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Chapter Five
Choosing a Form of Business Ownership
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Sole Proprietorships
• business owned & operated by one person
• simplest form of business ownership & easiest to start
• Common in retailing & services
• most widespread form of business ownership (72% of all businesses)
20% - Corporations
8% - PartnershipsSole Proprietorships - 72%
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Advantages of Sole Proprietorships
– Ease of start-up and shut down
– Sole retention of profits
– Possible Tax Advantages-tax for business paid on your personal return-no corporation tax
– Pride of ownership
– Flexibility to adapt quickly to change in marketplace
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Disadvantages of Sole Ownership
– Unlimited liability business owner personally responsible for all the
debts of the business
– Lack of continuity if owner dies, business dies
– Lack of money only one source for funding
– Limited management skills many hats and long hours
– Difficulty in hiring employees no room for advancement and few perks
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Partnerships
• A voluntary association of two or more persons who act as co-owners of a business
• Less common form of ownership than sole proprietorship or corporation (8%)
• No legal limit on the maximum number of partners; many have only 2
• Usually a pooling of special talents (law firms) or the result of a sole proprietor taking on a partner
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Types of Partners-not all are equal
• General partner– A person who assumes responsibility for operating a
business – Personally liable for his and other partners actions– Can represent the entire firm– Collects a salary +% of profits.
• Limited partner– A person who contributes capital to a business– has no management responsibility or liability for
losses beyond the amount he or she invested in the partnership
– Gets tax benefit and % of profits.
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Advantages of Partnerships
– Ease of start-up
– Availability of capital and credit -2 or more investors
– Personal retention of profits-motivation to succeed
– More concern for ethical business dealings-liable for each other’s actions
– Combined business skills and knowledge-less hats
– Possible tax advantages-only pay on your share of the profits-no corporate taxes
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Disadvantages of Partnerships
– Unlimited liability-personally liable for business failure
– Lack of continuity-but can buy each other’s interest in the business
– Management disagreements-
human interaction/friction
– Frozen investment-can’t remove your investment from the business without it dissolving
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Corporations
• An artificial person created by law with the legal rights of a real person
– can start and operate a business– can buy or sell property– can borrow money– can sue or be sued– can enter into binding contracts
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Corporations
• There are 5.1 million corporations in the U.S.
• They comprise only 20% of all businesses, but they account for 84.4 % of sales revenues
• Four biggest in 2006: Walmart –351 B Exxon - 347 B
Shell - 319 B
BP- 274 B
Saudi Arabia-309B Greece=244B S Africa=255 B
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Corporate Ownership
Stock - The shares of ownership of a corporation
– Closed (private) corporation• A corporation whose stock is owned by a few people
and is not sold to the general public
– Open (public) corporation• A corporation whose stock is bought and sold on
security exchanges and can be purchased by any individual-format of most large firms
NYSE
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Stockholders’ Rights
– Common stock• Stock owned by individuals or firms who vote on
corporate matters (one share=one vote) but whose claims on profit and assets are subordinate to the claims of preferred stockholders
– Preferred stock• Stock owned by individuals or firms who do not have
voting rights but whose claims on dividends are paid before those of common-stock holders
– Dividend• A distribution of earnings to the stockholders
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Advantages of Corporations
–Limited Liability• Each owner’s financial liability is limited to the amount of money he
paid for the corporation’s stock
–Ease of Raising Capitaldon’t need to incur debt; can sell stock
–Easy Ownership Transfer- just put your stock up for sale
–Perpetual Life when you die, corporation does not
–Specialized Management one hat/person & bigger salaries offered = better
people
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Disadvantages of Corporations
– Difficulty and Expense of Formation-• much paperwork & legal fees
– More Overhead - • must report to stockholders periodically
– Double Taxation-• corporate and personal
– Lack of Secrecy• competitors know your operations
– Limited Business Activities
• can only do those spelled out in your charter
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Special Types of Business Ownership
• S-corporations– Corporation taxed as though it were a partnership
(taxed only as personal income of stockholders)
– Advantages• Avoids double taxation of a corporation• Retains corporation’s legal benefit of limited liability
– S-corporation criteria• No more than 100 stockholders allowed• Stockholders must be individuals, estates, or
exempt organizations – no corporations
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Other Types of Business Ownership
• Government-Owned Corporations– A corporation owned and operated by a local,
state, or federal government
– Purpose• To ensure that a public service is available-many run
at a monetary loss
– Examples• Chicago Transit Authority (CTA)• National Aeronautics & Space Administration (NASA)• the Federal Deposit Insurance Corporation (FDIC)
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Other Types of Business Ownership
• Not-for-Profit Corporations– Corporations organized to provide social,
educational, religious, or other services, rather than to earn a profit
– Ex - museums, private schools, colleges • organized as not-for-profits primarily to ensure limited
liability
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Other Types of Business Ownership
• Cooperatives– Associations of individuals or firms whose purpose is to
perform some business function for its members
– Members benefit from the efficiencies of the cooperatives’ activities
• reducing unit costs by making bulk purchases
– Most prevalent in farming• Ex-Ocean Spray, Sunkist
• Answers questions about which legal form is best and how to get financing are provided at: http://www.sbaonline.sba.gov