Lecture 9

Chapter 4- forms of business ownership and franchising.

Seven critical considerations which normally comprise the basis of review and evaluation prior to the
final selection of the forms of ownership:

1. Tax consideration.
2. Liability exposure.
3. Start-up capital requirements.
4. Control
5. Business goals
6. Management succession plan.
7. Cost of formation.

Sole proprietorship-
Sole proprietorship- a business owned and managed by one individual

Advantages-

 Simple to create

 Least costly form of ownership to begin

 Profit incentives

 Total decision making authority

 No special legal restriction.

 Easy to discontinue

Disadvantages-

 Unlimited personal liability

 Limited skills and capabilities

 Feelings of isolation

 Limited access to capital

 Lack of continuity for the business.

The partnership
The partnership- an association of two or more people who co-own a business for the purpose of making
a profit.
Advantages-

 Easy to establish

 Complementary skills

 Divisions of profits

 Larger pool of capital

 Ability to attract limited partners.

 Little governmental regulations

 Flexibility

 Taxation

Disadvantages:

 Unlimited liability of at least one partners

 Capital accumulation.

 Difficulty in disposing of partnership interest without dissolving the partnership.

 Lack of continuity.

 Potential for personality and authority conflicts.

 Lecture 10

Corporations
Corporations- a separate legal entry apart from its owners that reserves the right to exist from the state in
which it is incorporated

Domestic Corporation- a corporation doing business in the state in which it is incorporated.

Foreign Corporation- a corporation doing business in a state other than the one in which it is
incorporated.

Alien corporation- a corporation formed in another country but doing business in the United States,

Advantages-

 Limited liabilities to the shareholders.

 Ability to attract capital

 Ability to continue indefinitely

 \transferable ownership

Disadvantages-

 Cost and time involved in the incorporation process

 Double taxation.

 Potential for diminished managerial incentives.

 Legal requirements and regulatory red tape.

 Potential loss of control by the founders.

Franchising
Franchising- a system of distribution in which semi independent business owners ( franchises) pay fees
and royalties to apparent company (franchiser) in return for the right to become identified with its
trademark, to sell its products or services, and often to use its business formats and system.

Types of franchising-

1. Trade name franchising- a system of franchising in which a franchisee purchases the right to use
the franchiser’s trade name without distributing particular products under the franchisers’ name.
 2. Product distribution franchising- a system of franchising in which a franchiser licenses a
franchise to sell its product under the franchisers’ brand name and trademark through a selective,
limited distribution network.

3. Pure franchising- a system of franchising in which a franchiser sell a franchise a complete

business format and system.

Question- write down the differences among the various types of franchising?

The benefit-

 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

 Site selection and territorial protection

 Greater chance for success.

Drawbacks-

 Franchising fees and profit sharing

 Strict adherence to standardized operations

 Restriction on purchasing

 Limited product line

 Unsatisfactory training program

 Market saturation

 Less freedom

Sample question-

 How does personal conflict affect partnership?

 Why might independent entrepreneur be dissatisfied with franchising arrangements?