CHAPTER 6: BUSINESS

FORMATION SECTION 4D - 6
Blue 10/31/23
Gold 11/01/23
 Chapter 6…so far
● What is a sole proprietorship?
○ advantages
○ disadvantages
● What is a partnership?
○ how many owners can there be?
● What are the owners of a corporation
called?
○ are all corporations large?
 Learning Objectives

▣ 6-4 Explain why corporations have become the

dominant form of business ownership

▣ 6-5 Explain why Limited Liability Companies

are becoming an increasingly popular form of
business

▣ 6-6 Evaluate the advantages and disadvantages

of franchising
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6-4d Advantages of C Corporations
▣ Limited Liability
◼ Stockholders not personally responsible
◼ Corp goes bankrupt, stocks useless
▣ Permanence
◼ Corporation continues to operate as long as
financially viable
◼ Unaffected by death of owner
▣ Ease of Transfer of Ownership
◼ Easy to publicly trade or withdraw
◼ Simply just sell your stock

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 Advantages of C Corporations
▣ Ability to Raise Large Amounts of Financial
Capital
◼ Issue shares of stocks
◼ Corporate Bonds (formal IOUs)
◼ Ex. Zoom raised $1.75 billion by selling 5.15 million
shares
▣ Ability to Make use of Specialized Management
◼ Easier than Sole or Partnership
◼ Offer attractive salaries and benefits
◼ Permanence and potential for growth (career
advancement)
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6-4e Disadvantages of C Corporations

▣ Expense and Complexity of Formation and

Operation
◼ More formal requirements
◼ Required to hold regular board
meetings
◼ Keep accurate minutes
▣ Complications When Operating in More than
One State
◼ Incorporated in one, business in another
◼ “Domestic” – state it’s incorporated in
◼ “Foreign” – other states it does business in
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 Disadvantages of C Corporations
▣ Complications in more than one state (cont)
◼ Register to do business in other states
🢭 Paperwork, fees, taxes (if substantial business)
◼ Ex. Operating a production facility or maintain
corporate office
🢭 Register as foreign corporation
◼ Ex. Firm holding bank account or solicit sales by
mail to customers in another state
🢭 Not required to register

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 Disadvantages of C Corporations
▣ Double Taxation on Earnings and Additional
Taxes
◼ IRS considers C Corp separate entity
🢭 Taxed on income
◼ Dividends are then taxed again
🢭 Personal income tax of stockholders
◼ Corporations often reinvest money
🢭 Retained earnings aren’t taxed on shareholders

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 Disadvantages of C Corporations
▣ More Paperwork, More Regulation, Less
Secrecy
◼ More closely regulated
◼ File more government paperwork
◼ Large publicly traded Corporations
🢭 Send annual statements to all shareholders
🢭 File other detailed reports
🢝 10-Q (quarterly)
🢝 10-K (annually. Filed with SEC, 100s of pages)
🢝 8-K (current reports)

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 Disadvantages of C Corporations
▣ Possible Conflict of Interest
◼ Corporate officers appointed by board
◼ Some top executives may pursue policies to further
their own interests at the expense of stockholders
🢭 Prestige
🢭 Power
🢭 Job security
🢭 High pay
🢭 Perks
◼ Boards approve high compensation for top execs,
even when company underperforms

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6-4f Other Types of Corporations
▣ Three other types
◼ S Corporations
◼ Statutory Close Corporations
◼ Nonprofit Corporations

▣ Each created by filing paperwork with government

agency

▣ Separate Legal Entities

◼ Enter contracts
◼ Own property
◼ Take legal action
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Exhibit 6.5 Other Corporations

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 Corporate Restructuring
▣ Large Corporations look to grow even larger

