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3.06B Select form of business ownership. 3.00 Acquire knowledge of business ownership to establish & continue business operations. Summarize the advantages and disadvantages of the most common types of business ownership. Objectives. Three basic forms of business ownership.

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3 06b select form of business ownership
3.06B Select form of business ownership

3.00 Acquire knowledge of business ownership to establish & continue business operations

slide3

Three basic forms of business ownership

Your choice depends on your needs & goals

  • Sole proprietorship
  • Partnership
  • Corporation
slide4

Sole proprietorship

  • A business owned and operated by one person.
slide5

Advantages of sole proprietorships

  • Easy and inexpensive to create.
    • Unless you need certification or local permits, government intervention is minimal
  • Owner makes all business decisions & has control over all aspects of the business.
  • Flexibility in scheduling to meet owner’s needs
slide6

Advantages of sole proprietorships cont.

  • Owner receives all profits.
  • Privacy – owner is the only one who knows details of the business
    • Secret ideas, formulas, or recipes
  • Ability to act quickly in making decisions – no checking with others
slide7

Advantages of sole proprietorships cont.

  • Tax advantages
    • Business itself pays no taxes
    • Taxes are paid as personal income of owner which is usually lower than corporate taxes
    • Many business expenses are deductible
  • Easy to close/dissolve
    • Pay employees and creditors
    • Sell your equipment
    • Notify customers if possible
slide8

Disadvantages of sole proprietorships

  • Owner has unlimited liability for all debts and actions of the business.
    • Unlimited liability: The debts of the business may be paid from the personal assets of the owner.
    • If you cannot pay business debt with business income, bill collectors can take your personal assets (home, car)
  • Difficult to raise capital.
    • Banks/lenders consider sole proprietorships to be a high-risk investment
    • Needs include paying employees, purchasing equipment & inventory, & running the business
    • Expansions can be delayed or halted causing you to lose business to your competition
slide9

Disadvantages of sole proprietorships

  • Sole proprietorship is limited by his/her skills and abilities.
  • Uncertain life
    • You are “it” – illness or injury that prevents you from working may cause you to close
    • Bankruptcy or incarceration will dissolve your business
    • The death of the owner automatically dissolves the business.
slide10

Partnership

A form of business ownership in which two or more people share the assets, liabilities, and profits.

slide11

Advantages of partnerships

  • Fairly easy & inexpensive to start
    • May pay attorney if you develop a partnership agreement
  • Combined resources
    • Team with partners with different skills, experience, contacts, & capital
    • Sharing responsibilities makes business run more efficiently & smoothly
    • Increase the amount of capital to run the business. Lenders may be more willing to lend or extend credit
  • Decreased Competition
    • Combining like businesses will decrease or eliminate competition
slide12

Advantages of partnerships cont.

  • Reduced expenses
    • When two or more businesses combine expenses are no longer being duplicated
      • Ex. promotion, office space, supplies, utilities
  • Business losses are shared by all partners.
  • The partnership does not pay income tax on profits.
    • Each partner pays income tax on her/his individual share of the profit
slide13

Disadvantages of partnerships

  • Unlimited liability
    • Each owner in a general partnership has unlimited liability.
    • Each partner can lose personal assets to pay business debt
    • In a limited partnership, the liability is limited to the amount invested in the business
  • Limited Capital
    • Although partners may bring more capital to the business than sole proprietors, it is still limited to what each can contribute
    • Some lenders may still be reluctant to lend large amounts
  • Difficulty in ending
    • Withdrawing can be complicated if there is no written partnership agreement
      • By law profits must be divided equally if no agreement
slide14

Disadvantages of partnerships cont.

  • Partnerships may lead to disagreements.
    • May disagree on business goals, finances, responsibilities, & division of profits
    • Can affect the efficiency of the business, morale of employees, & success or failure of the venture
  • Developing a detailed partnership agreement often helps resolve the conflict because it addresses many issues that cause potential disagreements
    • In 1916, the U.S. government developed the Uniform Partnership Act (updated in 1997)which serves as a guide for legally formulating a general partnership agreement
    • A limited partnership is more formal & specific in nature & is governed by the Uniform Limited Partnership Act (ULPA)
slide15

Disadvantages of partnerships cont.

