Chapter 5-2: Forms of Business Ownership

1. Electronic Flashcards Chapter 5-2:Forms of Business Ownership

2. Chapter 5-2:Forms of Business Ownership • Why might a person want to own their own business?

3. Chapter 5-2:Forms of Business Ownership • A chance to be in control • A chance to make decisions • A chance to invest and make $$ -- profit • Read more….

4. Chapter 5-2:Forms of Business Ownership • Thousands of people are business owners; however, • the amount of control they have, how decisions are made, the sources of money for the business, and control over profits – • depends on the form of ownership.

5. Chapter 5-2:Forms of Business Ownership • How many major forms of business ownerships are there?

6. Chapter 5-2:Forms of Business Ownership Three (3)

7. Chapter 5-2:Forms of Business Ownership • What are those three (3) forms of business ownership?

8. Chapter 5-2:Forms of Business Ownership The (3) forms of business ownership are… • Proprietorship; aka sole proprietorship (click to define) • Partnership (click to define) • Corporation (click to define)

9. Chapter 5-2:Forms of Business Ownership Return to Major Forms A proprietorship is… • A business owned and operated by just one person • 7 Characteristics?

10. Chapter 5-2:Forms of Business Ownership Return to Major Forms A partnership is… • A business owned and controlled by two or more (> = 2) people who entered into an agreement • 4 Characteristics?

11. Chapter 5-2:Forms of Business Ownership Return to Partnership • What is that agreement called? PARTNERSHIP AGREEMENT Consists of?

12. Chapter 5-2:Forms of Business Ownership Return to Partnership What does a partnership agreement consist of? • Details the rules of procedures that guide ownership and operation. • Identifies the business name and investment/contribution of each partner • Shows how profit/losses will be divided • Defines authority, duties, and responsibilities • Details how the partnership can be dissolved (ended)

13. Chapter 5-2:Forms of Business Ownership Return to Major Forms A corporation is… • A separate legal entity (body) formed by documents filed with a state; treated as an “individual” by governments • 7 Characteristics?

14. Chapter 5-2:Forms of Business Ownership Return to Major Forms Characteristics of a Proprietorship (7) • Easiest to start and end • Few legal requirements • Capital needs are minimal • Sole control over all business activities • Owner receives all profits • Owner responsible for all business debts • Personal/business assets can be claimed to pay off business debts

15. Chapter 5-2:Forms of Business Ownership Return to Major Forms Characteristics of a Partnership (4) • Quite easy to start • All owners share responsibilities for key business decisions and functions • Capital investments and profits are shared based on agreement • Each partner is liable for the debts of the business, if it fails

16. Chapter 5-2:Forms of Business Ownership Characteristics of a Corporation (7) • Owned by one or more shareholders (persons who buy shares of stock) • Managed by a board of directors (BoD) • More difficult to form • Must meet more legal requirements • All owners do not have direct involvement in decisions • Owners will not have access to profits unless BoD approves dividends (profits shared) • Liability (risk) of stockholders is limited to only amount invested

17. Chapter 5-2:Forms of Business Ownership What are the advantages of choosing to operate your business as a proprietorship? • Freedom of working for yourself (NO BOSS) • Total control of the business • Easy startup; minimal capital needed • No business name needed; minimal gov’t regulations • Business expenses can be used to reduce taxable income

18. Chapter 5-2:Forms of Business Ownership Resume Review What is taxable income? • For example, if a proprietor earned $40,000 a year and generate a profit of $5,000 from the business, • the government will expect a % of that $45,000 to be paid in taxes; 25% of $45K = $11,250 income taxes, but • the business expenses = $2,000, then only $43,000 of earned income would be taxable; taxes only $10,750. • $500 savings in taxes

19. Chapter 5-2:Forms of Business Ownership What are the disadvantages of choosing to operate your business as a proprietorship? • The need to obtain required licenses and permits • Limited capital and business skills • Taxes will have to be paid on profits • All risk is placed on the owner • In the eyes of the law, the business and owner are the same

20. Chapter 5-2:Forms of Business Ownership What are the advantages of choosing to operate your business as a partnership? • Two or more people can contribute to the investment needed to start the business • Added expertise to the business • Good for people who share an idea for a business and work well together

21. Chapter 5-2:Forms of Business Ownership What are the disadvantages of choosing to operate your business as a partnership? • No protection for personal assets in case of debt • Each partner is responsible for decisions made by all other partners • Each partner can lose much more than the original amount invested • If partner chooses to leave the partnership or dies, the partnership normally is dissolved.

