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Types of Business Ownership

Types of Business Ownership. Chapter 7. Sole Proprietorship. Owned by a single owner Easiest form of business ownership Owner is the only one responsible for the business’s activities Owner is obligated to cover any payments resulting from loans but does not need to share the profits

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Types of Business Ownership

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  1. Types of Business Ownership Chapter 7

  2. Sole Proprietorship • Owned by a single owner • Easiest form of business ownership • Owner is the only one responsible for the business’s activities • Owner is obligated to cover any payments resulting from loans but does not need to share the profits • Examples: • Local restaurants, construction firms, barber shop/beauty salon • Over 75% of all businesses in the U.S. are sole proprietorships

  3. Sole Proprietorship • Characteristics of Success • Must be willing to accept full responsibility for the firm’s performance • Must be willing to work flexible hours • Must exhibit strong leadership skills • Must be well organized • Must have good communication skills • Many have previous experience in the market in which they are competing • As an employee in a competitor’s firm • As a manager

  4. Sole Proprietorship • Advantages • All earnings go to the sole proprietor • Easy organization • Complete control • Lower taxes • Disadvantages • Sole proprietor incurs all losses • Unlimited liability • Limited funds • Limited skills

  5. Partnership • A business that is co-owned by two or more people • Must register with the state and may need to apply for an occupational license • About 10% of all firms are partnerships • Types of partnerships: • general—all partners have unlimited liability • General partners manage the business, receive a salary, share the profits or losses of the business • Limited—partner’s liability is limited to the cash or property they contributed to the partnership • Limited partners are only investors in the partnership and do not participate in its management

  6. partnerships • Advantages • Additional funding • Losses are shared • More specialization • Disadvantages • Control is shared • Unlimited liability • Profits are shared

  7. S-corporations • Firms that have 100 or fewer owners • Have limited liability • Taxed as if the firm were a partnership • Earnings are distributed to the owners and taxed at the respective personal income tax rate of each owner • Some state governments impose a corporate tax on S-Corporations • Many accounting firms and small businesses select the S-Corporation as a form of ownership

  8. Limited Liability company (llc) • LLCs have all of the favorable features of a general partnership but also offer limited liability for the partners • Protects a partner’s personal assets from the negligence of other partners in the firm • Assets of the company are not protected • Examples: machinery, property • Must be created according to the laws of the state where the business is located

  9. corporation • State chartered entity that pays taxes and is legally distinct from its owners • About 20% of firms • Generate about 90% of all business revenue • Forming a Corporation: • Adopt a corporate charter and file it with the state government • Name of firm • Stock issued • Firm’s operations • Establish bylaws • Guidelines for managing the firm

  10. corporation • Shareholders are legally separated from the entity • Limited liability—not held personally responsible for the firm’s actions • Most money that can be lost is the initial investment • Stockholders elect a board of directors • Responsible for establishing general policies of the firm • Can get rid of key officers (CEO, CFO) • Can be voted out

  11. CORPORATION • How stockholders earn a return • Receive dividends from the firm • Portion of the firm’s recent earnings over three months that are distributed to stockholders • Stock value may increase • When a firm becomes more profitable, the value of the stock tends to rise • Selling stock for a higher price than what they paid for it **risk losing money if stock value decreases**

  12. corporations • Privately held • Ownership is restricted to a small group of investors • Usually small corporations • Publicly held • Shares can be easily purchased or sold by investors • Can obtain additional funds by issuing new common stock

  13. corporations • Advantages • Limited liability • Access to funds • Transfer of ownership • Disadvantages • High organizational expense • Financial disclosure • Agency problems • High taxes

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