3 questions

Christie is a business owner and wants to start a new franchise. She ultimately decides on a Taco Bell franchise because she can’t live without their nacho cheese chalupas, and she also thinks it would be a good addition to the mostly American food chains on Main St. The overhead costs for this particular franchise are expensive; but she likes the absentee ownership arrangement that Taco Bell has set up. So she decides to go forward with the Taco Bell franchise.

1. What are the differences among the three types of franchises? Were Christie to open a Taco Bell, what type of franchise would Christie be forming?

2. How is a franchise created? What type of information is typically included in a franchise agreement?

3. What are some of the things that Christie could do wrong at her Taco Bell franchise that could lead to possible termination? Suppose that Christie does not follow the guidelines for cleanliness and preparation of the product. Would this be a legitimate cause for Taco Bell to terminate the franchise?

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Chapter 35
Forms of Business Organization
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Overview
• LO35-1: What are the major forms of
business organization, and what are the
differences among them?
• LO35-2: What are the specialized forms of
business organization?
• LO35-3: What is a franchise?
35-2
Major Forms of Business
Organizations
• Sole proprietorship
• General partnership
• Limited partnership
• Corporation
35-5
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Sole Proprietorship
•
•
•
•
•
Definition: Unincorporated business owned by one person
Owner has total control
Owner has unlimited liability
Profits taxed directly as income to sole proprietor
Advantages
• Ease of creation (start-up)
• Owner has total managerial control
• Owner retains profits
• Disadvantages
• Personal liability for all business debts/obligations
• Funding limited to personal contributions and loans
35-6
General Partnership
• Definition: Unincorporated business owned and operated by
two or more persons
• Each partner has equal control of business
• Each partner has unlimited, personal liability for business
debts/obligations
• Profits taxed as income to partners
• Advantages
• Ease of creation (start-up)
• Partnership income is partner income
• Business losses qualify for tax deduction
• Disadvantages
• Personal liability for all business debts/obligations, including
those incurred by other partners on behalf of partnership
35-7
Limited Partnership
• Definition: Unincorporated business with at least one general
partner, and one limited partner
• General partner in limited partnership has
managerial/operational control over business
• Limited partner’s liability limited to extent of his/her capital
contributions
• Limited partner has no managerial/operational control over
business
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Corporation
• Definition: State-sanctioned business with legal identity
separate and apart from its owners (shareholders)
• Owners’ (shareholders’) liability limited to amount of
investment in corporation
• Profits taxed as income to corporation, plus income to
owners/shareholders (double taxation)
• S Corporation can avoid double taxation
• Advantages
• Limited liability for shareholders
• Ease of raising capital by issuing (selling) stock
• Disadvantages
• Double taxation
• Formalities required in establishing and maintaining corporate
existence
35-9
S Corporation
• Definition: Business organization formed under
federal tax law that is considered corporation,
yet taxed like a partnership
• Formed under federal law
• No more than 100 shareholders
• Shareholders must report income on their
personal income tax forms
35-10
Limited Liability Company (LLC)
• Definition: Business organization with limited
liability of a corporation, yet taxed like
partnership
• Formed under state law
• Owners of LLC (members) pay personal income
taxes on shares they report
• No limitation on number of owners permitted in
LLC
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Specialized Forms of Business
Organizations
• Cooperative: Organization formed by individuals to market products
• Joint stock company: Partnership agreement in which company
members hold transferable shares, while all company goods are held
in names of partners
• Business trust: Business organization governed by group of trustees,
who operate trust for beneficiaries
• Syndicate: Investment group that forms for purpose of financing
specific large project
• Joint venture: Relationship between two or more
persons/corporations created for specific business undertaking
• Franchise: Agreement between franchisor (owner of trade
name/trademark) and franchisee (person who, by specific terms of
agreement, sells goods/services under trade name/trademark)
35-12
Advantages and Disadvantages of
Franchise to Franchisee
• Advantages
• Assistance from franchisor in starting franchise
• Trade name/trademark recognition
• Franchisor advertising
• Disadvantages
• Must meet contractual requirements or possibly
lose franchise
• Little/no creative control over business
35-13
Advantages and Disadvantages of
Franchise to Franchisor
• Advantages
• Low risk in starting franchise
• Increased income from franchises
• Disadvantages
• Little control (except contractually) over individual
franchise
• Can become liable for franchise, if franchisor
exerts too much control
35-14
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Types of Franchises
• Chain-style business operation
• Franchisor helps franchisee establish a business (using
franchisor’s business name and franchisor’s standard methods
and practices)
• Distributorship
• Franchisor licenses franchisee to sell franchisor’s product in
specific area
• Manufacturing arrangement
• Franchisor provides franchisee with technical knowledge to
manufacture franchisor’s product
35-15
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