Chapter 3 Forms of Ownership

1. Chapter 3Forms of Ownership Sole Proprietorship

2. Sole Proprietorships • Oldest & most common form of business ownership. • Owned & managed by 1 person with a minimum amount of help • Easiest form of ownership to start in terms of paperwork/procedures • $ (capital) used to start the business comes from owner through their own savings and/or loans.

3. + Ease of starting Full Control of Business Owner owns all profits Use Owner’s Abilities Tax Breaks Secrecy Ease of terminating business __ Unlimited Liability Difficult to raise capital Limited management abilities Lack of stability Time demands Employee hiring and retention Sole Proprietorship: Advantages and Disadvantages

4. Partnerships • Two or more people own a business • They share everything • Can be based on a written, oral, or implied agreement (legally)

5. Three types of Partnerships • General Partner- partnership that has at least one partner with unlimited debts of the business. • Limited Partner – partnership that has one general partner with unlimited liability and one or more with limited partnership. • Joint Venture – a partnership for a special project or purpose. When the project is completed, the joint venture is terminated.

6. + More financial capital Combined Managerial skills Ease of starting Clear legal status Tax advantages - Unlimited liability Potential disagreements Frozen investment Difficult to raise financial capital ($) Instability Partnerships: Advantages and Disadvantages

7. The Partnership Contract • Called the Articles of Partnership – may or may not be written but heavily suggested. The partnership contract includes the following main features: • Name of business partnership • Type of business • Location of the business • Expected life of the partnership • Names of the partners and the amount of each one’s investment • Procedures for distributing profits and covering losses • Amounts that partners will withdraw for services • Procedures for withdrawal of funds • Duties of each partner • Procedures for dissolving a partnership

8. Three ways to become a small business: • By succession • By buying an existing business • By starting a new business • The key to a successful business is a Business Plan – a formal document of what the owner intends to do to sell enough of the firms products/services to make a profit.

9. Corporations • A corporation is a business that is a legal entity separate from its owners. • It has legal rights of an individual (it can own property, purchase goods/services, and sue or be sued by other people or corporations). • A corporation is owned by shareholders.

10. + Limited Liability Skilled Managers Transfer of ownership Greater capital base Stability Legal entity status - Start up difficult and costly Lack of control Double taxation Lack of secrecy Lack of personal interest Credit limitations Corporations: Advantages and Disadvantages

11. Definitions • Shareholders – person who owns a share or shares of stock in a corporation. • Board of Directors – elected by the shareholders. They approve the bylaws of the corporation. • Bylaws – rules and regulations of a corporation. • Articles of Incorporation – application form filled out and filed with the State requesting to become a corporation (incorporated)

12. Definitions • Charter – a state’s written agreement giving a business the right to operate as a corporation. • Domestic corporation – a corporation that conducts business in the state in which it was incorporated. • Foreign corporation – a corporation that conducts business in a state other than the state it was incorporated in.

13. Definitions (continued) • Proxy – a written statement signed by a shareholder of a corporation allowing someone else to cast his/her number of votes. • Merger – joining together of two corporations into one. • Conglomerate merger – companies that sell goods in unrelated markets merge. • Vertical merger – companies that merge together with their suppliers or distributors.

14. Definitions • Acquisition – the process in which one company buys the assets and assumes the obligations of another company. • Conglomerate – firm that has at least 4 businesses, each making unrelated products.

15. Definitions (continued) • S Corporation – a corporation with 35 or fewer owners that files an income tax return as a partnership to take advantage of lower tax rates. • Coopertive (Co-op) – an organization in which people collectively own and operate a business in order to compete with big competitors. • Professional Service Association – Professional people (doctors, dentists, lawyers) join together to form an organization under professional association laws treated as a corporation for tax purposes. They come together to get better benefits like profit sharing/pension plans, limited liability.

16. Definition of Entrepreneurship • Entrepreneur- an innovative risk taker responsible for much of the change in our economy. • Intrapreneur – a person within a large corporation who takes direct responsibility for turning an idea into a profitable finished product through assertive risk-taking and innovation. • Ex. Post-it Notes: Art Fry, a new product development researcher at 3M Company invented the “Post-it” notes as a temporary bookmarker.