Explain the “invisible hand”.

The place where quantity demanded and

quantity supplied meet is called …?
CHECK In the long run, that price will become …?
APTER 2

4 phases of the business cycle?

 Chapter 5

HOW TO FORM
A BUSINESS

Introduction to Business Administration – Instructor: Phuoc Van Hanh

LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and discuss
the opportunities for diversity in franchising and the challenges of global
franchising.
LO 5-6 Explain the role of cooperatives.
GETTING TO KNOW

Alli Webb, Founder of Drybar

Basic Forms of Business Ownership
● How you form your business can make a tremendous difference
in your long-term success.

● The three major forms of business ownership are:

(1) Sole proprietorships Unlimited liability
(2) Partnerships: Unlimited partner + general partner
(3) Corporations: Unlimited liability

And other forms to expand the businesses like:

(4) Mergers and Acquisition (M&A)
(5) Franchise
(6) Cooperatives: a business owned and controlled by the ppl who
use it: Coopmart
 Basic Forms of Business Ownership

IN-CLASS DISCUSSION
Discuss the definition, and the advantages & disadvantages of each form.

Group 1 + 2: Franchise. Group 3 + 4: Sole proprietorship.

Group 5 + 6: Partnership. Group 7 + 8: Corporation.
Group 9 + 10: Merger and Acquisition (M&A). Group 11 + 12: Cooperative.

Do research & note your points (with real-life examples). 30 minutes.

=> Notes submitted. (5 points)
 Basic Forms of Business Ownership

IN-CLASS DISCUSSION
Discuss the definition, and the advantages & disadvantages of each form.

Group 1 + 2: Franchise. Group 3 + 4: Sole proprietorship.

Group 5 + 6: Partnership. Group 7 + 8: Corporation.
Group 9 + 10: Merger and Acquisition (M&A). Group 11 + 12: Cooperative.

Present about each business form. 10 minutes.

=> Good presentations. (5 points)

RESULT: Everyone should understand the key points of each business form.
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and discuss
the opportunities for diversity in franchising and the challenges of global
franchising.
LO 5-6 Explain the role of cooperatives.
Sole proprietorship: A business that is owned, and usually
managed, by one person.
Advantages of sole proprietorship:

1. Ease of starting and ending the business. All you have to do to start a
sole proprietorship is buy or lease the needed equipment and put up some announcements
saying you are in business.
2. Being your own boss. You may make mistakes and so are the many small
victories each day.
3. Pride of ownership. People who own and manage their own businesses deserve all
the credit for taking the risks and providing needed goods or services.
4. Leaving a legacy. Owners can leave an ongoing business for future generations.
5. Retention of company profits. Owners not only keep the profits earned but also
benefit from the increasing value as the business grows.
6. No special taxes. All the profits of a sole proprietorship are taxed as the personal
income of the owner, and the owner pays the normal income tax on that money.
Disadvantages of sole proprietorship:

1. Unlimited liability—the risk of personal losses. Any debts or damages

incurred by the business are your debts and you must pay them, even if it means selling your
home, your car, or whatever else you own.
2. Limited financial resources. Funds available to the business are limited to what
the one owner can gather.
3. Management difficulties.
4. Overwhelming time commitment. It’s hard to own a business, manage it, train
people, and have time for anything else in life when there is no one with whom to share the
burden.
5. Few fringe benefits.
6. Limited growth.
7. Limited life span.
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and discuss
the opportunities for diversity in franchising and the challenges of global
franchising.
LO 5-6 Explain the role of cooperatives.
Partnership: A legal form of business with two or more owners.

General partnership: A partnership in which all owners share in

operating the business and in assuming liability for the
business’s debts.
Limited partnership: A partnership with one or more general
partners and one or more limited partners.

General partner: An owner (partner) who has unlimited liability

and is active in managing the firm.

Limited partner: An owner who invests money in the business

but does not have any management responsibility or liability for
losses beyond the investment.
Limited liability means that the limited partners’ liability for the
debts of the business is limited to the amount they put into the
company; their personal assets are not at risk.

Limited partners and shareholders (stockholders) have limited

liability.
Advantages of partnership:

1. More financial resources. A limited partnership is specially designed to help raise

money.
2. Shared management and pooled/complementary skills and
knowledge. Partners give each other free time from the business and provide different
skills and perspectives.
3. Longer survival. Partnerships are more likely to succeed than sole proprietorships
because being watched by a partner can help a businessperson become more disciplined.
4. No special taxes. As with sole proprietorships, all profits of partnerships are taxed as
the personal income of the owners, who pay the normal income tax on that money.
Disadvantages of partnership:

1. Unlimited liability. Each general partner is liable for the debts of the firm, no matter
who was responsible for causing them. Like sole proprietors, general partners can lose their
homes, cars, and everything else they own if the business goes bankrupt.
2. Division of profits. Sharing risk means sharing profits, and that can cause conflicts.
3. Disagreements among partners.
*All terms of the partnership should be spelled out in writing to protect all parties and
minimize misunderstandings.
4. Difficulty of termination. You can quit. However, questions about who gets what
and what happens next are often difficult to resolve when the partnership ends.
Another type of partnership was created to limit the
disadvantage of unlimited liability.

