors,±lawyers,±and±individuals,± as±well±as±partners±in±a±variety±of±businesses,±have±incorporated.±The±vast±majority±of± corporations±in±the±United±States±are±small±businesses. ± 4.± Perpetual life. ±Because±corporations±are±separate±from±those±who±own±them,±the± death±of±one±or±more±owners±does±not±terminate±the±corporation. ± 5.± Ease of ownership change. ±It±is±easy±to±change±the±owners±of±a±corporation.±All±that±is± necessary±is±to±sell±the±stock±to±someone±else. ± 6.± Ease of attracting talented employees. ±Corporations±can±attract±skilled±employees±by± offering±benefits±like±stock±options±(the±right±to±purchase±shares±of±the±corporation± for±a±fixed±price). ± 7.± Separation of ownership from management. ±Corporations±are±able±to±raise±money±from± many±different±owners/stockholders±without±getting±them±involved±in±management.± You may find some confusing types of corporations when reading about them. Here are a few of the more widely used terms: Alien corporations do business in the United States but are chartered (incorporated) in another country. Domestic corporations do business in the state in which they are chartered (incorporated). Foreign corporations do business in one state but are chartered in another. About one-third of all corporations are chartered in Delaware because of its relatively attractive rules for incorporation. A foreign corporation must register in states where it operates. Closed (private) corporations have stock that is held by a few people and isn’t available to the general public. Open (public) corporations sell stock to the general public. General Motors and ExxonMobil are examples of public corporations. Quasi-public corporations are chartered by the government as an approved monopoly to perform services to the general public. Public utilities are examples of quasi-public corporations. Professional corporations are owned by those who offer professional services (doctors, lawyers, etc.). Shares in professional corporations aren’t publicly traded. Nonprofit (or not-for-profit) corporations don’t seek personal profit for their owners. Multinational corporations operate in several countries. FIGURE 5.4 CORPORATE TYPES Corporations can fit in more than one category. Test±File Rev.±Confirming±Pages Confirming Pages Revised±Pages First±Pages Design±Pages for more ebook/ testbank/ solution manuals requests: email 960126734@qq.com

124 PART 2 BUSINESS OWNERSHIP: STARTING A SMALL BUSINESS outsiders;±therefore,±they±do±not±share±all±the±advantages±and±disadvantages±of±large±corpo- rations±(such±as±size±and±more±money±for±investment).±Their±major±advantages±are±limited± liability±and±possible±tax±benefits.±Although±you±are±not±required±to±file±for±incorporation± through±a±lawyer,±it±is±usually±wise±to±consult±one.±In±addition±to±lawyers’±fees,±the±secretary± of±state’s±office±charges±a±fee±for±incorporating±a±business,±varying±by±state±from±a±low±of± $50±in±Arkansas±to±a±high±of±$725±in±Nevada. 10 ±Like±the±fee,±the±length±of±time±it±will±take± to±actually±have±your±business±incorporated±will±vary±by±state.±The±average±time±is±approxi- mately±30±days±from±the±date±of±application.±Figure±5.6±outlines±how±to±incorporate. S Corporations An± S corporation ±is±a±unique±government±creation±that±looks±like±a±corporation±but±is±taxed± like±sole±proprietorships±and±partnerships.±(The±name±comes±from±the±fact±that±the±rules± governing±them±are±in±Subchapter±S±of±Chapter±1±of±the±Internal±Revenue±Code.)±The±paper- work±and±details±of±S±corporations±are±similar±to±those±of±conventional±(C)±corporations.± S± corporations± have± shareholders,± directors,± and± employees,± and± the± benefit± of± limited± liability,±but±their±profits±are±taxed±only±as±the±personal±income±of±the±shareholders—thus± avoiding±the±double±taxation±of±C±corporations. Avoiding±double±taxation±is±reason±enough±for±approximately±4.7±million±U.S.±compa- nies±to±operate±as±S±corporations. 11 ±Yet±not±all±businesses±can±become±S±corporations.±In± order±to±qualify,±a±company±must: 12 ± 1.± Have±no±more±than±100±shareholders.±(All±members±of±a±family±count±as± 1±shareholder.) ± 2.± Have±shareholders±that±are±individuals±or±estates,±and±who±(as±individuals)±are± citizens±or±permanent±residents±of±the±United±States. S corporation A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships. FIGURE 5.6 HOW TO INCORPORATE The process of forming a corporation varies somewhat from state to state. The articles of incorporation are usually filed with the secretary of state’s office in the state in which the company incorporates. The articles contain: • The corporation’s name. • The names of the people who incorporated it. • Its purposes. • Its duration (usually perpetual). • The number of shares that can be issued, their voting rights, and any other rights the shareholders have. • The corporation’s minimum capital. • The address of the corporation’s office. • The name and address of the person responsible for the corporation’s legal service. • The names and addresses of the first directors. • Any other public information the incorporators wish to include. Before a business can so much as open a bank account or hire employees, it needs a federal tax identification number. To apply for one, get an SS-4 form from the IRS. In addition to the articles of incorporation listed, a corporation has bylaws. These describe how the firm is to be operated from both legal and managerial points of view. The bylaws include: • How, when, and where shareholders’ and directors’ meetings are held, and how long directors are to serve. • Directors’ authority. • Duties and responsibilities of officers, and the length of their service. • How stock is issued. • Other matters, including employment contracts. CHAPTER 5 HOW TO FORM A BUSINESS 125 nic94851_ch05_112-141.indd 125± 09/21/20±±12:08±PM ± 3.