Introduction to Business

Module 7:

Business Ownership

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1

Affirmations

• I am a lifelong learner, constantly seeking knowledge and wisdom.
• I am taking positive steps to advance my goals.
• I can learn from situations that make me feel challenged.

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Owning a Business, Sole Proprietorship

• Understand the factors that go into choosing the best organizational type for your business
• Understand the advantages and disadvantages of sole proprietorship

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Choosing a Business Structure

• Cost of start up
• Control vs. responsibility
• Do you want to share the profits?
• Taxation
• Entrepreneurial ability
• Risk tolerance
• Financing
• Continuity and transferability

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Sole Proprietorship

Owned and run by one person

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1 There is no distinction between the business and the owner

2 The owner is entitled to all business profits and is

responsible for all business debts, losses, and liabilities

3 The simplest and most common legal structure for a business

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Advantages and Disadvantages of Sole Proprietorship

Advantages

• Easy and inexpensive to form
• Profits all go to owner
• Direct control of the business
• Freedom from government regulation
• No special taxation
• Ease of dissolution

Disadvantages

• Unlimited personal liability for the sole proprietor
• Difficulty raising capital
• Limited managerial expertise
• Trouble finding qualified employees
• Personal time commitment
• Unstable business life
• Losses are the owner’s responsibility

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Partnerships

• Understand the difference between general and limited partnerships
• Understand the advantages and disadvantages of partnerships
• Understand the advantages and disadvantages of a limited liability partnership (LLP)

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General & Limited Partnerships

Partnerships are businesses in which two or more people share ownership and responsibility.

General Partnership

• Assume that profits, liability, and management duties are divided equally among partners.
• If you opt for unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.

Limited Partnerships

• Also called limited liability partnerships (LLP)
• More complex than general partnerships.
• Allow partners to have limited liability as well as limited input with management decisions.
• Limited partnerships are attractive to investors of short-term projects.

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Forming a Partnership

To form a partnership, you must:

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1 Register your business with the state

2 Establish your business name

3 Once your business is registered, you must

also obtain licenses and permits

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Advantages and Disadvantages of Partnerships

Advantages

• Easy and inexpensive to form
• Shared financial commitment among partners
• Complementary skills / utilize the expertise of each partner
• Partnership incentives for employees

Disadvantages

• Joint and individual liability
• Disagreements among partners
• Shared profits

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Limited Liability Partnership (LLP)

A partnership in which some or all partners have limited liabilities

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1 One partner is not responsible or liable for another partner’s

misconduct or negligence

2 Some states require one partner to be a “general partner” with unlimited liability

3 Partners may manage the company directly without electing a board of directors

4 Profits are allocated among the partners for tax purposes, avoiding the

problem of “double taxation” often found in corporations

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Advantages and Disadvantages of LLPs

Advantages

• Single taxation: The credits and deductions of the company are passed through to partners to file on their individual tax returns.
• Limited liability: The LLP structure protects individual limited partners from personal liability for negligent acts of other partners or employees not under their direct control.
• Flexibility: LLPs provide the partners flexibility in business ownership.

Disadvantages

• Duration: The business life of an LLP is unstable.
• Limitations of formation: Limited liability partnerships are not recognized as legal business structures in every state.
• Partner control: If an LLP is formed without a limited liability partnership agreement, individual partners are not obligated to consult with other participants in certain business agreements.

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Corporations

• Understand the differences between C and S corporations
• Understand what a benefit corporation is
• Understand the advantages and disadvantages of corporations
• Understand the advantages and disadvantages of a limited liability company (LLC)

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Types of Corporations

1. C corporations
2. S corporations
3. B corporations

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C Corporations

Independent legal entities owned by shareholders

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1 More complex than other business structures because of � administrative fees and legal requirements

2 It is a separate tax paying entity, unlike sole proprietorships � or partnerships

3 Income paid as dividends is taxed twice

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Advantages and Disadvantages of C Corps

Advantages

• Limited liability: shareholder’s personal assets are protected. Shareholders can generally only be held responsible for their investment in stock in the company
• Ability to generate capital through sale of stock
• Corporate tax treatment: Corporations file taxes separately from their owners.
• Attractive to potential employees

Disadvantages

• Time and money: costly and time consuming to start and operate
• Double taxing: In some cases, corporations are taxed twice—first, when the company makes a profit, and again when dividends are paid to shareholders.
• Additional paperwork: There are increased paperwork and record-keeping burdens associated with this entity.

