Types of Business Ownership Back to Table of Contents.

Types of Business Ownership


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Types of Business Ownership Types of Business Ownership

2

Chapter 7

Types of Business Types of Business OwnershipOwnership

Sole Proprietorships and Sole Proprietorships and PartnershipsPartnerships

CorporationsCorporations

7.1

7.2


3

Discuss the sole proprietorship legal form.

Explain the partnership legal form.

Section 7.1 Sole Proprietorships and Partnerships

7.1


4

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.


7.1


5

sole proprietorship

liability protection

unlimited liability


7.1

partnership

general partner

limited partner


6

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



7

Sole Proprietorship

The owner of a sole proprietorship:


receives the profits

incurs any losses

is liable for the debts of the business


8

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

Section 7.1 Sole Proprietorships and Partnerships 9

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.


11

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



12

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



13

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.


14

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


Partnerships


Advantages

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.


17

1. Discuss the sole proprietorship legal form.


7.1

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.


18

2. Explain the partnership legal form.


7.1

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.


19

Explain how the corporate form gives owners more protection from liability.

Discuss the advantages and disadvantages of a C-corporation

Describe a Subchapter S corporation.

Compare nonprofit corporations to C-corporations.

Explain the limited liability company.

Discuss how to decide which legal form to use.

Section 7.2 Corporations

7.2


20

In a corporation, the owners of the business are protected from liability for the actions of the company.


7.2


21

corporation

C-corporation

shareholders

limited liability


7.2

Subchapter S corporation

limited liability company (LLC)

nonprofit corporation


22

What Is a Corporation?

There 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


23

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



24

C-Corporation

In smaller corporations, the founders generally are the major shareholders.

shareholders an owner of shares of stock in a corporation


C-Corporation

Section 7.2 Corporations 25

Advantages

status

limited liability

ability to raise investment money

perpetual existence

employee benefits

tax advantages


26

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

Section 7.2 Corporations 27

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


28

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



29

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


30

Limited Liability Company

There are many benefits to forming a limited liability company (LLC)

limited liability company (LLC) a company whose owners and managers have limited liability and some tax benefits, but avoids some restrictions associated with Subchapter S corporations



31

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


32

1. Explain how the corporate form gives owners more protection from liability.


7.2

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


33

2. Discuss the advantages and disadvantages of a C-corporation.


7.2

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.


34

3. Describe a Subchapter S corporation.


7.2

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. Generally, it can have no more than 75 stockholders who must be U.S. citizens. It can have only one class of stock.


35

4. Compare nonprofit corporations to C-corporations.


7.2

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.


36

5. Explain the limited liability company.


7.2

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.


37

6. Discuss how to decide which legal form to use.


7.2

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?


38Section 7.2 Corporations 38

Big companies can afford to spend millions of dollars developing their e-commerce sites.

However, there are ways that allow small businesses to ease into e-commerce at a slower, less-expensive pace.

Entry LevelE-Commerce



Tech Termshosted shopping cart

a business that offers e-commerce services for a monthly fee; users can upload product information and have their business launched instantly

online auction

an auction that takes place on a Web site such as eBay



Tech Termsopen-source software

software applications that are distributed free of charge; a number of e-commerce shopping cart programs are available as open-source software

virtual store

an online storefront that allows entrepreneurs to sell products they do not own.



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