± Have±only±one±class±of±stock.±(You±can±read±more±about±the±various± classes±of±stock±in±Chapter±19.) ± 4.± Derive±no±more±than±25±percent±of±income±from±passive± sources±(rents,±royalties,±interest). An±S±corporation±that±loses±its±S±status±may±not±operate±under± it±again±for±at±least±five±years.±The±tax±structure±of±S±corporations± isn’t±attractive±to±all±businesses.±For±one±thing,±the±benefits±change± every±time±the±tax±rules±change.±The±best±way±to±learn±all±the±benefits± or±shortcomings±for±a±specific±business±is±to±go±over±the±tax±advan- tages±and±liability±differences±with±a±lawyer,±an±accountant,±or±both. 13 Limited Liability Companies A± limited liability company (LLC) ±is±similar±to±an±S±corporation,± but± without± the± special± eligibility± requirements.± LLCs± were± introduced± in± Wyoming± in± 1977,± and± were± recognized± by± the± Internal±Revenue±Service±as±a±partnership±for±federal±income± tax±purposes±in±1988.±An±LLC±can±submit±a±form±to±the±IRS±if± it±chooses±to±be±treated±as±a±corporation. 14 ±By±1996,±all±50±states± and±the±District±of±Columbia±recognized±LLCs. The± number± of± LLCs± has± risen± dramatically± since± 1988,± when±there±were±fewer±than±100±filings±to±operate±them.±Today,±more± than±half±of±new±business±registrations±in±some±states±are±LLCs. 15 Why±the±drive±toward±forming±LLCs?±Advantages±include: ± 1.± Limited liability. ±Personal±assets±are±protected.±Limited±liability±was±previously± available±only±to±limited±partners±and±shareholders±of±corporations. ± 2.± Choice of taxation. ±LLCs±can±choose±to±be±taxed±as±partnerships±or±as±corporations.± Partnership-level±taxation±was±previously±a±benefit±normally±reserved±for±partners±or± S±corporation±owners. ± 3.± Flexible ownership rules. ±LLCs±do±not±have±to±comply±with±ownership±restrictions±as± S±corporations±do.±Owners±can±be±a±person,±partnership,±or±corporation. ± 4.± Flexible distribution of profits and losses. ±Profits±and±losses±don’t±have±to±be± distributed±in±proportion±to±the±money±each±person±invests,±as±in±corporations.±LLC± members±agree±on±the±percentage±to±be±distributed±to±each±member. ± 5.± Operating flexibility. ±LLCs±do±have±to±submit±articles±of±organization,±which±are± similar±to±articles±of±incorporation,±but±they±are±not±required±to±keep±minutes,± file±written±resolutions,±or±hold±annual±meetings.±An±LLC±also±submits±a±written± operating±agreement,±similar±to±a±partnership±agreement,±describing±how±the± company±is±to±be±operated. Of±course,±LLCs±have±their±disadvantages±as±well.±These±include: ± 1.± No stock. ±LLC±ownership±is±nontransferable.±LLC±members±need±the±approval±of±the± other±members±in±order±to±sell±their±interests±in±the±company.±In±contrast,±regular± and±S±corporation±stockholders±can±sell±their±shares±as±they±wish. ± 2.± Fewer incentives. ±Unlike±corporations,±LLCs±can’t±deduct±the±cost±of±fringe±benefits± for±members±owning±2±percent±or±more±of±the±company.±And±since±there’s±no±stock,± they±can’t±use±stock±options±as±incentives±to±employees. ± 3.± Taxes. ±LLC±members±must±pay±self-employment±taxes—the±Medicare/Social±Security± taxes±paid±by±sole±proprietors±and±partnerships—on±their±profits.±In±contrast,±± S±corporations±pay±self-employment±tax±on±owners’±salaries±but±not±on±the±entire±profits. ± 4.± Paperwork. ±While±the±paperwork±required±of±LLCs±is±not±as±great±as±that±required±of± corporations,±it±is±more±than±required±of±sole±proprietors. limited liability company (LLC) A company similar to an S corporation but without the special eligibility requirements. Splash/PetZen/GoPet/Newscom PetZen Products LLC offers doggie treadmills to help pudgy pets get back their puppy figures. What are the advantages and disadvantages of LLCs? Test±File Rev.±Confirming±Pages Confirming Pages Revised±Pages First±Pages Design±Pages for more ebook/ testbank/ solution manuals requests: email 960126734@qq.com

126 PART 2 BUSINESS OWNERSHIP: STARTING A SMALL BUSINESS The± start-up± cost± for± an± LLC± varies.± Online± legal± services± such± as± LegalZoom± (legalzoom.com)±can±file±the±necessary±paperwork±for±as±little±as±$79±plus±the±state±filing±fee. 16 ± Figure±5.7±summarizes±the±advantages±and±disadvantages±of±the±major±forms±of±business± ownership. SOLE PROPRIETORSHIP General Partnership PARTNERSHIPS CORPORATIONS Limited Partnership Conventional Corporation S Corporation Limited Liability Company Documents Needed to Start Business None; may need permit or license Partnership agreement (oral or written) Written agreement; must file certificate of limited partnership Articles of incorporation, bylaws Articles of incorporation, bylaws, must meet criteria Articles of organization and operating agreement; no eligibility requirements Easy to terminate: just pay debts and quit May be hard to terminate, depending on the partnership agreement Same as general partnership Hard and expensive to terminate Same as