▣ This is achieved by several different methods

◼ Mergers
◼ Acquisitions
◼ Divestitures

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 Mergers And Acquisitions
▣ Acquisition
◼ One firm buys another firm
◼ Ex. Microsoft buying Bethesda Softworks
🢭 Expand Xbox Game Studios
🢭 Microsoft – “acquiring firm”
🢭 Bethesda – “target firm”
🢝 After purchase, target firm ceases to exist independently
🢝 Purchase firm operates, stock still traded
◼ Not all acquisitions are friendly
🢭 “hostile takeover”
🢝 Acquiring firm buys despite opposition from board and
top management
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 Mergers and Acquisitions
▣ Merger – two companies agree to a
combination of equals, joining together to form
a new company out of two previously
independent firms
▣ Ex. Knight Transportation/Swift Transporation
◼ Largest trucking company in US
◼ Maintained distinct brands, but merged
management and operations
◼ Became Knight-Swift Transportation Holdings Inc.

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Exhibit 6.6

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 Divestitures
▣ Restructuring by subtraction
◼ Divestiture occurs when a firm transfers total or
partial ownership of some of its operations to
investors to another company
▣ Used to rid themselves of parts of companies
▣ Sale of assets to outsiders
◼ Raises financial capital
◼ Pay off debts

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 Divestitures
▣ “Spin-Off” – common type
◼ Company issues stock to own divisions
◼ Sets up separate company
◼ Distributes stock to existing shareholders
🢭 Own 2 companies instead of one
🢭 Buy, sell, hold as they see fit
▣ “Carve-Out”
◼ Similar to spin-off
🢭 Converts unit into separate company
◼ Difference from spin-off
🢭 Doesn’t distribute to current stockholders
🢭 Sells to outside investors
🢭 Raises additional capital
🢭 Sells minority of total shares
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 6-5 Limited Liability Company
▣ Newest form of business
◼ Many States have made it easier
◼ Transfer ownership is easier
◼ Other states have kept restrictions

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6-5a Forming and Managing an LLC
▣ Similar to forming Corporation
◼ Documents need filed
🢭 Certificate of Organization
🢭 Articles of Organization
◼ Pay filing fees
◼ Draft agreement (similar to Corporate Bylaws)
◼ Some states require publishing intent to operate
▣ Owners called members
◼ Not stockholders or partners
◼ Members manage own company
🢭 Similar to general partnership
🢭 Some LLCs hire professional managers (CEO, top officers)
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 6-5b Advantages of LLC
▣ Limited Liability
◼ Similar to Corporation, extends to all owners
▣ Tax Pass-Through
◼ Sole proprietorship as one owner
◼ Treat taxes as Corp or Partnership
🢭 Default Partnership (most common)
🢭 No separate tax on earnings
🢭 “pass-through” – taxed as income
🢭 Eliminates double taxation of Corp

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 Advantages of LLC
▣ Simplicity and Flexibility in Management and
Operation
◼ No board meetings
◼ Less paperwork
◼ Fewer reporting requirements

▣ Flexible Ownership
◼ Unlike S Corp, LLCs can have a number of owners
◼ Owners can include foreign investors
🢭 Some states make it difficult to transfer ownership to
outsiders
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 6-5c Limitations and Disadvantages of
LLC
▣ Complexity of Formation
◼ Takes more time and effort
◼ File fees, file articles of organization
▣ Annual Franchise Tax
◼ Required to be paid by states
▣ Foreign Status in Other States
◼ LLCs register to qualify to operate in other states
◼ Additional paperwork, fees, taxes
▣ Limits on Types of Firms
◼ No banks, insurance companies, nonprofits
▣ Differences in State Laws
◼ Requirements vary
◼ Operating in multiple states is complex (until uniformity)
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 6-6 Franchising: Proven Methods for a
Price
▣ Franchise is a licensing agreement under
which one party (franchisor) allows another
party (franchisee) to use its name, trademark,
patents, copyrights, business methods, and
other property in exchange for monetary
payments and other considerations
▣ International Franchise Association (U.S. stats)
◼ 732,000 US businesses are franchises
◼ 8% of private sector jobs, 7.6 million employees
◼ 13.2 million jobs by companies supporting franchise
◼ 5.3% of private GDP
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Franchising: Proven Methods for a Price
▣ Distributorships
◼ Franchisor makes a product and grants distributors license
to sell it
◼ Common: Automakers and car dealerships

