Chapter 5Types of BusinessesStarting a BusinessChoosing an Organizational Form

Who are the Entrepreneurs?Mark Zuckerburg – Facebook

Mitchell and Mollie Murphree – ◦Five Senses Restaurant

Mark Davis◦Insert Therapeutics

Setting Up Your Small Business

Choose a legal form of business and register it with the government.

Make a business plan◦Especially if you plan to go for a loan

or attract an investor.

Visit your local TSBDC and SCORE offices.

What Is a Form of Business, and Why Do We Need to Choose One?

Our government does keep tabs on businesses, for the consumer’s sake.

◦ A legal form of business is a way of describing how the business is treated for tax and legal purposes.

◦ Getting some tax and legal benefits means you give up others – you decide which form is best.

Option 1: Sole ProprietorThe most common form of ownership

You are the business.Only one owner is allowed.

◦With 2, you become a partnership.No limitation of liability.

◦People can sue you for everything you own.Net income from the business is treated

as your personal income.◦Goes into line on the 1040.

Must file for business license in TN.

Option 2: Partnerships2 or more ownersNo limited liability

◦Exception: General vs. limited partnerships

More likely to survive than sole prop.◦Why?

Division of profits, liability, and conflicts are the downside◦Partnership agreements can help with this.

Special Types of Partnerships Limited Partnerships

◦General and limited partners◦Limited partners cannot manage

“Silent partners” – cannot work over 500 hours per year in the business

MLP◦Master Limited Partnership

Can be publicly traded

LLP◦Limited Liability Partnership

Only liable for your own mistakes and those under your supervision

Review QuestionsWhat is the main difference

between a sole proprietorship and a partnership?

What is unlimited liability?

How are sole proprietorships and partnerships taxed?

Option 3: CorporationsExist separately from ownerRepresent over 70% of U.S. revenues

◦Should tell you something about sole proprietorships!

S and C – different tax treatment and ownership allowances

Perpetual lifeMore red tape and money to start up

($100 extra just in fees from TN)

Option 4: Limited Liability Companies (LLCs)Very much like S-corporationCan be taxed as self-employmentUsually for professionalsFlexible distribution of profitMust have approval of other

owners to sell outMust dissolve by deadline; dies

with owners

Growing a CorporationCould be done through public

offering

Could be done through◦Merger (two companies form a new

legal entity, combining into one)◦Acquisition (one company buys the

other’s stock)

Types of MergersVertical mergers:

◦Mergers between suppliers and purchasers

Horizontal mergers:◦Mergers between companies in the same

industry (AOL-Time Warner)

Conglomerate mergers:◦Unite firms in different industries (Walt

Disney and ABC)◦Don’t usually generate extra value for

investors!

Franchises

One firm already has a successful product or service

Offers its trademarks and patented business processes to another for…

Initial franchise fee and ongoing royalties

Still have to pick a legal form

Franchise Opportunities

Pros and Cons of FranchisesPros

◦ Assistance with operations

◦ Motivation to excel vs. being an employee

◦ Instant brand image

◦ Lower failure

Cons◦ Larger start-up

costs◦ Royalties◦ Control of parent

company◦ No control over

other franchise locations

Cooperatives

Formed for increased purchasing or marketing power

MTEMC is a cooperative◦ Owned by the users of the electricity

Farm cooperatives◦ Farmers band together to get better pricing

Each member has one vote

Other examples? Ace Hardware, Ocean Spray, True Value Hardware

Ways that Companies GrowMergers

◦Vertical◦Horizontal◦Conglomerate

Acquisitions

Leveraged Buyout (not growth, but ownership change)