conventional corporation May be difficult, depending upon operating agreement Ease of Termination Terminates on the death of owner Terminates on the death or withdrawal of partner Same as general partnership Perpetual life Same as conventional corporation Varies according to dissolution dates in articles of organization Length of Life Business can be sold to qualified buyer Must have other partner(s)’ agreement Same as general partnership Easy to change owners; just sell stock Can sell stock, but with restrictions Can’t sell stock Transfer of Ownership Limited to owner’s capital and loans Limited to partners’ capital and loans Same as general partnership More money to start and operate; may sell stocks and bonds Same as conventional corporation Same as partnership Financial Resources Unlimited liability Unlimited liability Limited liability Limited liability Limited liability Limited liability Risk of Losses Taxed as personal income Taxed as personal income Same as general partnership Corporate, double taxation Taxed as personal income Varies Taxes Owner manages all areas of the business Partners share management Can’t participate in management Separate management from ownership Same as conventional corporation Varies Management Responsibilities Usually fewer benefits and lower wages Often fewer benefits and lower wages; promising employee could become a partner Same as general partnership Usually better benefits and wages, advancement opportunities Same as conventional corporation Varies, but are not tax- deductible Employee Benefits * * FIGURE 5.7 COMPARISON OF FORMS OF BUSINESS OWNERSHIP CHAPTER 5 HOW TO FORM A BUSINESS 127 nic94851_ch05_112-141.indd 127± 09/21/20±±12:08±PM 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. Corporate Expansion: Mergers and Acquisitions What’s±the±difference±between±mergers±and±acquisitions?±A± merger ±is±the±result±of±two±firms± joining±to±form±one±company.±It±is±similar±to±a±marriage,±joining±two±individuals±as±one±fam- ily.±An± acquisition ±is±one±company’s±purchase±of±the±property±and±obligations±of±another± company.±It±is±more±like±buying±a±house±than±entering±a±marriage. There±are±three±major±types±of±corporate±mergers:±vertical,±horizontal,±and±conglomer- ate.±A± vertical merger ±joins±two±firms±operating±in±different±stages±of±related±businesses.±A± merger±between±a±soft±drink±company±and±an±artificial±sweetener±maker±would±ensure±the± merged±firm±a±constant±supply±of±an±ingredient±the±soft±drink±manufacturer±needs.±It±could± also±help±ensure±quality±control±of±the±soft±drink±company’s±products. A± horizontal merger ±joins±two±firms±in±the±same±industry±and±allows±them±to±diversify± or±expand±their±products.±A±soft±drink±company±and±a±mineral±water±company±that±merge± can±now±supply±a±variety±of±beverage±products. A± conglomerate merger ± unites± firms± in± completely± unrelated± industries± in± order± to± diversify±business±operations±and±investments.±A±soft±drink±company±and±a±snack±food±com- pany±would±form±a±conglomerate±merger.±Figure±5.8±illustrates±the±differences±among±the± three±types±of±mergers.± Mergers± between± large± competitors± must± prove± to± the± Federal± Trade± Commission± (FTC)±that±the±new±combined±company±does±not±limit±competition±unfairly. 17 ±For±example,± in±2016±Staples±and±Office±Depot±had±to±abandon±their±plans±to±merge±when±a±judge±ruled± that±the±merger±would±mean±diminished±competition±and±higher±prices±for±large±national± businesses±that±buy±office±supplies±in±bulk. 18± In±2020±the±FTC±blocked±the±sale±of±shaving± upstart±Harryʼs±to±Schick-maker±Edgewell.±The±shaving±market±is±dominated±by±just±two± companies,±Edgewell±and±Gillette,±which±were±forced±to±lower±prices±when±Harryʼs±entered± the±market±online±and±later±entered±brick-and-mortar±stores.±The±FTC±judged±that±allowing± one±of±these±giants±to±swallow±Harryʼs±would±harm±the±competition±and±innovation±that±the± small±disrupter±spurred. 19 Rather±than±merge±or±sell±to±another±company,±some±corporations±decide±to±maintain,± or±in±some±cases±regain,±control±of±a±firm±internally.±By± taking a firm private, ±management± or±a±group±of±stockholders±obtains±all±the±firm’s±stock±for±themselves±by±buying±it±back±from± the±other±stockholders.±Burger±King,±Dell,±Krispy±Kreme,±and±Panera±Bread±are±examples±of± firms±that±have±been±taken±private. 20 Suppose±employees±believe±they±may±lose±their±jobs,±or±managers±believe±they±could± improve±corporate±performance±if±they±owned±the±company.±Does±either±group±have±an± opportunity± of± taking± ownership± of± the± company?± Yes—they± might± attempt± a± leveraged± merger The result of two firms forming one company. acquisition One company’s purchase of the property and obligations of another company. vertical merger The joining of two companies involved in different stages of related businesses. horizontal merger The joining of two firms in the same industry. conglomerate merger The joining of firms in completely unrelated industries. What are the major advantages and disadvantages of incorporating a business? What is the role of owners (stockholders) in the corporate hierarchy? 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? Why are so many new businesses choosing a limited liability com- pany (LLC) form of ownership? TEST PREP Test±File Rev.±Confirming±Pages Confirming Pages Revised±Pages First±Pages Design±Pages for more ebook/ testbank/ solution manuals requests: email 960126734@qq.com

