Objectives Summarize the advantages and disadvantages of the most common types of business ownership Three basic forms of business ownership Sole proprietorship Partnership Corporation Your choice depends on your needs amp goals ID: 1030120
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1. Form of Business Ownership
2. ObjectivesSummarize the advantages and disadvantages of the most common types of business ownership.
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4. Three basic forms of business ownershipSole proprietorshipPartnershipCorporationYour choice depends on your needs & goals
5. Sole proprietorshipA business owned and operated by one person.
6. Advantages of sole proprietorshipsEasy and inexpensive to create.Unless you need certification or local permits, government intervention is minimalOwner makes all business decisions & has control over all aspects of the business.Flexibility in scheduling to meet owner’s needs
7. Advantages of sole proprietorships cont.Owner receives all profits.Privacy – owner is the only one who knows details of the businessSecret ideas, formulas, or recipesAbility to act quickly in making decisions – no checking with others
8. Advantages of sole proprietorships cont.Tax advantagesBusiness itself pays no taxesTaxes are paid as personal income of owner which is usually lower than corporate taxesMany business expenses are deductibleEasy to close/dissolvePay employees and creditorsSell your equipment Notify customers if possible
9. Disadvantages of sole proprietorshipsOwner has unlimited liability for all debts and actions of the business. Unlimited liability: The debts of the business may be paid from the personal assets of the owner. If you cannot pay business debt with business income, bill collectors can take your personal assets (home, car)Difficult to raise capital.Banks/lenders consider sole proprietorships to be a high-risk investmentNeeds include paying employees, purchasing equipment & inventory, & running the businessExpansions can be delayed or halted causing you to lose business to your competition
10. Disadvantages of sole proprietorshipsSole proprietorship is limited by his/her skills and abilities. Uncertain lifeYou are “it” – illness or injury that prevents you from working may cause you to closeBankruptcy or incarceration will dissolve your businessThe death of the owner automatically dissolves the business.
11. PartnershipA form of business ownership in which two or more people share the assets, liabilities, and profits.
12. Advantages of partnershipsFairly easy & inexpensive to startMay pay attorney if you develop a partnership agreementCombined resourcesTeam with partners with different skills, experience, contacts, & capitalSharing responsibilities makes business run more efficiently & smoothlyIncrease the amount of capital to run the business. Lenders may be more willing to lend or extend credit Decreased Competition Combining like businesses will decrease or eliminate competition
13. Advantages of partnerships cont.Reduced expensesWhen two or more businesses combine expenses are no longer being duplicatedEx. promotion, office space, supplies, utilitiesBusiness losses are shared by all partners.The partnership does not pay income tax on profits.Each partner pays income tax on her/his individual share of the profit
14. Disadvantages of partnershipsUnlimited liability Each owner in a general partnership has unlimited liability.Each partner can lose personal assets to pay business debtIn a limited partnership, the liability is limited to the amount invested in the businessLimited CapitalAlthough partners may bring more capital to the business than sole proprietors, it is still limited to what each can contributeSome lenders may still be reluctant to lend large amounts Difficulty in endingWithdrawing can be complicated if there is no written partnership agreementBy law profits must be divided equally if no agreement
15. Disadvantages of partnerships cont.Partnerships may lead to disagreements.May disagree on business goals, finances, responsibilities, & division of profitsCan affect the efficiency of the business, morale of employees, & success or failure of the ventureDeveloping a detailed partnership agreement often helps resolve the conflict because it addresses many issues that cause potential disagreementsIn 1916, the U.S. government developed the Uniform Partnership Act (updated in 1997) which serves as a guide for legally formulating a general partnership agreementA limited partnership is more formal & specific in nature & is governed by the Uniform Limited Partnership Act (ULPA)
16. Disadvantages of partnerships cont.Uncertain life/TransferabilityUnless specified in a detailed partnership agreement, bankruptcy, death & the withdrawal or admittance of a new partner dissolves the partnershipRemaining partners may start a new partnership if they have the money to buy the former partner’s share
17. CorporationA business that is chartered by a state and legally operates apart from its owners.Owned by stockholders who have purchased units or shares of the company
18. Types of corporationsC-corporation: The most common form of corporation. It protects the entrepreneur from being personally sued for the actions and debts of the corporationSubchapter S corporation: A corporation that is taxed like a sole proprietorship or partnership. Nonprofit corporation: Legal entities that make money for reasons other than the owner’s profit. Limited Liability Company (LLC): A form of business ownership that provides limited liability and tax advantages.
19. Advantages of corporationsFinancial PowerCan raise money quickly by issuing shares of stock.Because it is closely regulated by the government, financial institutions are more willing to lend larger amounts of capitalLimited LiabilityOwners are liable only up to the amount of their investments. Personal assets cannot be used to pay business debt Unlimited lifeMay exist indefinitelyThe death or withdrawal of an owner/stockholder does not affect the life span of the corporation
20. Advantages of corporations cont.Easy-to-transfer ownershipOwnership simply transferred by selling stock to someone elseNew stock certificate is issued in the name of new stockholder. No permission is required by othersThe business can hire experts to professionally manage each aspect of the business.Can result in a more efficiently run organization
21. Disadvantages of corporationsDifficulty in forming & operatingLegal assistance is needed to start a corporationLawyer fees can be very expensiveMust request approval from the State & register the Articles of IncorporationDecisions about value & class of stock & shareholder voting rights Corporations are subject to more government regulations than partnerships or sole proprietorships.Reporting & taxation requirements vary from state to state Required to keep detailed reports for stockholders & to keep them informed of certain corporate transactions, meetings, & voting rightsNew charter must be approved if corporate activities change
22. Disadvantages of corporationsSeparate owners & managersStockholders are not generally involved in the day-to-day operation of the corporationStockholders form a board of directors to make decisions about the business & managers carry out these decisionsSeparation of ownership & management provides more opportunity for irregularities or misunderstandingsDual taxationCorporation is taxed on profits from the companyShareholders are taxed on the dividends they earn on their investments
23. Hybrid forms of Business OwnershipLimited Liability Company (LLC)Limited Liability Partnership (LLP)Both combine various elements of sole proprietorships, partnerships, & corporations into one package
24. Advantages of Hybrid BusinessesCost to start & operateGenerally less expensive than corporationsNo dual taxation - requires less paperwork & regulationLLPs are designed for business professionals such as lawyers & doctorsPartners might need to carry a required amount of liability insuranceLimited LiabilityPersonal assets cannot be used to pay business debt Owners (members) lose only what they have invested in the business if it fails
25. Advantages of Hybrid Businesses cont.TaxationLLCs & LLPs pay taxes on personal income-tax returnsSince they are not considered separate entities (like corporations) they are not subject to dual taxationCombined resourcesOften have more owners & tend to have a wider pool of financial resources, skills, talents, & contactsLife spanHybrids are required to dissolve after a specific time periodDepending on the state registered in, usually between 30 & 40 yearsOwners can decide if they want to reorganize or let it dissolve
26. Advantages of Hybrid Businesses cont.FlexibilityNumber of members permitted in LLCs are unlimitedSub S corporations must have 100 or fewer shareholdersMost states require only one member to establish a business as a hybridMembers are permitted to run the company or to allow others to manage itMembership changes do not automatically dissolve the company
27. Disadvantages of hybridsVerification of each state’s statutes can be costlyRequirements & laws to establish & operate hybrids vary from state to stateProblematic for businesses that operate in more than one stateNo universal guidelines from state to state
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