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S Corporations

Special type of corporation created through an IRS tax election

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1 Avoid double taxation by electing to be treated as an S corporation

2 Profits and losses can pass through to your personal tax return

3 The business is not taxed; instead, only the shareholders are taxed

4 Any shareholder who works for the company must pay

themselves a “reasonable compensation”

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Advantages and Disadvantages of S Corps

Advantages

• Tax savings: Only the wages of the S corp shareholder who is an employee are subject to employment tax.
• Business expense tax credits: Some expenses that shareholder/employees incur can be written off as business expenses.
• Independent life: An S corp designation also allows a business to have an independent life, separate from its shareholders.

Disadvantages

• Stricter operational processes: As a separate structure, S corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers, and records maintenance.
• Shareholder compensation requirements: A shareholder must receive reasonable compensation.

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Benefit (B) Corporations

Type of for-profit corporate entity, authorized by 30 U.S. states and the District of Columbia, that creates a general public benefit, which is defined as a material positive impact on society and the environment.

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1 The positive impact can be on society, workers, or the environment

2 Transparency provisions require benefit corporations to publish annual

benefit reports on their social and environmental performance using a

comprehensive, credible, independent, and transparent third-party-standard

3 Differ from traditional C corporations in purpose, accountability, and

transparency, but not in taxation. B Corps elect to be taxed as a C or an S corp.

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Advantages and Disadvantages of B Corps

Advantages

• Protection of mission: Becoming a B Corp gives companies more options and protections if they decide to sell the business to someone else or take it public
• Reputation: B Corps stand out as businesses that have a social conscience and aspire to a standard they consider higher than maximizing profit
• Creation of value: B Corps may create value via employee engagement and customer loyalty, thereby improving results for all stakeholders

Disadvantages

• Transparency and reporting requirements: B Corps must provide an annual benefit report according to a third-party standard and make the report available on their company Websites.
• Annual fees to retain certified B Corp status
• Compliance and governance obligations: Most states require publicly traded companies with a B corp designation to have a “benefit director” who is responsible for ensuring that the corporation meets its stated public purpose.

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Limited Liability Company (LLC)

Hybrid business structure allowed by state statute

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1 Provides the limited liability features of a corporation

2 Provides tax efficiencies and operational flexibility of partnerships

3 Owners of an LLC are called members

4 LLCs are not taxed as a separate business entity: instead profits

and losses are “passed through” the business to each member

of the LLC

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Advantages and Disadvantages of LLCs

Advantages

• Limited Liability: Members are protected from personal liability for business decisions
• Less Record Keeping compared to an S Corporation
• Sharing of Profits: Members distribute profits as they see fit. It’s up to the members to decide who has earned what percentage of the profits or losses

Disadvantages

• Possible Limited Life: When an LLC is formed, the members must decide on the duration of the LLC.
• Self Employment Taxes: Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security.

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Identify Business Structures

When it comes to opening a new business, what do you value most?

• Maintaining control
• Risk aversion
• Accepting personal responsibility (the positive and the negative)

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Discuss

Identify all possibilities and decide which organizational type would be most suitable to the business owner(s).

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Franchises

• Understand what a franchise is
• Understand the advantages and disadvantages for franchisors

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Franchisor and Franchisee

A franchise is a business model that involves one business owner (the franchisor) licensing trademarks and methods to an independent entrepreneur (the franchisee) for a prescribed period of time.

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Advantages and Disadvantages for the Franchisee

Advantages

• Less risk
• Name/brand recognition: The franchise has an established image and identity already, which can reduce or simplify marketing efforts.
• Access to expertise, ongoing support: Franchisee often receives help with site selection, training materials, product supply, and marketing plans.
• Relative autonomy

Disadvantages

• Cost: Buying and running a franchise can be very expensive.
• Unequal partnership: The franchisor sets the rules, and the franchisee must follow them.
• Rules and enforcement: Franchisor rules imposed by the franchising authority are becoming increasingly strict. Some franchisors are using minor rule violations to terminate contracts and seize the franchise without any reimbursement.