130 PART 2 BUSINESS OWNERSHIP: STARTING A SMALL BUSINESS FIGURE 5.9 BUYING A FRANCHISE Since buying a franchise is a major investment, be sure to check out a company’s financial strength before you get involved. Watch out for scams too. Scams called bust-outs usually involve people coming to town, renting nice offices, taking out ads, and persuading people to invest. Then they disappear with the investors’ money. For example, in San Francisco a company called T.B.S. Inc. sold distributorships for in-home AIDS tests. It promised an enormous market and potential profits of $3,000 for an investment of less than $200. The “test” turned out to be nothing more than a mail-order questionnaire about lifestyle. A good source of information about evaluating a fran- chise deal is the handbook Investigate before Investing, available from International Franchise Association Publications. Checklist for Evaluating a Franchise The Franchise Did your lawyer approve the franchise contract you’re considering after he or she studied it paragraph by paragraph? Does the franchise give you an exclusive territory for the length of the franchise? Under what circumstances can you terminate the franchise contract and at what cost to you? If you sell your franchise, will you be compensated for your goodwill (the value of your business’s reputation and other intangibles)? If the franchisor sells the company, will your investment be protected? The Franchisor How many years has the firm offering you a franchise been in operation? Does it have a reputation for honesty and fair dealing among the local firms holding its franchise? Has the franchisor shown you any certified figures indicat- ing exact net profits of one or more going firms that you personally checked yourself with the franchisee? Ask for the company’s disclosure statement. Will the firm assist you with A management training program? An employee training program? A public relations program? Capital? Credit? Merchandising ideas? Will the firm help you find a good location for your new business? Has the franchisor investigated you carefully enough to assure itself that you can successfully operate one of its franchises at a profit both to itself and to you? You, the Franchisee How much equity capital will you need to purchase the franchise and operate it until your income equals your expenses? Does the franchisor offer financing for a portion of the franchising fees? On what terms? Are you prepared to give up some independence of action to secure the advantages offered by the franchise? Do you have your family’s support? Does the industry appeal to you? Are you ready to spend much or all of the remainder of your business life with this franchisor, offering its product or service to the public? Your Market Have you made any study to determine whether the product or service that you propose to sell under the franchise has a market in your territory at the prices you’ll have to charge? Will the population in the territory given to you increase, remain static, or decrease over the next five years? Will demand for the product or service you’re considering be greater, about the same, or less five years from now than it is today? What competition already exists in your territory for the product or service you contemplate selling? Sources: U.S. Department of Commerce, Franchise Opportunities Handbook; Steve Adams, “Buying a Brand,” Patriot Ledger (Quincy, MA), March 1, 2008. established±franchise,±you±get±instant±recognition±and±support±from±a±product±group± with±established±customers±around±the±world. ± 4.± Financial advice and assistance. ±Two±major±problems±for±small-business±owners±are± arranging±financing±and±learning±to±keep±good±records.±Franchisees±often±get±valuable± assistance±and±periodic±advice±from±people±with±expertise±in±these±areas.±In±fact,±some± franchisors,±including±Jiffy±Lube,±and±UPS±Stores,±provide±financing±to±potential± franchisees±they±feel±will±be±valuable±parts±of±the±franchise±system. 27 ± 5.± Lower failure rate. ±Historically,±the±failure±rate±for±franchises±has±been±lower±than±that± of±other±business±ventures.±However,±franchising±has±grown±so±rapidly±that±many±weak± franchises±have±entered±the±field,±so±you±need±to±be±careful±and±invest±wisely. 131 nic94851_ch05_112-141.indd 131± 09/21/20±±12:08±PM Franchising a Different Form of Fun SPOTLIGHT ON SMALL BUSINESS OPEN stumpyshh.com W hile chucking an axe at a big hunk of wood might not seem like an ideal first date activity, Brendan Wehmann claims that he sees new couples all the time at his Stumpy’s Hatchet House franchise in Tampa, Florida. “It’s something fun and different,” said Weh- mann. Founded in New Jersey, Stumpy’s has opened more than 30 franchises across the coun- try where people can join their friends for a game that’s like darts, only with hatchets instead. Customers rent rooms by the hour and take turns tossing axes individually while the rest of the party stands away in a safe zone. Although Stumpy’s offers some snacks and soft drinks, people Jewel Samad/AFP/Getty Images can also bring their own food and alcoholic beverages to enjoy. The four founders of Stumpy’s came up with the idea one day when they were barbecuing by the New Jersey coast. After cut- ting wood