forms of business ownership

proprietorshippartnership

corporation

[ characteristics] DEFINITION: A business owned and managed by one person,

also known as a sole proprietorship.

PROPRIETOR: The owner/manager of a business who performs day-to-day tasks that make a business successful with the help of hire employees.

WORTH NOTING:

• Most common form of business organization

• Over 16 million proprietorships in the United States

• 30% of proprietorships are part-time businesses run out an office or home

• Appealing to stay-at-home parents

proprietorship

[ advantages ]• Owner is the boss

• Owner receives all profits

• Owner personally knows employees and customers

• Owner can make decisions (and quickly)

• Owner is free from red tape

• Pay less income tax than a corporation

proprietorship

[ disadvantages ]

• Owner may lack necessary skills and abilities

• Owner may lack funds

• Owner bears all losses• Assumes a great deal of risk

• Illness or death may close the business

proprietorship

[ criteria ]

The type of business that can be operated suitably as a proprietorship is one that:

1) is small enough to be managed by the proprietor or a few people hired by the proprietor.

2) does not require a large amount of capital.

3) is primarily concerned with providing personal services.

4) is the type that sells merchandise/services on a small scale.

proprietorship

examplesproprietorship

SERVICES

Dentists

Accountants

Landscape Gardeners

Carpenters/Painters

Barbers/Hair Stylists

Website Developers

Graphic Designers

Day Care Providers

PRODUCTS

Newspapers/Magazine

Food Stands

Family Restaurants

Flower Shops

Small Grocery Stores

Web-Based Businesses

[ characteristics] partnership

DEFINITION: A business owned by two or more people.

WORTH NOTING:

• Partners must clearly agree upon each person’s responsibilities in order to be successful

• Can be classified in a variety of ways• Silent or secret partners

• Critical to prepare a balance sheet• Shows assets, liabilities, and capital at the start of the

business

[ advantages ]• Pooled skills and abilities

• Increased sources of capital• For equipment, inventory, property, etc.

• Improved credit

• Contribution of goodwill

• Increased concern in business management

• Lower tax burden• Pay personal income taxes vs. tax on profits

• Reduction in competition

• Operating expense efficiency• Advertising, supplies, etc.

partnership

[ disadvantages ]• Unlimited financial liability

• Disagreement among partners

• Partners bound by contracts

• Uncertainty of partnership longevity• Unexpected death

• Limited capital sources• “Too many cooks in the kitchen”

• Unsatisfactory division of profits• Usually according to contributions, specified in

contract• Labor, expertise, capital

• Difficult to withdraw

partnership

[ criteria] partnership

The type of business that can be operated suitably as a partnership is one that:

1) furnishes more than one kind of product or service. Car dealer (sales/service departments)

2) has more than one location and/or operates long hours. Restaurants

3) could also be a partnership, especially those that offer professional services. Lawyers, doctors, accountants, etc.

If you were starting XYZ business, would you form a

proprietorship or partnership?

Why?

[ corporations ]

[ characteristics ]

CORPORATION: A business owned by a group of people and authorized by the state in which it is located

to act as though it were a single person, separate from its owners.

WORTH NOTING:

• Few in number, large in size Smaller corporations do exist

• Often begin as small businesses

• Corporate sales of goods/services estimated to be 17 times greater than sales from proprietorships and 16 times greater than sales from partnerships

corporation

[ characteristics ]

INCORPORATION: Forming a new business

CHARTER: Official document through which a state grants the power to operate as a corporation

A CORPORATION IS…In a sense, an artificial person created by the laws of the state.

corporation

[ organization ]corporation

• Naming the business Corporation, Corp., Incorporated, Inc.

• Clearly describe purpose of the business To operate a retail food business

• Invest in the business Issue stock

• Pay incorporation costs/tax

• Prepare a balance sheet

• Determine voting rights of stockholders

[ advantages ]corporation

• Several sources of capital, specifically sales of shares

• Limited liability of stockholders – initial investment

• More permanent type of organization than partnership/proprietorship

• Easy to transfer ownership – selling stock

[ disadvantages ]corporation

• Subject to numerous taxes• Filing fee• State tax based on profits• Federal income tax• Dividends are taxed twice

• Extensive government regulations• Must publish financial data

• Time-consuming and expensive responsibilities• Record-keeping of stockholders (1,000’s)

• Charter restrictions• New charter for diversification

[ characteristics ]DEFINITION: A legal agreement that gives an individual the right

to market a company’s products or services in a particular area.

FRANCHISEE: The person who purchases a franchise agreement.

FRANCHISOR: The person or company that offers a franchise for purchase.

WORTH NOTING:

• More than 500k people in the U.S. own franchises, and that number is growing

• Franchising opportunities are available in virtually every field• Motels, pet stores, video outlets, etc.

• The U.S. Dept. of Commerce lists more than 1,400 franchise opportunities by category

franchise

[ operating costs ]INITIAL FRANCHISE FEE: • Fee the franchise owner (franchisee) pays in return for the

right to run the franchise.• Can start as low as a few thousand dollars and can exceed

hundreds of thousands of dollars.

START-UP COSTS: • Costs associated with beginning a business.

• Renting/purchasing a facility• Renting/purchasing equipment• Purchasing inventory

ROYALTY FEES: • Weekly or monthly payments made by the owner (franchisee)

of the franchise to the seller of the franchise (franchisor).

ADVERTISING FEES: • Fees paid to support television, magazine, or other advertising

of the franchise as a whole.

franchise

[ advantages ]• Entrepreneur is provided with an established product or

service, which levels the playing field

• Franchisors offer management, technical, and other assistance• On-site training• Start-up, daily operations• Tips on crisis management

• Equipment and supplies can be less expensive• Large quantity purchase discounts from franchisor

• Guarantee of consistency attracts customers• Brand recognition

franchise

[ disadvantages ]• Franchises can cost a lot of money and cut down on profits

• Initial capital/investment is high• Some profits are returned to franchisor as royalties

• Owners of franchises have less freedom to make decisions than other entrepreneurs• Set product/service line, prices, etc.

• Franchises are dependent on the performance of other franchisees in the chain• Benefit from success of other franchisees, but bad

reputations can cause customer opinions and satisfaction to decline

• Franchisor can terminate the franchise agreement• Failing to pay royalty fees or inability to meet

conditions may result in loss of franchise and investment/non-renewal of contract agreement

franchise

[ franchise evaluation ]Provide a background of franchise, then answer these questions:1. What are the costs and royalty fees associated with the

franchise?2. Will I be guaranteed an exclusive territory for the duration of

the franchise term, or can the franchisor sell additional franchises in the territory?

3. How profitable have other franchises in the area been? What do other franchisees think of the franchisor?

4. How long has the franchisor been in business? How profitable is the franchisor?

5. What services does the franchisor provide? Will the franchisor help me with marketing, merchandising, and site selection?

6. Are the benefits provided by the franchisor worth the loss of independence and the cost of purchasing the franchise?

7. What happens if I want to cancel the franchise agreement?8. Is becoming a franchisee of this business a good

opportunity? Why or why not?

franchise

[ franchise evaluation ]

www.franchising.com

www.franchise.com

www.franchise.org

http://www.census.gov/econ/census/franchising/

http://www.entrepreneur.com/franchises/index.html#

franchise