1. Types of Business Ownership Back to Table of Contents

2. Types of Business Ownership 2 Chapter 7 Types of Business Ownership Sole Proprietorships and Partnerships Corporations 7.1 7.2

3. Types of Business Ownership 3 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. Section 7.1 Sole Proprietorships and Partnerships 7.1

4. Types of Business Ownership 4 sole proprietorship liability protection unlimited liability Section 7.1 Sole Proprietorships and Partnerships 7.1 partnership general partner limited partner

5. Types of Business Ownership 5 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 Section 7.1 Sole Proprietorships and Partnerships

6. Types of Business Ownership 6 Sole Proprietorship The owner of a sole proprietorship: Section 7.1 Sole Proprietorships and Partnerships receives the profits incurs any losses is liable for the debts of the business

7. Types of Business Ownership 7 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 Section 7.1 Sole Proprietorships and Partnerships

8. Sole Proprietorship Section 7.1 Sole Proprietorships and Partnerships 8 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.

9. Sole Proprietorship Section 7.1 Sole Proprietorships and Partnerships 9 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.

10. Types of Business Ownership 10 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 Section 7.1 Sole Proprietorships and Partnerships

11. Types of Business Ownership 11 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 Section 7.1 Sole Proprietorships and Partnerships

12. Types of Business Ownership 12 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 Section 7.1 Sole Proprietorships and Partnerships A partnership may be set up so that all of the partners are general partners.

13. Types of Business Ownership 13 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 Section 7.1 Sole Proprietorships and Partnerships

14. Partnerships Section 7.1 Sole Proprietorships and Partnerships 14 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.

15. Partnerships Section 7.1 Sole Proprietorships and Partnerships 15 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.

16. Types of Business Ownership 16 1. Discuss sole proprietorship. Section 7.1 Sole Proprietorships and Partnerships 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.

17. Types of Business Ownership 17 2. Explain the partnership. Section 7.1 Sole Proprietorships and Partnerships 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.

18. Types of Business Ownership 18 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

19. Types of Business Ownership 19 In a corporation, the owners of the business are protected from liability for the actions of the company. Section 7.2 Corporations 7.2

20. Types of Business Ownership 20 corporation C-corporation shareholders limited liability Section 7.2 Corporations 7.2 Subchapter S corporation limited liability company (LLC) nonprofit corporation

21. Types of Business Ownership 21 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 Section 7.2 Corporations corporation nonprofit corporation

22. Types of Business Ownership 22 Corporation A corporation is the most common corporate form. corporation an entity that pays taxes on earnings; its shareholders pay taxes as well Section 7.2 Corporations

23. Types of Business Ownership 23 Corporation In smaller corporations, the founders generally are the major shareholders. shareholders an owner of shares of stock in a corporation Section 7.2 Corporations

24. Corporation Section 7.2 Corporations 24 Advantages status limited liability ability to raise investment money perpetual existence employee benefits tax advantages

25. Types of Business Ownership 25 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 Section 7.2 Corporations

26. Corporation Section 7.2 Corporations 26 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

27. Types of Business Ownership 27 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 Section 7.2 Corporations religion charity public benefit mutual benefit

28. Types of Business Ownership 28 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 Section 7.2 Corporations

29. Types of Business Ownership 29 Making the Decision Before deciding on a legal form, ask yourself key questions about: Section 7.2 Corporations your skills capital expenses willingness to assume liability level of control wanted length of time you expect to own the business

30. Types of Business Ownership 30 1. Explain how the corporate form gives owners more protection from liability. Section 7.2 Corporations 7.2 A corporation offers limited liability. In other words, shareholders are liable only up to the amount of their individual investments.

31. Types of Business Ownership 31 2. Discuss the advantages and disadvantages of a corporation. Section 7.2 Corporations 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.

32. Types of Business Ownership 32 4. Compare nonprofit corporations to corporations. Section 7.2 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.

33. Types of Business Ownership 33 5. Explain the limited liability company. Section 7.2 Corporations 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.

34. Types of Business Ownership 34 6. Discuss how to decide which legal form to use. Section 7.2 Corporations 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?