for the chiminea, they began to toss an axe against the remnants of a big tree that had fallen during Hurricane Sandy. It became a regular outdoor activity that eventually led to the founding of Stumpy’s in 2016. The company started franchising soon after due to the venture’s relatively simple setup. Along with its modest fran- chise fee of $35,000, Stumpy’s also has plenty of room to grow since many Americans have never gone hatchet-tossing before. “I always say to people, when was the last time you did something for the first time? And that’s what Stumpy’s is,” said cofounder Trish Oliphant. “I think this is America’s next bowling.” Source: Matthew Rocco, “How Stumpy’s Turned Hatchet-Throwing Into a Fast-Growing Business,” Fox Business , foxbusiness.com, August 28, 2018. Disadvantages of Franchises There±are,±however,±some±potential±pitfalls±to±franchising.±Check±out±any±franchise±arrange- ment±with±present±franchisees±and±discuss±the±idea±with±an±attorney±and±an±accountant.± Disadvantages±of±franchises±include±the±following: ± 1.± Large start-up costs. ±Most±franchises±demand±a±fee±for±the±rights±to±the±franchise.± Start-up±costs±for±a±Cruise±Planners±franchise±begin±at±$2,000,±but±if±it’s±a± Dunkin’±franchise±you’re±after,±you’d±better±have±a±lot±more±dough—approximately± $1.6±million. 28 ± 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. ±For±example,±if±a±franchisor±demands±a±10±percent± royalty±on±a±franchise’s±net±sales,±10±cents±of±every±dollar±the±franchisee±collects± (before±taxes±and±other±expenses)±must±be±paid±to±the±franchisor. 29 ± 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. 30 ± Often±franchisees±will±band±together±to±resolve±their±grievances±with±franchisors± rather±than±fighting±their±battles±alone.±For±example,±the±KFC±National±Council±&± Advertising±Cooperative,±which±represents±all±U.S.±KFC±franchisees,±sued±KFC±to± gain±control±of±advertising±strategies.±The±franchisees±were±angry±over±Yum!±Brands’s± (owner±of±KFC)±decision±to±implement±an±ad±strategy±that±emphasized±a±shift±to± grilled±chicken±rather±than±fried±chicken.±The±campaign±centered±around±the±slogan± “Unthink±KFC,”±which±was±exactly±what±customers±did.±Sales±plummeted±7±percent± Test±File Rev.±Confirming±Pages Confirming Pages Revised±Pages First±Pages Design±Pages for more ebook/ testbank/ solution manuals requests: email 960126734@qq.com

132 PART 2 BUSINESS OWNERSHIP: STARTING A SMALL BUSINESS that±quarter±and±franchisees±had±to±throw±away±up±to±50±percent±of±their±grilled± chicken±supplies. ± 4.± Coattail effects. ±What±happens±to±your±franchise±if±fellow±franchisees±fail?±The±actions± of±other±franchises±have±an±impact±on±your±future±growth±and±profitability.±Due±to±this± coattail effect, ±you±could±be±forced±out±of±business±even±if±your±particular±franchise±has± been±profitable.±For±example,±the±customer±passion±for±high-flying±franchisor±Krispy± Kreme±sank±as±the±market±became±flooded±with±new±stores±and±the±availability±of±the± product±at±retail±locations±caused±overexposure.±McDonald’s±and±Subway±franchisees± complain±that±due±to±the±company’s±relentless±growth,±some±new±stores±have±taken± business±away±from±existing±locations,±squeezing±franchisees’±profits±per±outlet. ± 5.± Restrictions on selling. ±Unlike±owners±of±private±businesses,±who±can±sell±their± companies±to±whomever±they±choose±on±their±own±terms,±many±franchisees±face± restrictions±on±the±resale±of±their±franchises.±To±control±quality,±franchisors±often± insist±on±approving±the±new±owner,±who±must±meet±their±standards. 31 ± 6.± Fraudulent franchisors. ±Most±franchisors±are±not±large±systems±like±McDonald’s±and± Subway.±Many±are±small,±rather±obscure±companies±that±prospective±franchisees±may± know±little±about.±Most±are±honest,±but±complaints±to±the±Federal±Trade±Commission± have±increased±about±franchisors±that±delivered±little±or±nothing±of±what±they± promised.±For±example,±new±restaurant±franchise±Burgerim±grew±from±zero±to±1,200± franchise±licenses±in±just±four±years.±Many±of±the±franchisees±were±inexperienced± and±underfinanced.±Unfortunately±when±the±company±couldn’t±handle±the±growth,±it± collapsed±and±the±owner±fled±the±country,±leaving±franchisees±with±unfinished±stores± and±heavy±loan±debt. 32 ±Before±you±buy±a±franchise,±make±certain±you±check±out±the± facts±fully±and±remember±the±old±adage±“You±get±what±you±pay±for.” Diversity in Franchising A±lingering±issue±in±franchising±is±the±number±of±women±who±own±franchises.±While±women± own±about±half±of±all±U.S.±companies±and±are±opening±businesses±at±double±the±rate±of±men,± their±ownership±of±franchises±is±only±about±35±percent.±However,±that±statistic±doesn’t±tell± the±whole±story;±female±franchise±ownership±has±grown±significantly±from±only±24±percent± a±decade±ago. 33 Women±aren’t±just±franchisees±anymore;±they’re±becoming±franchisors±as±well.±If±they± face±difficulty±getting±financing±for±growing±their±businesses,±turning±to±franchisees±to±help± carry±expansion±costs±can±help.±For±example,±top-rated±franchise±companies±like±Auntie± Anne’s,±Decorating±Den,±and±Build-A-Bear±Workshops±were±started±by±women. Franchisors±are±also±becoming±more±focused±on±recruiting±minority±franchisees.±Today± there±are±more±than±four±million±minority-owned±businesses± in±operation,±employing±almost±5±million±people±and±gen- erating±nearly±$591±billion±in±annual±revenue. 