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Chapter 4: Forms of Ownership & Franchising 1Copyright 2002 Prentice Hall Publishing Company

Forms ofOwnership and

Franchising

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Chapter 4: Forms of Ownership & Franchising 2Copyright 2002 Prentice Hall Publishing Company

Major Forms of

Ownership Sole Proprietorship

Partnership

Corporation

S Corporation

Limited Liability Company

Joint Venture

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Chapter 4: Forms of Ownership & Franchising 3Copyright 2002 Prentice Hall Publishing Company

Advantages of the Sole

Proprietorship

Simple to create

Least costly form to begin

Profit incentive

Total decision making authority

No special legal restrictions

Easy to discontinue

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Chapter 4: Forms of Ownership & Franchising 4Copyright 2002 Prentice Hall Publishing Company

Disadvantages of the Sole

Proprietorship

Unlimited personal liability

Limited skills and capabilities

Feelings of isolation

Limited access to capital

Lack of continuity

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Chapter 4: Forms of Ownership & Franchising 5Copyright 2002 Prentice Hall Publishing Company

Advantages of the Partnership

Easy to establish Complementary skills of partners

Division of profits

Larger pool of capital

Ability to attract limited partners

Little government regulation

Flexibility

Taxation

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Chapter 4: Forms of Ownership & Franchising 6Copyright 2002 Prentice Hall Publishing Company

Disadvantages of the Partnership

Unlimited liability of at least one partner Capital accumulation

Difficulty in disposing of partnership

interest

Lack of continuity

Potential for personality and authority

conflicts

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Types of Partners

General partnersTake an active role in managing a business.

Have unlimited liability for the partnershipsdebts.

Limited partnersCannot participate in the day-to-day

management of a company.Have limited liability for the partnerships

debts.

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Types of Corporations

Domestica corporation doing businessin the state in which it is incorporated.

Foreigna corporation doing business ina state other than the state in which it isincorporated.

Aliena corporation formed in another

country but doing business in the UnitedStates.

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Advantages of the Corporation

Limited liability of stockholders

Ability to attract capital

Ability to continue indefinitely

Transferable ownership

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Chapter 4: Forms of Ownership & Franchising 11Copyright 2002 Prentice Hall Publishing Company

S Corporation

No different from any other corporation from a

legal perspective.

For tax purposes, however, an S corporation is

taxed like a partnership, passing all of itsprofits (or losses) through to individual

shareholders.

To elect S status, all shareholders must

consent, and the corporation must file with the

IRS within the first 75 days of its tax year.

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Chapter 4: Forms of Ownership & Franchising 12Copyright 2002 Prentice Hall Publishing Company

Limited Liability Company (LLC)

Resembles an S Corporation but isnot subject tothe same restrictions.

Two documents required: thearticles of

organization and theoperating agreement.

An LLC cannot have more thantwo of these four

corporate characteristics:

Limited liability

Continuity of life Free transferability of interest

Centralized management

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Chapter 4: Forms of Ownership & Franchising 13Copyright 2002 Prentice Hall Publishing Company

The Franchising Boom !!!

Sales of $1 trillion in virtually every

product or service imaginable.

More than 4,500 franchisers operating

some 600,000 outlets worldwide. Franchise sales account for 44% of

total retail sales.

A new franchise opens somewhere in

the world every six-and-a-half minutes.

Boom!

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Chapter 4: Forms of Ownership & Franchising 14Copyright 2002 Prentice Hall Publishing Company

Types of Franchising

Tradename

Product distribution

Pure (or Comprehensive or BusinessFormat)

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Chapter 4: Forms of Ownership & Franchising 15Copyright 2002 Prentice Hall Publishing Company

Benefits of Franchising

Management training and support

Brand name appeal

Standardized quality of goods and services

National advertising program

Financial assistance

Proven products and business formats

Centralized buying power

Site selection and territorial protection Greater chance for success

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Chapter 4: Forms of Ownership & Franchising 16Copyright 2002 Prentice Hall Publishing Company

Drawbacks of Franchising

Franchise fees and profit sharing Strict adherence to standardized

operations

Restrictions on purchasing

Limited product line

Unsatisfactory training programs

Market saturation

Less freedom

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Chapter 4: Forms of Ownership & Franchising 17Copyright 2002 Prentice Hall Publishing Company

TheRight Way to Buy a Franchise

Evaluate yourself - What do you like and dislike?

Research your market

Consider your franchise options.

Get a copy of the franchisers Uniform FranchiseOffering Circular (UFOC) and read it.

Talk to existing franchisees.

Ask the franchiser some tough questions. Make your choice.

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Chapter 4: Forms of Ownership & Franchising 18Copyright 2002 Prentice Hall Publishing Company

Factors That Make a Franchise

Appealing

Unique concept or marketing approach

Profitability

Registered trademark Business system that works

Solid training program

Affordability

Positive relationship with franchisees