Chapter 4: Forms of Business
Ownership and Franchising
Objectives |
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Upon completion of this chapter, you will be able to:
- Explain the advantages and the disadvantages of the three major forms of
ownership: the sole proprietorship, the partnership, and the corporation.
- Discuss the advantages and the disadvantages of the S corporation, the
Limited Liability Company, the professional corporation, and the joint venture.
- Describe the three types of franchising: tradename, product distribution,
and pure.
- Explain the benefits and the drawbacks of buying a franchise.
- Understand the laws covering franchise purchases.
- Discuss the right way to buy a franchise.
- Outline the major trends shaping franchising
Chapter 4: Forms of Business
Ownership and Franchising
Chapter Overview
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- A. Explain the advantages and the disadvantages of the sole
proprietorship.
- A sole proprietorship is a business owned and managed by one individual and
is the most popular form of ownership.
- Sole proprietorships offer these advantages: They are simple to
create; they are the least costly form to begin; the owner has total
decision-making authority; there are no special legal restrictions; and they are
easy to discontinue.
- They also suffer from these disadvantages: unlimited personal
liability of owner; limited managerial skills and capabilities; limited access
to capital; lack of continuity.
B. Explain the advantages and the disadvantages of the partnership.
- A partnership is an association of two or more people who co-own a business
for the purpose of making a profit. Partnerships offer these advantages:
ease of establishing; complementary skills of partners; division of profits;
larger pool of capital available; ability to attract limited partners; little
government regulation flexibility; and tax advantages.
- Partnerships suffer from these disadvantages: unlimited liability of
at least one partner; difficulty in disposing of partnership; interest lack of
continuity; potential for personality and authority conflicts; and partners
bound by the law of agency.
C. Explain the advantages and the disadvantages of the corporation.
- A corporation, the most complex of the three basic forms of ownership, is a
separate legal entity. To form a corporation, an entrepreneur must file the
articles of incorporation with the state in which the company will incorporate.
Corporations offer these advantages: limited liability of stockholders;
ability to attract capital; ability to continue indefinitely; and transferable
ownership.
- Corporations suffer from these disadvantages: cost and time involved
in incorporating; double taxation; potential for diminished managerial
incentives; legal requirements and regulatory red tape; and potential loss of
control by the founder(s).
- Discuss the advantages and the disadvantages of the S corporation,
the Limited Liability Company, the professional corporation, and the joint
venture.
- Entrepreneurs can also choose from several other forms of ownership,
including S Corporations, and limited liability companies. An S Corporation
offers its owners limited liability protection but avoids the double taxation of
C Corporations.
- A Limited Liability Company, like an S Corporation, is a cross between a
partnership and a corporation, yet is operates without the restrictions imposed
on an S Corporation. To create an LLC, an entrepreneur must file the articles of
organization and the operating agreement with the secretary of state.
- A professional corporation offers professionals the benefits of the
corporate form of ownership.
- A joint venture is like a partnership, except that it is formed for a
specific purpose.
- Describe the three types of franchising: tradename, product
distribution, and pure.
- Tradename franchising involves a franchisee purchasing the right to become
affiliated with a franchiser's tradename without distributing its products
exclusively.
- Product distribution franchising involves licensing a franchisee to sell
products or services under the franchiser's brand name through a selective,
limited distribution network.
- Pure franchising involves a selling a franchisee a complete business format.
- Explain the benefits and the drawbacks of buying a franchise.
- Franchises offer many benefits: management training and support; brand name
appeal; standardized quality of goods and services; national advertising
programs; financial assistance; proven products and business formats;
centralized buying power; territorial protection; and a greater chance of
success.
- Franchising also suffers from certain drawbacks: franchise fees and profit
sharing; strict adherence to standardized operations; restrictions on
purchasing; limited product lines; unsatisfactory training programs; market
saturation; and less freedom.
- Understand the laws covering franchise purchases.
- The Federal Trade Commission (FTC) enacted the Trade Regulation Rule in
1979, which requires all franchisers to disclose detailed information on their
operations at the first personal meeting or at least ten days before a franchise
contract is signed, or before any money is paid. The FTC rule covers all
franchisers. The Trade regulation Rule requires franchisers to provide
information on 23 topics in their disclosure statements.
- Seventeen states have passed their own franchise laws requiring franchisers
to provide prospective franchisees a Uniform Franchise Offering Circular (UFOC).
- Discuss the right way to buy a franchise.
- The following steps will help you make the right franchise choice: Evaluate
yourself; research your market; consider your franchise options; get a copy of
the franchiser's UFOC; talk to existing franchisees; ask the franchiser some
tough questions; make your choice.
- Outline the major trends shaping franchising.
- Key trends shaping franchising today include: the changing face of
franchisees, international franchise opportunities, smaller, non-traditional
locations, conversion franchising, multiple-unit franchising, master
franchising, and piggybacking (or combination franchising).
Chapter 4: The Foundations of
Entrepreneurship
Small Business
Assignments |
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Select 5 from the following questions:
1. What factors should you consider before choosing a form of
ownership?
2. Why are sole proprietorships so popular as a form of ownership?
3. How does personal conflict affect partnerships?
4. Can one partner commit another to a business deal without the other's
consent? Why?
5. What role do limited partners play in a partnership? What
happens if a limited partner takes an active role in managing the business?
6. How is an LLC created? What criteria must an LLC meet to avoid
double taxation?
7. Outline the advantages and disadvantages of the major forms of
business ownership
8. Describe the three types of franchising and give an example of each
Chapter 4: Forms of Business
Ownership and Franchising
Small Business Links
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Forms of Ownership
Franchising