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Advantages and Disadvantages for the Franchisor

Advantages

• Access to capital for growth and expansion
• Cash flow for operations: In addition to initial franchise fees that can range from $50,000 to $5 million, franchisors receive payments in the form of royalties from each franchisee.
• Economies of scale: Once a franchise is established with multiple locations, the company may be able to leverage its buying power to realize economies of scale with suppliers, advertisers, and vendors.

Disadvantages

• Lack of control: Despite the language of the franchise agreement, once the franchisee has established their location, the franchisor may have difficulty ensuring that quality standards are met and the franchise is operating in a manner that benefits the brand.
• Trade secrets: If the success of a business is based on a trade secret, special process, or innovative technology, establishing a franchise may make the business vulnerable to knock-offs or imitation.
• Overexposure / Brand Dilution

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Franchise Scavenger Hunt

Name as many franchises as you can think of.

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Discuss your franchise.

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• Associated costs of starting the franchise
• List 3 positive characteristics that distinguish this franchise from competitors (this could be anything from product offerings, branding, company values, etc.)
• 3 Advantages of owning a franchise
• 3 Disadvantages of owning a franchise

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Mergers and Acquisitions

• Understand what mergers and acquisitions are
• Understand why businesses merge and acquire other businesses

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Mergers

A merger is the consolidation of two companies that, prior to the merger, were operating as independent entities.

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Two Types of Mergers

Horizontal

• Occurs between companies in the same industry
• A consolidation of two or more businesses that operated in the same market space, often as competitors
• Common in industries with fewer firms where competition tends to be higher

Vertical

• A merger of two organizations that have a buyer-seller relationship or
• Two or more firms that are operating at different levels within an industry’s supply chain
• Logic behind the merger is often that the two firms would operate more efficiently together rather than separately

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Acquisition

An acquisition occurs when a company purchases the assets of another business (such as stock, property, plants, equipment) and usually permits the acquired company to continue operating as it did prior to the acquisition.

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Reasons for Mergers and Acquisitions

• Obtaining quality staff or additional skills, knowledge of your industry or sector, and other business intelligence
• Accessing funds or valuable assets for new development
• Your business is underperforming
• Accessing a wider customer base and increasing your market share
• Diversification of the products, services, and long-term prospects of your business
• Reducing your costs and overheads through shared marketing budgets, increased purchasing power, and lower costs
• Reducing competitions
• Organic growth

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What is professionalism?

Brainstorm ways that you show professionalism in different contexts:

• school
• work
• networking

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Bias in Professionalism

What are some situations that you have observed at your place of work or while you were at a business that you immediately perceived as unprofessional?

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Discuss professionalism.

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• What does professionalism mean to you? Take 3 minutes to brainstorm all the words that you associate with "professionalism."
• Group similar words together
• Does anything stand out?
• Why did you choose these words?

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Discuss professionalism (1 of 3)

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You are required to participate in a weekly team meeting via Zoom that lasts for 30 minutes. During this meeting important information is shared that is directly related to how each team member will interact with clients on active projects. It is the culture of the company to always have your camera on during meetings. It is obvious that many team members are looking at their phones or typing during meetings. The manager who runs the meeting calls out this behavior as unacceptable. Is responding to messages during a meeting unprofessional?

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Discuss professionalism (2 of 3)

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A manager at your company overheard another employee on a personal phone call speaking in their native language which was not English. At a staff meeting later that day, the manager tells everyone that it is important to maintain display professionalism in the office because there are clients in the office every day and professionalism includes speaking in English only so everyone can understand each other. Is it unprofessional to speak in a language other than English on a personal phone call while you are at work?

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Discuss professionalism (3 of 3)

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The office culture in your company is rather formal. Meetings are held in person rather than virtually. Messages tend to be communicated via email rather than text or voicemail. Office dress is also formal; business suits are the standard for everyday wear. One employee who is Black starts wearing their hair in braids but they still dress in a formal business style every day. Someone from Human Resources contacted the employee and told them that their appearance did not conform to the professional dress required in the office. Is it unprofessional to wear braids at work?

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Closing Slide

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Questions…..

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Next steps…..

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Reminders about student hours, upcoming deadlines, campus activities ….

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Storyset Illustration Library

Find the illustrations at StorySet.com.

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Authored by: Lumen Learning. License: CC BY: Attribution

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