22. Chapter 5-2:Forms of Business Ownership What are the advantages of choosing to operate your business as a corporation? • Liability of any owner is limited to amount invested. • Amount of the business debt doesn’t matter • Can invest, make a profit, and NOT take part in the day-to-day management and operation

23. Chapter 5-2:Forms of Business Ownership What are the disadvantages of choosing to operate your business as a corporation? • Decision making is shared by managers, the BoD, and shareholders • More records are required and more laws that regulate operation • Investors pay taxes on individual earnings from stocks; company must pay corporate taxes on profit because it is treated as an “individual.”

24. Chapter 5-2:Forms of Business Ownership What other specialized forms of business ownership exists?

25. Chapter 5-2:Forms of Business Ownership Specialized Partnerships and Corporations • Limited liability partnership (Click to define) • Joint venture (Click to define) • S-corporation (Click to define) • Limited liability company (LLC) (Click to define) • Non-profit corporation (Click to define) Cooperatives and Franchises (Click to define)

26. Chapter 5-2:Forms of Business Ownership Return to Special Forms A limited liability partnership is … a partnership that identifies some investors who cannot lose more than the amount of their investment, but they are not allowed to participate in the day-to-day management of the business. is difficult and costly to setup

27. Chapter 5-2:Forms of Business Ownership Return to Special Forms A joint venture is … a unique business organized by two or more other businesses to operate for a limited time and for a specific project.

28. Chapter 5-2:Forms of Business Ownership Return to Special Forms An S-corporation is … offers the limited liability of a corporation; all income is pass through to the owners based on their investment and is taxed on their individual tax returns.

29. Chapter 5-2:Forms of Business Ownership Return to Special Forms An limited liability company (LLC) is … a combination of a partnership and corporation; provides liability protection for owners simpler requirements than corporation; document like partnership agreement must be developed

30. Chapter 5-2:Forms of Business Ownership Return to Special Forms A non-profit corporation is … a group of people who join to do some activity that benefits the public. • works in areas such as education, health care, charity, or the arts • capital is generated by grants and donations • must be organized as a corporation

31. Chapter 5-2:Forms of Business Ownership Return to Special Forms A cooperative is … • a company owned by members, serves their needs, and is managed in their interest. A franchise is… • a written contract granting permission to operate a business to sell g/s in a set way. • Read more…

32. Chapter 5-2:Forms of Business Ownership Return to Corporation What is a Board of Directors? The people who will make major policy and financial decisions for the business

33. Chapter 5-2:Forms of Business Ownership Cooperatives and Franchises • Cooperatives • Consumers form co-ops to purchases g/s cheaper as a group • Businesses form co-ops to market the g/s needed by its members • Larger numbers = greater bargaining power • Read more…

34. Chapter 5-2:Forms of Business Ownership Cooperatives and Franchises • Franchises • The company that owns the g/s and grants the rights to another business is known as the franchiser (i.e.,employer); examples – McDonald’s, Jiffy Lube, Merry Maids, etc. • The company purchasing the rights to run the business is the franchisee (i.e., employee). • Franchisee pays a fee and % of profit to franchiser. END of REVIEW

35. Chapter 5-2:Forms of Business Ownership Return to Corporation What are the legal requirements? • Must file articles of incorporationwith • the state in which it will operate • Must create corporate bylaws

36. Chapter 5-2:Forms of Business Ownership Return to Legal Reqs What is an article of incorporation? A written legal document that defines ownership and operating procedures and conditions for the business

37. Chapter 5-2:Forms of Business Ownership Return to Corporation What are corporate bylaws? Details that are the operating procedures for the corporation

38. Chapter 5-2:Forms of Business Ownership THE END You did it!!! Give yourself a hand.