  • Uncertain life/Transferability
    • Unless specified in a detailed partnership agreement, bankruptcy, death & the withdrawal or admittance of a new partner dissolves the partnership
    • Remaining partners may start a new partnership if they have the money to buy the former partner’s share
slide16

Corporation

  • A business that is chartered by a state and legally operates apart from its owners.
  • Owned by stockholders who have purchased units or shares of the company
slide17

Types of corporations

  • C-corporation: The most common form of corporation. It protects the entrepreneur from being personally sued for the actions and debts of the corporation
  • Subchapter S corporation: A corporation that is taxed like a sole proprietorship or partnership.
  • Nonprofit corporation: Legal entities that make money for reasons other than the owner’s profit. Limited Liability Company (LLC):A form of business ownership that provides limited liability and tax advantages.
slide18

Advantages of corporations

  • Financial Power
    • Can raise money quickly by issuing shares of stock.
    • Because it is closely regulated by the government, financial institutions are more willing to lend larger amounts of capital
  • Limited Liability
    • Owners are liable only up to the amount of their investments. Personal assets cannot be used to pay business debt
  • Unlimited life
    • May exist indefinitely
    • The death or withdrawal of an owner/stockholder does not affect the life span of the corporation
slide19

Advantages of corporations cont.

  • Easy-to-transfer ownership
    • Ownership simply transferred by selling stock to someone else
    • New stock certificate is issued in the name of new stockholder. No permission is required by others
  • The business can hire experts to professionally manage each aspect of the business.
    • Can result in a more efficiently run organization
slide20

Disadvantages of corporations

  • Difficulty in forming & operating
      • Legal assistance is needed to start a corporation
        • Lawyer fees can be very expensive
      • Must request approval from the State & register the Articles of Incorporation
      • Decisions about value & class of stock & shareholder voting rights
  • Corporations are subject to more government regulations than partnerships or sole proprietorships.
      • Reporting & taxation requirements vary from state to state
      • Required to keep detailed reports for stockholders & to keep them informed of certain corporate transactions, meetings, & voting rights
      • New charter must be approved if corporate activities change
slide21

Disadvantages of corporations

  • Dual taxation
    • Corporation is taxed on profits from the company
    • Shareholders are taxed on the dividends they earn on their investments
  • Separate owners & managers
    • Stockholders are not generally involved in the day-to-day operation of the corporation
    • Stockholders form a board of directors to make decisions about the business & managers carry out these decisions
    • Separation of ownership & management provides more opportunity for irregularities or misunderstandings
slide22

Hybrid forms of Business Ownership

  • Limited Liability Company (LLC)
  • Limited Liability Partnership (LLP)
  • Both combine various elements of sole proprietorships, partnerships, & corporations into one package
slide23

Advantages of Hybrid Businesses

  • Cost to start & operate
    • Generally less expensive than corporations
    • No dual taxation - requires less paperwork & regulation
    • LLPs are designed for business professionals such as lawyers & doctors
      • Partners might need to carry a required amount of liability insurance
  • Limited Liability
    • Personal assets cannot be used to pay business debt
    • Owners (members) lose only what they have invested in the business if it fails
slide24

Advantages of Hybrid Businesses cont.

  • Taxation
    • LLCs & LLPs pay taxes on personal income-tax returns
    • Since they are not considered separate entities (like corporations) they are not subject to dual taxation
  • Combined resources
    • Often have more owners & tend to have a wider pool of financial resources, skills, talents, & contacts
  • Life span
    • Hybrids are required to dissolve after a specific time period
      • Depending on the state registered in, usually between 30 & 40 years
    • Owners can decide if they want to reorganize or let it dissolve
slide25

Advantages of Hybrid Businesses cont.

  • Flexibility
    • Number of members permitted in LLCs are unlimited
      • Sub S corporations must have 100 or fewer shareholders
    • Most states require only one member to establish a business as a hybrid
    • Members are permitted to run the company or to allow others to manage it
    • Membership changes do not automatically dissolve the company
slide26

Disadvantages of hybrids

  • Requirements & laws to establish & operate hybrids vary from state to state
    • Problematic for businesses that operate in more than one state
    • No universal guidelines from state to state
  • Verification of each state’s statutes can be costly