CHAPTER 7

TYPES OF BUSINESS OWNERSHIP

• Entrepreneurs need to understand the advantages and disadvantages of various types of businesses so that they can choose the one that best suits their needs.

SOLE PROPRIETORSHIP

• The easiest and most popular form of business ownership is the sole proprietorship.

sole proprietorship

a business that is owned and operated by one person

sole proprietorship

a business that is owned and operated by one person

SOLE PROPRIETORSHIP

• The owner of a sole proprietorship:

receives the profits,incurs any losses, andis liable for the debts of the business.

SOLE PROPRIETORSHIP

• In a sole proprietorship the owner must decide how much liability protection he or she needs.

liability protection

insurance against the debts and actions of a business

liability protection

insurance against the debts and actions of a business

ADVANTAGES

• Sole proprietorship is easy and inexpensive to create.

The owner has complete authority over all business activities.

It is the least regulated form of business ownership.

The business pays no taxes; income is taxed at the personal rate of the owner.

DISADVANTAGES

The owner has unlimited liability.

Raising capital is more difficult.

The business is totally reliant on the skills and abilities of the owner.

The death of owner dissolves the business unless there is a will to the contrary.

DISADVANTAGES

• The biggest disadvantage of a sole proprietorship is financial.

• In this form of business ownership, the owner has unlimited liability.

unlimited liability

full responsibility for all debts and actions of a business

unlimited liability

full responsibility for all debts and actions of a business

PARTNERSHIP

• A partnership draws on the skills, knowledge, and financial resources of more than one person.

partnership

an unincorporated business with two or more owners who share the decisions, assets, liabilities, and profits

partnership

an unincorporated business with two or more owners who share the decisions, assets, liabilities, and profits

PARTNERSHIP

General vs Limited

The law requires that all partnerships have at least one general partner.A partnership may be set up so that all of the partners are general partners.

general partner

a participant in a partnership who has unlimited personal liability and takes full responsibility for managing the business

general partner

a participant in a partnership who has unlimited personal liability and takes full responsibility for managing the business

PARTNERSHIP

• Some partnerships include a limited partner.

limited partner

a partner in a business whose liability is limited to his or her investment; a limited partner cannot be actively involved in managing the business

limited partner

a partner in a business whose liability is limited to his or her investment; a limited partner cannot be actively involved in managing the business

PARTNERSHIP

Partnerships are inexpensive to create.

General partners have complete control.

Partners can share ideas.

Partners can share ideas.

PARTNERSHIP

It is difficult to dissolve one partner’s interest without dissolving the partnership.

There may be personality conflicts.

Partners can be held liable for each others’ actions.

CORPORATIONS

In a corporation, the owners of the business are protected from liability for the actions of the company.

There are three types of corporations:•C-Corporation•Subchapter S Corporation•Nonprofit Corporation

corporation

a business that is registered by a state and operates apart from its owners; it issues shares of stock and lives on after the owners have sold their interest or passed away

corporation

a business that is registered by a state and operates apart from its owners; it issues shares of stock and lives on after the owners have sold their interest or passed away

C- CORPORATIONS

• A C-corporation is the most common corporate form.

• C-Corporations: In smaller corporations, the founders generally are the major shareholders.

C-corporation

an entity that pays taxes on earnings; its shareholders pay taxes as well

C-corporation

an entity that pays taxes on earnings; its shareholders pay taxes as well

shareholders

the owners of a corporation

shareholders

the owners of a corporation

C-CORPORATIONS

ADVANTAGES

status

limited liability

ability to raise investment money

perpetual existence

employee benefits

tax advantages

C-CORPORATIONS

ADVANTAGES

Corporate shareholders have limited liability, but some banks require officers to personally guarantee the debts of the company.

limited liability

partial responsibility of a corporate shareholder; he or she is responsible only up to the amount of his or her individual investment

limited liability

partial responsibility of a corporate shareholder; he or she is responsible only up to the amount of his or her individual investment

C-CORPORATIONS

DISADVANTAGES

expensive to set up

income more heavily taxed

subject to double taxation on income

pays taxes on profits

stockholders taxed on dividends

NON-PROFIT CORPORATIONS

• A nonprofit corporation must fall within one of four categories:

• religion• charity• public benefit • mutual benefit

nonprofit corporation

a legal entity that makes money for reasons other than the owner’s profit; it can make a profit, but the profit must remain within the company

nonprofit corporation

a legal entity that makes money for reasons other than the owner’s profit; it can make a profit, but the profit must remain within the company

CORPORATIONS- LIMITED LIABILITY

• There are many benefits to forming a limited liability company (LLC).

limited liability company (LLC)

a company whose owners and managers have limited liability and some tax benefits, but which avoids some restrictions associated with Subchapter S corporations

limited liability company (LLC)

a company whose owners and managers have limited liability and some tax benefits, but which avoids some restrictions associated with Subchapter S corporations

1. Simpler to set up than a corporation.

2. Allows for the flexibility of a partnership structure.

3. Protects its owners with the limited liability of a corporation.

4. No subject to double taxation.

5. No limitations on the number of members or their status.

CORPORATIONS

• Before deciding on a legal form, ask yourself key questions about:

Making the Decision

willingness to assume liability?level of control wanted?length of time you expect to own the business?

your skills?access to capital?Expenses?