1. CHAPTER 16: TYPES OF BUSINESS OWNERSHIP
Ms. Baumgartner Inc. presents…
CHAPTER 16: TYPES OF BUSINESS OWNERSHIP

2. 16.1 Goals/Objectives
Identify advantages and disadvantages of a sole proprietorship
Explain difference between general partners and limited partners
Identify advantages and disadvantages of a partnership

3. Types of Business Ownership
3 legal forms:
Sole Proprietorship
Partnership
Corporation

4. Sole Proprietorship Owned by 1 person
Oldest and most common form of ownership
75% of businesses in the U.S. are these
Starter of the business is an ENTREPRENEUR
EX: auto repair, house cleaning, plumbing, etc.
Operate out of homes or small offices/stores
Many go out of business
Example of successful SP: Debbie Fields
Mrs. Fields Cookies

5. Advantages of Sole Proprietorship
Freedom to make all decisions (total control)
Receive all profits
Pay tax 1 time per year (as individual, not company)
Easy set-up (little paperwork, low costs)
Simple Licensing (easy to get business license)
Must apply for Business Name
Apply for a Certificate of Doing Business under an assumed Name—DBA
You need an Employer Identification Number
Assigned by IRS for tax purposes
You need this if you plan on hiring 1 or more employees

6. Disadvantages of S.P.
Limited capital (you have to either use your own money or get a loan yourself)
Unlimited liability (responsibility)
Owner is responsible to pay debts out of their personal assets (out of what they own)
EX: if business does bad, you may lose your car
Limited Human Resources (you must be good at all parts of business—pricing, advertising, selling, transporting, etc.)
Limited Life (situation where a business’s life span is determined by owner’s life span or decision to close the business

7. Partnerships Owned by 2 or more people
Agree to operate business for profit
Sign a partnership agreement
Written document that says how partnership will work
Agreement includes
Names of partners
Name and type of business
Amount that each partner invested in the beginning
Duties, rights and responsibilities of each partner
Procedures for sharing profits and losses
How assets will be split up if partnership is ended
5% of all businesses in the U.S. are partnerships
EX: Campbell Soup Company

8. General Partners vs Limited Partners
2 basic types of partnerships
General Partners
Business partner who has authority to make decisions, is active in the business operations and has unlimited liability for all losses or debts of business
EVERY partnerships has at least 1 general partner
All general partners have mutual agency power (right to sign contracts that are legally binding)
Limited Partners
Does not take an active role in decision making or running of the business
Liability is limited to the amount they invested only

9. Advantages of Partnership
Easy set-up (like sole proprietorships)
More skills and knowledge (since people have different areas of strengths, the more the people, the more strengths are being used)
Available Capital (several people can invest money; easier to get a loan with 2 people
Total control by partners (both people to blame for good OR bad that happens)
Profits taxed only once (taxed once a year and not taxed as a business; each partner pays personal income taxes based on what they made)

10. Disadvantages of Partnership
Unlimited liability for each General Partner
Each partner is responsible for all debts and losses of business. Both people must pay debts out of their own pocket if business cannot afford
Disagreement among Partners
If you don’t get along, business could suffer
Shared Profits
Profits must be shared—even if you do more work
Limited Life (can end for several reasons)
If a partner dies or decides to remove from business because of illness; may be a disagreement; may want to add new partners

11. 16.2 Goals/Objectives Describe 2 types of corporations
Summarize the process of forming a corporation
List advantages/disadvantages of corporation

12. What is a Corporation?
A business organization that operates individually that is separate from its owners and is treated by law as if it were an individual person
Can do everything the other 2 can do
It can sue or be sued
20% of businesses in the U.S. are corporations
They produce 90% of total business revenue

13. Starting a Corporation
File an application with state for permission to operate (called ARTICLES OF INCORPORATION)
You must write a set of corporate bylaws (rules that a corporation must operate to)
Then state issues a corporate charter
A license to operate a corporation; states the purpose of the business and lists the laws and guidelines

14. Issuing Stock Ownership divided into small units (shares)
Bought by people called stockholders
Stockholders are legal owners of the company
Each receives a stock certificate—which is proof of ownership
Closely held corporations: private corporation who has a small amount of stockholders; not traded in open markets
Public Corporations: sells stocks openly in market
Going Public: when a corporation decides to sells stocks in the open market

15. Advantages of Corporations
Ability to raise money easily
By selling stocks
Limited Liability
If the corporation has $ problems, the owners only lose the amount of their investment—their stock price
Continued Life
If a stockholder changes, the business does not end (unlike sole proprietorships)
Separate Ownership and Management
Owners do not run the business
Instead, they elect a board of directors who are responsible for overseeing general operations.

16. Disadvantages of Corporations
Complex, Expensive Set-Up
Must complete many forms, file reports and obey many laws, pay legal fees, licensing costs, and stock certificate fees
Slow Decision-Making process
People discuss issues and debate them before making any decisions—takes time!
Taxes
It must pay state and federal taxes on its profits and dividends

17. Limited Liability Company
Also called an LLC
A business that operates and pays taxes like a partnership but has limited liability for owners
Combines some of partnership and corporation
The owner’s liability is only what they invested
This form of business can only be used if the business is small

18. Franchise
An agreement to sell a company’s products or services in a designated geographic area
EX: McDonald’s, Subway, Burger King, Wendy’s, Taco Bell
When you open a franchise, you decide if your business is going to be a S.P, Partnership, Corporation or LLC.
Then purchase a franchise license from the parent corporation (EX: Burger King)
McDonald’s costs about $350,000 to start

19. Chapter 16 Review Activities
Reviewing Key Concepts: 1-6 (pg 544)
Your Financial portfolio (pg 547)
Worksheet to organize partnership (pg )