34 ±Minority± business± owners± started± more± than± 50± percent± of± the± 2± million±new±businesses±in±the±United±States±in±the±last±10± years. 35 ±In±order±to±draw±talented±entrepreneurs±like±these± to±franchising,±initiatives±like±DiversityFran±by±the±Inter- national±Franchise±Association±work±to±build±awareness±of± franchising± opportunities± within± minority± communities.± The±U.S.±Commerce±Department’s±Federal±Minority±Busi- ness±Development±Agency±also±provides±aspiring±minority± business±owners±with±training±in±how±to±run±franchises.± Some±franchisors±support±minority±ownership±programs± as± well.± For± example,± Dunkin’± Brands’s± Diversity± in± Franchising± Initiative± offers± financing± and± development± support±to±minorities±and±military±veterans. 36 Today± more± than± 30± percent± of± franchises± are± owned± by± African± Americans,± Latinos,± Asians,± and± Donna and Michelle Lewis, Painting with a Twist, Detroit Artists of all skill levels can bring a bottle of wine and join their friends for a relaxing, creative evening at Painting with a Twist. Michelle Lewis enjoyed her first visit so much that she partnered with her sister Donna to open a franchise in Detroit in 2009 followed by two more locations a couple of years later. What is the appeal of franchising to entrepreneurs like Michelle and Donna Lewis? CHAPTER 5 HOW TO FORM A BUSINESS 133 nic94851_ch05_112-141.indd 133± 09/21/20±±12:08±PM Native±Americans.±Less±than±19±percent±of±non-franchise±businesses±are±minority±owned. 37 ± Franchising±opportunities±seem±perfectly±attuned±to±the±needs±of±aspiring±minority±busi- nesspeople.±Minorities±may±choose±franchising±over±sole±proprietorship±because±they±have± limited± access± to± business± connections± and± support.± For± example,± after± Michelle± Lewis± spent±an±evening±at±a±Painting±with±a±Twist±studio,±a±paint-and-sip±franchise±where±guests± paint±“masterpieces”±as±they±sip±wine,±she±quit±her±job±as±an±architect±and±bought±a±fran- chise.±She±admits±that±she±was±concerned±about±not±having±what±it±takes±to±be±a±business± owner.±But±after±receiving±the±guidance±she±needed±to±be±successful,±she±now±owns±three± Painting±with±a±Twist±franchises±and±employs±30±people. 38 Home-Based Franchises Home-based±businesses±offer±many±obvious±advantages,±including±relief±from±the±stress±of± commuting,±extra±time±for±family±activities,±and±low±overhead±expenses.±One±disadvantage± is±the±feeling±of±isolation.±Compared±to±home-based±entrepreneurs,±home-based±franchisees± feel±less±isolated.±Experienced±franchisors±often±share±their±knowledge±of±building±a±profit- able±enterprise±with±other±franchisees. Home-based±franchises±can±be±started±for±as±little±as±$2,000.±Today±you±can±be±a±fran- chisee±in±areas±ranging±from±cleaning±services±to±tax±preparation,±child±care,±pet±care,±or± cruise±planning. 39 ±Before±investing±in±a±home-based±franchise±it±is±helpful±to±ask±yourself±the± following±questions:±Are±you±willing±to±put±in±long±hours?±Can±you±work±in±a±solitary±envi- ronment?±Are±you±motivated±and±well±organized?±Does±your±home±have±the±space±you±need± for±the±business?±Can±your±home±also±be±the±place±you±work?±It’s±also±important±to±check± out±the±franchisor±carefully. E-commerce in Franchising The± Internet± has± changed± franchising± in± many± ways.± Most± brick-and-mortar± franchises± have±expanded±their±businesses±online±and±created±virtual±storefronts±to±deliver±increased± value±to±customers.±Setting±up±a±website±is±one±of±the±best±ways±for±a±franchisee±to±increase± sales±quickly.±However,±many±franchisors±prohibit±franchisee-sponsored±websites±because± conflicts±can±erupt±if±the±franchisor±creates±its±own±website.±Sometimes±franchisors±send± “reverse±royalties”±to±franchisees±who±believe±their±sales±were±hurt±by±the±franchisor’s±online± sales,±but±that±doesn’t±always±bring±about±peace.±Before±buying±a±franchise,±read±the±small± print±regarding±online±sales. Using Technology in Franchising Franchisors±often±use±technology,±including±social±media,±to±extend±their±brands±and±meet± the±needs±of±both±their±customers±and±their±franchisees.±For±example,±Candy±Bouquet±Inter- national,± Inc.,± of± Little± Rock,± Arkansas,± offers± franchises± that± sell± candies± in± flowerlike± arrangements.±Franchisees±have±brick-and-mortar±locations±to±serve±walk-in±customers,±but± they±also±are±provided±leads±from±the±company’s±main±website.±All±franchisees±are±kept±up-to- date±daily±on±company±news±via±e-mail,±and±they±use±a±chat±room±to±discuss±issues±and±product± ideas±with±each±other.±Candy±Bouquet±International±now±has±300±locations±around±the±globe. 40 Franchising in Global Markets Franchising±today±is±truly±a±global±effort.±U.S.±franchisors±are±counting±their±profits±in±euros,± yuan,±pesos,±won,±krona,±baht,±yen,±and±many±other±currencies.±McDonald’s±has±more±than± 36,000±restaurants±in±over±100±countries±serving±an±estimated±69±million±customers±each±day. 41 Because±of±its±proximity±and±shared±language,±Canada±is±the±most±popular±target±for± U.S.-based±franchises.±Franchisors±are±finding±it±surprisingly±easier±now±to±move±into±China,± South±Africa,±the±Philippines,±and±the±Middle±East.±Plus±it’s±not±just±the±large±franchises± like±Subway±and±Marriott±Hotels±making±the±move.±Newer,±smaller±franchises±are±going± global±as±well.±Auntie±Anne’s±sells±hand-rolled±pretzels±in±more±than±25±countries±including± Test±File Rev.±Confirming±Pages Confirming Pages Revised±Pages First±Pages Design±Pages for more ebook/ testbank/ solution manuals requests: email 960126734@qq.com