Limited liability partnership (LLP): A partnership that limits

partners’ risk of losing their personal assets to only their own
acts and omissions and to the acts and omissions of people
under their supervision.
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and discuss
the opportunities for diversity in franchising and the challenges of global
franchising.
LO 5-6 Explain the role of cooperatives.
Corporation: A legal entity with authority to act and have liability
apart from its owners.

It is like an artificial being & exists only in the eyes of the law.
Fig 5.4 Corporate types
Corporations can fit in more than one category.
A conventional (C) corporation is a state-chartered legal entity
with authority to act and have liability separate from its owners—
its stockholders.

A corporation not only limits the liability of owners but often

enables many people to share in the ownership (and profits) of a
business without working there or having other commitments to
it.

*Corporations may choose whether to offer ownership to outside

investors or remain privately held.
Advantages of corporations:

1. Limited liability. It means that the owners of a business are responsible for its losses
only up to the amount they invest in it.
2. Ability to raise more money for investment. To raise money, a corporation
can sell shares of its stock to anyone who is interested.
Corporations can also borrow money …
3. Size. A large corporation with numerous resources can take advantage of opportunities
anywhere in the world.
4. Perpetual life.
5. Ease of ownership change.
6. Ease of attracting talented employees.
7. Separation of ownership from management. The owners/stockholders
have some say in who runs the corporation but have no real control over the daily operations.
Disadvantages of corporations:

1. Initial cost. Incorporation may cost thousands of dollars and require expensive
lawyers and accountants.
2. Extensive paperwork. A corporation, in contrast, must keep detailed financial
records, the minutes of meetings, and more.
3. Double taxation. Corporate income is taxed twice.
4. Two tax returns.
5. Size. Large corporations sometimes become too inflexible and tied down in red tape to
respond quickly to market changes, and their profitability can suffer.
6. Difficulty of termination.
7. Possible conflict with stockholders and board of directors. Conflict
may brew if the stockholders elect a board of directors who disagree with management.
Fig 5.5 How owners affect management.

Owners have an influence on how a business is managed

by electing a board of directors.
The board hires the top officers (and fires them if
necessary). It also sets the pay for those officers.
The officers then select managers and employees with the
help of the human resource development.
 Short summary

Fig 5.7 Comparisons of

forms of business
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and discuss
the opportunities for diversity in franchising and the challenges of global
franchising.
LO 5-6 Explain the role of cooperatives.
 Corporate Expansion: Mergers and Acquisitions (M&A)

A merger is the result of two firms joining to form one company.

An acquisition is one company’s purchase of the property and

obligations of another company.

A leveraged buyout (LBO) is an attempt by employees, management,

or a group of private investors to buy out the stockholders in a
company, primarily by borrowing the necessary funds.
Fig 5.8 Types of mergers.
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and discuss
the opportunities for diversity in franchising and the challenges of global
franchising.
LO 5-6 Explain the role of cooperatives.
Franchise agreement

An arrangement whereby someone with a good idea for a

business (the franchisor) sells the rights to use the
business name and sell a product or service (the franchise)
to others (the franchisees) in a given territory.
Advantages of franchises:

1. Management and marketing assistance. A franchisee usually has a much

greater chance of succeeding because he or she has an established product to sell, help
choosing a location, and assistance in all phases of promotion and operation.
2. Personal ownership. A franchise operation is still your business, and you enjoy as
much of the incentives and profit as any sole proprietor would.
3. Nationally recognized name. With an established franchise, you get instant
recognition and support from a product group with established customers around the world.
4. Financial advice and assistance. Franchisees often get valuable assistance
and periodic advice from people with expertise in these areas.
5. Lower failure rate.
Disadvantages of franchises:

1. Large start-up costs. Most franchises demand a fee for the rights to the franchise.
2. Shared profit. The franchisor often demands either a large share of the profits in
addition to the start-up fees or a percentage commission based on sales, not profit. This share
is called a royalty.
3. Management regulation. Management “assistance” has a way of becoming
managerial orders, directives, and limitations. Franchisees feeling burdened by the company’s
rules and regulations may lose the drive to run their own business.
4. Coattail effects.
5. Restrictions on selling.
6. Fraudulent franchisors.
LEARNING OBJECTIVES
LO 5-1 Compare the advantages and disadvantages of sole proprietorships.
LO 5-2 Describe the differences between general and limited partners, and
compare the advantages and disadvantages of partnerships.
LO 5-3 Compare the advantages and disadvantages of corporations, and
summarize the differences between C corporations, S corporations, and
limited liability companies.
LO 5-4 Define and give examples of three types of corporate mergers, and
explain the role of leveraged buyouts and taking a firm private.
LO 5-5 Outline the advantages and disadvantages of franchises, and discuss
the opportunities for diversity in franchising and the challenges of global
franchising.
LO 5-6 Explain the role of cooperatives.
Cooperatives (co-op) (Hợp tác xã)

A business owned and controlled by the people who use it -

producers, consumers, or workers with similar needs who pool
their resources for mutual gain.

Empowering communities and addressing farming challenges through cooperativ

es: The Case of Yen Duong Cooperative
Homework for bonus (individual)
(10 points)

Q: Find a real business next to your place.

Interview them and report:
- How did they form their business?
- what are the challenges they have been through
with their choice of business forms?

*** The most inspiring story might be chosen for

sharing in front of the class and receiving a small gift.