▣ Business Format Franchise

◼ Franchisor grants right to both make and
sell its good or service
◼ Franchisor provides range of services to franchisee
🢭 Site selection
🢭 Training
🢭 financing
◼ Examples: Domino’s, Subway, Baskin-Robbins
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6-6a Franchising in Today’s Economy

▣ Associated with restaurant, but any kind of

business can be a franchise
◼ Ex. Century 21 Real Estate
▣ Big Trend – Expansion into foreign markets
◼ Competition is less intense
◼ Markets are less saturated
🢭 Ex. McD 23,196 foreign outlets
🢝 10,021 more than in United States
◼ Can pose challenges
🢭 Differences in culture, laws, demographics, economic
development

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 Franchising in Today’s Economy
▣ Trend – growth in Women franchisees
◼ 26% owned by women
◼ 24% increase from 10 years ago
◼ Last two years, 41% started by women

▣ Minority participation growing consistently over

last 20 years
◼ African Americans, Hispanics, Asian Americans,
Native Americans make up 32% of population
🢭 Own 30% of franchises
🢭 Up 20% from 2016
🢭 Non-franchised businesses have 18% ownership
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 6-6b Advantages of Franchising
▣ Allows franchisor to expand
▣ Less Risk
◼ Franchise offers access to proven system
◼ Franchisor has proven track record
◼ Shorter path to start business than ground zero
▣ Training and Support
◼ Franchisor provides
◼ Franchisor sends out newsletters, phone support,
internet support, on-site evaluations

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 Advantages of Franchising
▣ Brand Recognition
◼ Instant brand-name recognition
◼ Attracts customers

▣ Easier Access to Funding

◼ Bankers and other lenders may be more willing to
lend money
◼ Not new or unproven

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 6-6c Disadvantages of Franchises
▣ Costs –initial fee
◼ Ongoing royalty and other fees (ex. Advertising)

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 Disadvantages of Franchises
▣ Lack of Control
◼ Follow procedures to the LETTER
▣ Negative Halo Effect
◼ Incompetence affects all franchises
▣ Growth Challenges
◼ Strings attached to grow (territories)
◼ Approval before expansion
▣ Restrictions on Sale – approval before selling
▣ Poor Execution
◼ Not all Franchisors live up to promises
◼ Poor job of screening franchisees
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6-6d Entering Franchise Agreement
▣ Franchisee must sign franchise agreement
◼ Legally binding
▣ Terms and Conditions
◼ Right to use trademarks, patents, signage, etc.
◼ Length of agreement (renewal costs)
▣ Fees and Other Payments
◼ Right to use products
◼ When payments are due
▣ Training and Support – types provided
▣ Specific Operational Requirements
◼ Established by franchisor
◼ Followed by franchisee
▣ Conflict Resolution –how to handle disputes
▣ Assigned Territory – geographic area
◼ Whether or not franchisee has exclusive rights to the area
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 Entering Franchise Agreement
▣ FTC (Federal Trade Commission)
▣ Requires franchisor to provide franchisee with
Franchise Disclosure Document
◼ 23 major topics
◼ Cover 100 pages
◼ Invaluable source for info
🢭 100 franchisee contact info
◼ Written in “plain english”
🢭 No jargon
🢭 Easy to understand
◼ Minimum 14 calendar days to review before signing
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 Canvas Assignments
▣ Please complete the guided notes for Chapter 6,
Sections 4d – 6 for today. This is an online
submission. Please take a screenshot or picture
of your finished notes for credit (5 pts)

▣ Please complete the LearnIt 6-4, 6-5, and 6-6

questions. The link is on Canvas. You have
multiple attempts to get each question correct.

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