Mousa Rabie Albalawi 201010121 Homework3

CHOOSING A FORM OF OWNERSHIP

Chapter Discussion Questions
1. What factors should an entrepreneur consider before choosing a form of
ownership?
Factors to consider before choosing a form of ownership include:
Tax considerations calculate the firm's tax bill under each form of
ownership.
Liability exposure how much personal liability is involved in the
ownership form?
Start-up capital required how much capital does the entrepreneur have
and how much will he need?
Control how much control is involved for each type of business
organization? How much is the entrepreneur willing to give up?
Business goals how large and profitable does the entrepreneur expect the
business to be?
Management succession plans consider smooth transition when passing
company to the next generation of buyers.
Cost of formation some forms are more costly to create.
2. Why are sole proprietorships so popular as a form of ownership?
Sole proprietorships are a popular form of ownership for several reasons. First,
they are simple to create. Anyone wanting to start a business can do so by
obtaining the necessary licenses from state, county, and/or local governments.
This form is normally the least expensive to establish. In addition, the owner has
the total decision- making authority, can keep all profits remaining after expenses
are paid, and may discontinue the sole proprietorship fairly easily if he or she
desires.

8. How does an S corporation differ from a regular corporation?
An S corporation offers many of the same advantages of a corporationlimited
liability, capital formation, and otherswhile being taxed as a partnership. Thus,
the S corporation avoids the corporate disadvantage of double taxation.

11. How is an LLC created? How does this differ from creating an S
corporation?

Creating an LLC is much like creating a corporation. Forming an LLC requires an
entrepreneur to file the articles of organization with the secretary of state. The LLCs
articles of organization, similar to the corporations articles of incorporation,
establish the companys name, its method of management (board-managed or
member-managed), its duration, and the names and addresses of each organizer.( File
articles of organization with
the secretary of state. Adopt operating agreement, and file necessary reports with the
secretary of state. The name must show it is a limited liability company.) but S
corporation Must meet all criteria to file as an S corporation. Must file timely election
with the IRS (within 212 months of first taxable year).

13. How does a joint venture differ from a partnership?

A joint venture is very much like a partnership, except that it is formed for a specific purpose.

Here is some differences :

Parties :
Joint venture: The participant in joint venture is known as co-ventures.
Partnership: The participant in partnership is known as partners.

Nature :
Joint venture: It is temporary in nature and is terminated as soon as the venture is
completed.
Partnership: It is a going concern business.


Name :
Joint venture: It does not need any single name to carry on the activity.
Partnership: It always bears a first name.

14. In what circumstances might a joint venture be applicable?
The joint venture is formed for a specific and limited purpose. For example,
multiple investors may form a joint venture to build a building, sell it, and dissolve
the joint venture when that sale is finalized.



Franchising and the Entrepreneur
Discussion Questions
1- What is franchising?
Franchising involves semiindependent business owners (franchisees) that pay
fees and royalties to a parent company (franchiser) in return for the right to sell its
products or services and often to use its brand, logo, business format and system.

2 - Describe the three types of franchising and give an example of each.
The three types of franchising with examples are:
1. Trade name franchising: The franchisee purchases the right to use the
franchisors trade name without distributing particular product under the
franchisors name. Examples include TrueValue Hardware and Western
Auto.
2. Product distribution franchising: Involves a franchiser licensing a
franchisee to sell specific products under the franchisers brand name and
trademark through a selective, limited distribution network. Examples
include Exxon, Chevrolet, and Pepsi Cola.
3. Pure franchising: Involves providing the franchisee with a complete
business format. Examples include Burger King, H&R Block and Hampton
Hotels.

3 - How does franchising benefit the franchisor?
Franchising offers franchisors a relatively quick way to expand a distribution
system with minimum capital. The franchisor can grow his/her business without
the cost and inconvenience of locating and developing key managers internally.
Franchisors receive income from franchisees through franchise fees and ongoing
royalties. A franchisor gains the opportunity to grab a share of a regional or
national market relatively quickly without having to invest huge amounts of her
own money, and she gets paid while she does it.

4 - Discuss the advantages and the disadvantages of franchising for the franchisee.
The benefits of buying a franchise include:
Management training and support Franchisers provide training programs
for franchisees in an attempt to reduce failures due to incompetent
management.
Brand name appeal Franchisee has the ability to identify his business
with a widely recognized product or service, giving the firm immediate
drawing power.
Standardized quality of goods and services Since the quality of the
product or service sold determines the franchisers reputation, he maintains
uniform quality standards.
National advertising programs Franchisers design mass advertising
programs that accomplish more than the franchisees could achieve
individually.
Financial assistance Entrepreneurs may be able to purchase franchises for
less money requirements than what it costs to start businesses from scratch,
and some franchisers offer financial help.
Proven products and business formats Franchisees can depend on an
established product and business system.
Territorial protection Franchisees are guaranteed territorial protection in
some cases; they have the right to exclusive distribution of the
product/service in this territory.
Greater chance for success The failure rate for franchisees is substantially
lower than that of independent businesses.
The drawbacks of buying a franchise include:
Franchise fees and profit sharing Franchisees are required to pay initial
franchise fees plus a share of gross receipts throughout the life of the
franchise arrangement.
Strict adherence to standardized operations The franchisee may be
restricted in his freedom to make decisions about business operations.
Restrictions on purchasing Franchisees frequently are required to
purchase goods or services from approved vendors.
Limited product line Franchise agreements normally require franchisees
to sell only approved products and services from the outlet.
Unsatisfactory training programs Some franchisers do not deliver all they
promise in a franchisee training program.
Market saturation Some franchisers do not offer franchisees territorial
protection and the market becomes oversaturated.
Less freedom When a franchisee signs a contract, he is agreeing to sell the
franchisers product or service following its prescribed formula. In essence,
there is a lack of independence.

5 - How beneficial to the franchisee is a quality training program? Explain.
The leading cause of business failure is incompetent management. Training
programs are the key to success because this is how the success system with its
processes and procedures is communicated to the franchisee and his/her
employees. It is the means by which standardization is reinforced. Many
franchisors, especially the well-established ones, also provide follow-up training
and counseling services. Training programs often involve both classroom and on-
site instruction to teach franchisees the basic operations of the business--from
producing to selling the good or service.

6 - Compare the failure rates for franchises with those of independent businesses.
Investing in a franchise is not risk-free. Between 200 and 300 new franchise
companies enter the market each year, and many of them do not survive. Studies
show that nearly 75 percent of new franchisers do not last as many as 10 years.
Still, available statistics suggest that franchising is less risky than building a
business from the ground up. Approximately 24 percent of new businesses fail by
the second year of operation; in contrast, only about 7 to 10 percent of all
franchises will fail by the second year. After five years, about 85 percent of
franchises are still in business compared to less than 50 percent of independent
businesses. This impressive success rate for franchises is attributed to the broad
range of services, assistance, and guidance franchisers provide. These statistics
must be interpreted carefully, however, because when a franchise is in danger of
failing, the franchiser often repurchases or relocates the outlet and does not report
it as a failure.