136 PART 2 BUSINESS OWNERSHIP: STARTING A SMALL BUSINESS What is a master limited partnership? A±master±limited±partnership±is±a±partnership±that±acts±like±a±corporation±but±is±taxed±like±a± partnership. What are the advantages and disadvantages of partnerships? The±advantages±include±more±financial±resources,±shared±management±and±pooled/ complementary±skills±and±knowledge,±longer±survival,±and±no±special±taxes.±The± disadvantages±include±unlimited±liability,±division±of±profits,±disagreements±among±partners,± and±difficulty±of±termination. LO 5–3 Compare the advantages and disadvantages of corporations, and summarize the differences among C corporations, S corporations, and limited liability companies. What is the definition of a corporation? A±corporation±is±a±state-chartered±legal±entity±with±authority±to±act±and±have±liability± separate±from±its±owners. What are the advantages and disadvantages of corporations? nic94851_ch05_112-141.indd 137± 09/21/20±±12:08±PM CHAPTER 5 HOW TO FORM A BUSINESS 137 What is a franchisee? A±franchisee±is±a±person±who±buys±a±franchise. What are the benefits and drawbacks of being a franchisee? The±benefits±include±getting±management±and±marketing±assistance,±the±pride±of±personal± ownership,±a±nationally±recognized±name,±financial±advice±and±assistance,±and±lower±failure±rate. What is the major challenge to global franchises? It±is±often±difficult±to±transfer±an±idea±or±product±that±worked±well±in±the±United±States±to± another±culture.±It±is±essential±to±adapt±to±the±region. LO 5–6 Explain the role of cooperatives. What is the role of a cooperative? Cooperatives±are±organizations±owned±by±consumer-members.±Some±people±form±cooperatives± to±acquire±more±economic±power±than±they±would±have±as±individuals.±Small±businesses±often± form±cooperatives±to±gain±more±purchasing,±marketing,±or±product±development±strength. KEY TERMS acquisition 127 conglomerate merger 127 conventional (C) corporation 120 cooperative (co-op) 134 corporation 114 franchise 129 franchise agreement 129 franchisee 129 franchisor 129 general partner 116 general partnership 116 horizontal merger 127 leveraged buyout (LBO) 128 limited liability 117 limited liability company (LLC) 125 limited liability partnership (LLP) 117 limited partner 116 limited partnership 116 master limited partnership (MLP) 117 merger 127 partnership 114 S corporation 124 sole proprietorship 114 unlimited liability 115 vertical merger 127 CRITICAL THINKING Imagine±you±are±considering±starting±your±own±business. ± 1.± What±kinds±of±products±or±services±will±you±offer? ± 2.± What±talents±or±skills±do±you±need±to±run±the±business? ± 3.± Do±you±have±all±the±skills±and±resources±to±start±the±business,±or±will±you±need±to±find± one±or±more±partners?±If±so,±what±skills±would±your±partners±need±to±have? ± 4.± What±form±of±business±ownership±would±you±choose—sole±proprietorship,±partnership,± C±corporation,±S±corporation,±or±LLC?±Why? PUTTING PRINCIPLES TO WORK PURPOSE To±explore±franchising±opportunities±and±to±evaluate±the±strengths±and±weaknesses±of±a± selected±franchise. EXERCISE Go±to±Be±the±Boss±(betheboss.com). ± 1.± Use±the±search±tool±to±find±a±franchise±that±has±the±potential±of±fulfilling±your±entre- preneurial±dreams.±Navigate±to±the±profile±of±the±franchise±you±selected.±Explore±the± franchise’s±website±if±a±link±is±available.±Refer±to±the±questions±listed±in±Figure±5.9±in± this±chapter±and±assess±the±strengths±and±weaknesses±of±your±selected±franchise. ± 2.± Did±your±search±give±you±enough±information±to±answer±most±of±the±questions±in± Figure±5.9?±If±not,±what±other±information±do±you±need,±and±where±can±you±obtain±it? Test±File Rev.±Confirming±Pages Confirming Pages Revised±Pages First±Pages Design±Pages for more ebook/ testbank/ solution manuals requests: email 960126734@qq.com

138 PART 2 BUSINESS OWNERSHIP: STARTING A SMALL BUSINESS KEY: Team Analytic Communication Technology ± 1.± Research±businesses±in±your±area±and±identify±sole±proprietorships,±partnerships,± corporations,±and±franchises.±Arrange±interviews±with±managers±using±each±form±of± ownership±and±get±their±impressions,±hints,±and±warnings.±(If±you±are±able±to±work± with±a±team±of±fellow±students,±divide±the±interviews±among±team±members.)±How± much±does±it±cost±to±start?±How±many±hours±do±they±work?±What±are±the±specific± benefits?±Share±the±results±with±your±class. ± 2.± Have± you± thought± about± starting± your± own± business?± What± opportunities± seem± attractive?±Choose±someone±in±the±class±whom±you±might±want±for±a±partner±or± partners±in±the±business.±List±all±the±financial±resources±and±personal±skills±you±will± need±to±launch±the±business.±Then±make±separate±lists±of±the±personal±skills±and± the±financial±resources±that±you±and±your±partner(s)±might±bring±to±your±new±ven- ture.±How±much±capital±and±what±personal±skills±will±be±needed±beyond±those±you± already±have?±Develop±an±action±plan±for±needed±capital. ± 3.± Let’s±assume±you±want±to±open±one±of±the±following±new±businesses.±What±form±of± DEVELOPING CAREER SKILLS CAREER EXPLORATION Whether±you±choose±to±structure±your±business±as±a±sole± proprietorship,± partnership,± corporation,± or± LLC,± you± can±operate±in±any±industry±you±like.