BASICForms Of Business

VICTORIA CABALLEROMBA 630 MANAGERIAL ECONOMICS

MASTERS IN BUSINESS ADMINISTRATION

TYPES OF BUSINESS OWNERSHIP

Sole Proprietorships Partnerships

Corporations

Entrepreneurs need to understand the advantages and disadvantages

of various forms of business ownership so they can choose the most appropriate form for their

business.

SOLE PROPRIETORSHIP

The easiest and most popular

form of business ownership is

the sole proprietorship.

SOLE PROPRIETORSHIP

A business that is owned and

operated by one person

SOLE PROPRIETORSHIP

The owner of a sole proprietorship:

Receives the profits

Incurs any losses

Is liable for the debts of the

business

SOLE PROPRIETORSHIP

In a sole proprietorship the owner

must decide how much liability

protection he or she needs.

LIABILITY PROTECTION

Insurance against the debts and

actions of a business

SOLE PROPRIETORSHIP

Advantages

Sole proprietorship is easy and inexpensive to create.

The owner has complete authority over all business activities.

It is the least regulated form of business ownership.

The business pays no taxes; income is taxed at personal rate of owner.

SOLE PROPRIETORSHIP

Disadvantages

The owner has unlimited liability.

Raising capital is more difficult.

The business is totally reliant on skills and abilities of owner.

The death of owner dissolves the business unless there is a will to the contrary.

DISADVANTAGES

The biggest disadvantage of a sole proprietorship is financial.

In this form of business ownership, the owner has unlimited liability.

UNLIMITED LIABILITY

Full responsibility for all debts

and actions of a business

PARTNERSHIPS

A partnership draws on skills,

knowledge, and financial resources or

more than one person.

PARTNERSHIP

An unincorporated business with two or

more owners who share the decisions,

assets, liabilities, and profits

GENERAL VERSUS LIMITED PARTNERS The law requires that all partnerships have at least one general partner.

GENERAL PARTNER A participant in a partnership who has unlimited personal liability and takes full responsibility for managing the business

A partnership may be set up so that all of the partners are general partners.

GENERAL VERSUS LIMITED PARTNERS

Some partnerships include a limited

partner.

LIMITED PARTNER

A partner in a business whose liability is limited

to his or her investment; a limited partner cannot

be actively involved in managing the business.

PARTNERSHIPSAdvantages

Partnerships are inexpensive to create.

General partners have complete control.

Partners can share ideas.

Partners can share ideas and secure investment capital more easily and in greater amounts.

PARTNERSHIPS

Disadvantages

It is difficult to dissolve one partner’s interest without dissolving the partnership.

There may be personality conflicts.

Partners can be held liable for each others’ actions.

Sole proprietorship is the easiest and most popular form of business to create. The owner receives the profits, incurs any

losses, and is liable for the debts of the business.

A partnership is an unincorporated business with two or more owners. The partners share the decisions, assets, liabilities,

and profits. The partnership can draw on the skills, knowledge, and financial resources of more than one person,

which is an advantage when seeking loans.

In a corporation, the owners of the

business are protected from liability

for the actions of the company.

CORPORATIONThere are three types of corporations:

CORPORATION A business that is registered by a state and operates apart from its owners; it issues shares of stock and lives on after the owners have sold their interest or passed away.

C-corporation

Subchapter S corporation

nonprofit corporation

C-CORPORATION

A C-corporation is the most common

corporate form.

C-CORPORATION

an entity that pays taxes on earnings;

its shareholders pay taxes as well

C-CORPORATION

In smaller corporations, the founders

generally are the major shareholders.

SHAREHOLDERS

An owner of shares of stock

in a corporation

C-CORPORATION

AdvantagesStatus

Limited liability

Ability to raise investment money

Perpetual existence

Employee benefits

Tax advantages

ADVANTAGES

Corporate shareholders have limited liability, but some banks require officers to personally guarantee the debts of the company.

LIMITED LIABILITY Partial responsibility of a corporate shareholder; he or she is responsible only up to the amount of the individual investment.

C-CORPORATION

Disadvantages

Expensive to set up

Income is more heavily taxed

Subject to double taxation on income

Pays taxes on profits

Stockholders pay taxes on dividends

SUBCHAPTER S CORPORATION

An entrepreneur can avoid the double taxation of a C-corporation by setting up a Subchapter S corporation.

SUBCHAPTER S CORPORATION A corporation that is taxed like a partnership; profits are taxed only once at the shareholder’s personal tax rate.

NONPROFIT CORPORATION A nonprofit corporation must fall within one of four categories:

NONPROFIT CORPORATION A legal entity that makes money for reasons other than the owner’s profit; it can make a profit, but the profit must remain within the company

religion

charity

public benefit

mutual benefit

MAKING THE DECISION Before deciding on a legal form, ask yourself key questions about:

Your skills

Capital

Expenses

Willingness to assume liability

Level of control wanted

Length of time you expect to own the business

A corporation offers limited liability. In other words, shareholders are liable only up to the amount of their

individual investments.

ADVANTAGES:

A corporation has a more professional appearance, its shareholders are liable only up to the amount of their individual investment, it can raise money by

issuing shares of stock, it has perpetual existence, it is structured to accommodate employee benefits, and it has tax advantages.

DISADVANTAGES:

A corporation is expensive to set up and its income is more heavily taxed.

The Subchapter S corporation is taxed like a partnership; profits are taxed only once at the shareholder’s personal tax rate. Therefore, the

Subchapter S corporation is not a tax-paying entity.

Nonprofit corporations can make a profit, but the profit must remain within the companies and not be distributed to

shareholders. Any type of business can be a corporation, but a nonprofit must be formed for religious or for charitable

purposes, public benefit, or religious purposes. C-corporations are created to make a profit for its owners, or shareholders.

The limited liability company protects owners with the limited liability of a corporation. That is, the company’s owners are

not liable for its debts. It also provides pass-through tax advantages; shareholders are taxed only once. There are no limitations on the number of members or on their status.

You should consider your skills, capital, living expenses, willingness to assume personal liability for any claims against the business, control desired. Also, ask yourself: do you expect to have initial losses, or will the business be profitable from the

beginning? Do you expect to sell the business some day?

THANK YOU