Chapter 6

1. Chapter 6 Business Ownership & Operations

2. Organizing a Business • Three main types are: • 1. Sole proprietorship • 2. Partnership • 3. Corporation

3. Sole Proprietorship – a business owned by one person. • ADVANTAGES: • Easy to start • May need a license/permit • “In charge” of your business • You make all decisions • You keep all profits • Income is taxed once. • Income taxes are usually lower than a corporation’s.

4. Sole Proprietorship-Disadvantages • Unlimited liability—the owner is responsible for the company’s debts. • If owner has more debts than income, then the owner has to make up the difference. • Limited access to credit • If potential owner does not have much experience or money saved, banks aren’t as willing to lend $. • Many sole proprietorships fail because they run out of money. • Lack of skills needed to run business. • Sole Proprietorship ends when owner dies.

5. Partnerships • Owned by 2 or more people who share its risks & rewards. • Need a partnership agreement • Contract outlining the rights & responsibilities of each partner. • Examples: • Doctors, dentists, lawyers, accountants

6. Partnership-Advantages • Easy to start • Easier to obtain capital • Each partner usually contributes money to start business. • Banks are often more willing to lend money. • Taxed only once. • Each partner brings different skills & talents to the business.

7. Partnership-Disadvantages • All partners share business risks • Unlimited legal & financial liability • Problems arise if partners don’t get along, or • If one partner leaves business—must reorganize. • If one partner makes a bad decision—all partners are responsible.

8. Corporations • A company registered by a state & operates apart from its owners. • Must get a corporate charter from state where main office is located. • Charter is license to run a corporation. • To raise money—owners sell stock in company—i.e. Facebook • Must have a board of directors who govern the corporation.

9. Corporation-Advantages • Major advantageLimited Liability • Owners are responsible for no more than the capital they have invested. • Ability to raise money • Business continues if an owner dies. • Deceased owner’s shares are sold, and business continues.

10. Disadvantages of Corporation • Taxed twice • Taxes paid on income, and • Stockholders pay taxes on profits—double taxation. • More government regulation • Difficult & expensive to start Other types of corporations— S corporation & LLC—do not have double taxation, but have other restrictions.

11. Other ways to organize • Cooperative – owned & operated by its members—i.e. farms. • Purpose: To pool resources & save money on purchase or certain goods/services. • Example: Ocean Spray is a cooperative of cranberry growers.

12. Nonprofit organizations – focus on providing a service. • No profit • Do not pay taxes • Franchise – contractual agreement to use name & sell products/services of a company in a certain geographic area. • Invest money • Must pay franchise fees or a share of profits • You get a well-known name & business plan