±Here±are±a±few±with± low±start-up±costs±to±consider.±Find±out±about±the±tasks± performed,± skills± needed,± and± opportunity± outlook± in± these±fields±in±the± Occupational Outlook Handbook (OOH) at±bls.gov. Graphic design service— communicate±ideas±that±inspire,±inform,±and±attract± consumers;±develops±the±overall±layout±and±production± nic94851_ch05_112-141.indd 139± 09/21/20±±12:08±PM CHAPTER 5 HOW TO FORM A BUSINESS 139 Every± year± more± than± a± half-million± new± businesses± are± launched±in±the±United±States.±Of±those±aspiring±businesses,± roughly±1±out±of±10±are±franchises.±Today,±franchising±has± clearly±found±its±place±in±virtually±every±form±of±business± including±health±clubs,±hotels,±gas±stations,±and±of±course,± restaurants.± In± 1960,± brothers± Tom± and± Jim± Monaghan± opened± DomiNick’s± Pizza± in± Ypsilanti,± Michigan,± as± a± partnership.±After±8±months,±Jim±decided±the±pizza±busi- ness±was±not±for±him±and±he±sold±his±share±of±the±business± to±his±brother±for±a±used±Volkswagen±Beetle.±It±was±hard± to±imagine±then±that±Tom±Monaghan’s±sole±proprietorship± pizza±business±would±grow±from±DomiNick’s±to±Domino’s± and±create±a±franchise±empire±with±more±than±13,000±stores± in±80±countries±on±6±continents. Starting±any±business±from±scratch±is±a±difficult,±risky,± and±time-consuming±effort.±After±opening±a±new±restaurant,± it±can±take±many±years±to±develop±the±correct±product±line± and±build±a±loyal±customer±base.±With±over±50±years’±experi- ence,±an±established±product,±and±a±respected±brand±name,± Domino’s± has± already± built± its± reputation± in± the± market.± That’s± the± key± reason± why± many± aspiring± businesspeople± seek±to±open±a±Domino’s±franchise±rather±than±attempting± to±open±a±restaurant±on±their±own.±With±a±brand±like±Domi- no’s,±a±franchisee±can±hit±the±market±full±speed±ahead±with±a± proven±business±model±and±product±offerings±that±are±tried± and±tested. Proven±franchise±systems±such±as±Domino’s±also±offer± franchisees± valuable± training± as± well± as± management± and± marketing± assistance.± Domino’s± knows± that± for± the± com- pany±to±succeed,±it’s±vital±that±its±franchisees±be±successful.± Valuable± company± promotions,± including± advertising,± in- store±displays,±and±coupon±programs,±let±franchisees±focus± on±running±their±businesses±without±having±to±worry±about± developing± expensive± promotions± to± attract± customers.± Since±location±is±such±a±crucial±component±in±a±restaurant’s± ® VIDEO CASE Domino’s Still Rolling in the Dough success,± Domino’s± assists± franchisees± with± securing± the± proper±location±for±their±businesses. While±the±United±States±remains±the±company’s±largest± market,±over±5,000±Domino’s±Pizza±locations±can±be±found± around±the±globe.±While±the±menus±may±be±different,±and± some±of±the±toppings±a±bit±unique±to±U.S.±tastes,±Domino’s± remains± dedicated± to± its± single-brand± image,± quality± con- trol,± and± same± core± strategy.± All± aspects± from± uniforms,± store±layouts,±training±programs,±supplier±approval±systems,± and± ordering± systems± remain± the± same.± But± even± though± Domino’s±remains±committed±to±its±successful±system±and± business±model,±the±company±is±always±open±to±adapting±its± product±to±meet±the±wants±and±needs±of±its±consumers.±This± is±especially±true±in±global±markets±where±consumer±tastes± and±expectations±can±be±very±different. Today,±as±technology±changes±many±aspects±of±business,± Domino’s± has± provided± franchisees± with± innovative± order- ing±platforms±including±Facebook±Messenger,±Apple±Watch,± Amazon± Echo,± Twitter,± and± a± text± message± with± a± pizza± emoji.± To± ensure± the± efficiency± of± its± technology± system,± Domino’s±Tracker±follows±a±pizza±order±from±when±it±arrives± in±the±store±to±when±it±heads±out±the±door±for±delivery. The± franchise± system± has± been± called± the± greatest± business± model± ever± developed.± Domino’s± has± had± pizza± delivery±drivers±and±pizza±makers±become±part±of±the±Dom- ino’s±family±of±franchisees±and±live±the±dream±of±this±great± business±model. THINKING IT OVER ± 1.± Why±do±franchises±like±Domino’s±have±a±lower±busi- ness±failure±rate±than±businesses±started±from±scratch? ± 2.± How±is±a±franchise±different±from±a±partnership? ± 3.± What±important±questions±should±you±ask±before± becoming±a±franchisee±in±a±company±like±Domino’s? NOTES 1. Small Business Administration, sba.com, accessed February 2020. 2. James Chen, “Master Limited Partnership,” Investopedia, investopedia.com, August 28, 2019; Ned Piplovic, “7 Best MLP Stocks to Buy Now,” DividendInvestor, dividendinvestor.com, January 16, 2020. 3. Sunoco, sunoco.com, accessed February 2020. 4. Internal Revenue Service, irs.gov, accessed February 2020; John Hall, “How Love Can Be One of the Biggest Drivers of Business Success,” Forbes, forbes.com, February 9, 2020. 5. Bureau of Labor Statistics, bls.gov, accessed February 2020. 6. Sam Ashe-Edmunds, “Importance of Partnership Agreement,” Small Business Chronicle, smallbusiness.chron.com, accessed February 2020. 7. Joshua Kennon, “The Role and Duties of a Corporate Board of Directors,” The Balance, thebalance.com, Test±File Rev.±Confirming±Pages Confirming Pages Revised±Pages First±Pages Design±Pages for more ebook/ testbank/ solution manuals requests: email 960126734@qq.com