Business Explain: Business Formation

What are the advantages and disadvantages of franchising?

PROS: franchiser gains revenue without the need to invest its own money, franchisee gains right to use a well-known brand name and proven business methods and often receives training and support from the franchiser.

CONS: franchisers often find that dealing with a large number of franchisees can be complex and challenging, franchisees must pay fees and royalties to franchiser and do not have much control over management of their business.

Why are limited liability companies becoming an increasingly popular form of ownership?

Avoid problem of double taxation endemic to C corps but still giving all owners protection of limited liability. Fewer regulations than corporations and owners have flexibility to either manage the company themselves or hire professional managers.

Why have corporations become the dominant form of business ownership?

Most common form of corporation is C CORPORATION, all stockholders have limited liability.

C corps can raise financial capital by issuing bonds or shares of stock, giving a financial growth advantage.

Also, unlimited life, easy transfer of ownership, ability to take advantage of professional management; however, are complex and expensive than partnership, profits are double taxed, and subject to extensive government regulation.

What are the pros and cons of partnerships?

General Partnership

PROS: pooled financial resources, shared workload to take advantage of complimentary skills, earnings taxed only as income to the partners/no separate income tax on business itself.

CONS: each owner has unlimited liability for the debts of the company, disagreements can complicate decision making, death/withdrawal of a partner can cause instability/uncertainty in the management and financing of company.

Limited Partnership -- must have at least one general partner and one limited partner. General partners actively manage company and have unlimited liability, while limited partners have limited liability but may not actively manage the partnership.

Limited Liability Partnership-- all partners may manage their company and are protected by some degree of limited liability.