Objectives Summarize the advantages and disadvantages of the most common types of business ownership.

Three basic forms of business ownership Sole proprietorship Partnership Corporation Your choice depends on your needs & goals

Sole proprietorship A business owned and operated by one person.

Advantages of sole proprietorships Easy and inexpensive to create. Unless you need certification or local permits, government intervention is minimal Owner makes all business decisions & has control over all aspects of the business. Flexibility in scheduling to meet owner’s needs

Advantages of sole proprietorships cont. Owner receives all profits. Privacy – owner is the only one who knows details of the business Secret ideas, formulas, or recipes Ability to act quickly in making decisions – no checking with others

Advantages of sole proprietorships cont. Tax advantages Business itself pays no taxes Taxes are paid as personal income of owner which is usually lower than corporate taxes Many business expenses are deductible Easy to close/dissolve Pay employees and creditors Sell your equipment Notify customers if possible

Disadvantages of sole proprietorships Owner has unlimited liability for all debts and actions of the business. Unlimited liability : The debts of the business may be paid from the personal assets of the owner. If you cannot pay business debt with business income, bill collectors can take your personal assets (home, car) Difficult to raise capital. Banks/lenders consider sole proprietorships to be a high- risk investment Needs include paying employees, purchasing equipment & inventory, & running the business Expansions can be delayed or halted causing you to lose business to your competition

Disadvantages of sole proprietorships Sole proprietorship is limited by his/her skills and abilities. Uncertain life You are “it” – illness or injury that prevents you from working may cause you to close Bankruptcy or incarceration will dissolve your business The death of the owner automatically dissolves the business.

PARTNERSHIP A form of business ownership in which two or more people share the assets, liabilities, and profits.

Advantages of partnerships Fairly easy & inexpensive to start May pay attorney if you develop a partnership agreement Combined resources Team with partners with different skills, experience, contacts, & capital Sharing responsibilities makes business run more efficiently & smoothly Increase the amount of capital to run the business. Lenders may be more willing to lend or extend credit Decreased Competition Combining like businesses will decrease or eliminate competition

Advantages of partnerships cont. Reduced expenses When two or more businesses combine expenses are no longer being duplicated Ex. promotion, office space, supplies, utilities Business losses are shared by all partners. The partnership does not pay income tax on profits. Each partner pays income tax on her/his individual share of the profit

Disadvantages of partnerships Unlimited liability Each owner in a general partnership has unlimited liability. Each partner can lose personal assets to pay business debt In a limited partnership, the liability is limited to the amount invested in the business Limited Capital Although partners may bring more capital to the business than sole proprietors, it is still limited to what each can contribute Some lenders may still be reluctant to lend large amounts Difficulty in ending Withdrawing can be complicated if there is no written partnership agreement By law profits must be divided equally if no agreement

A disadvantage of a general partnership is that each partner is liable for the business's losses. Partnerships may lead to disagreements. May disagree on business goals, finances, responsibilities, & division of profits Can affect the efficiency of the business, morale of employees, & success or failure of the venture Disadvantages of partnerships cont.

Uncertain life/Transferability Unless specified in a detailed partnership agreement, bankruptcy, death & the withdrawal or admittance of a new partner dissolves the partnership Remaining partners may start a new partnership if they have the money to buy the former partner’s share

CORPORATION  A business that is chartered by a state and legally operates apart from its owners.  Owned by stockholders who have purchased units or shares of the company

TYPES OF CORPORATIONS C-corporation : The most common form of corporation. It protects the entrepreneur from being personally sued for the actions and debts of the corporation Subchapter S corporation : A corporation that is taxed like a sole proprietorship or partnership.

TYPES OF CORPORATIONS  Nonprofit corporation: Legal entities that make money for reasons other than the owner’s profit. Limited Liability Company (LLC): A form of business ownership that provides limited liability and tax advantages.

Advantages of corporations Financial Power Can raise money quickly by issuing shares of stock. Because it is closely regulated by the government, financial institutions are more willing to lend larger amounts of capital Limited Liability Owners are liable only up to the amount of their investments. Personal assets cannot be used to pay business debt Unlimited life May exist indefinitely The death or withdrawal of an owner/stockholder does not affect the life span of the corporation

Advantages of corporations cont. Easy-to-transfer ownership Ownership simply transferred by selling stock to someone else New stock certificate is issued in the name of new stockholder. No permission is required by others The business can hire experts to professionally manage each aspect of the business. Can result in a more efficiently run organization

Disadvantages of corporations Difficulty in forming & operating Legal assistance is needed to start a corporation Lawyer fees can be very expensive Must request approval from the State & register the Articles of Incorporation Decisions about value & class of stock & shareholder voting rights Corporations are subject to more government regulations than partnerships or sole proprietorships. Reporting & taxation requirements vary from state to state Required to keep detailed reports for stockholders & to keep them informed of certain corporate transactions, meetings, & voting rights New charter must be approved if corporate activities change

Disadvantages of corporations Separate owners & managers Stockholders are not generally involved in the day-to-day operation of the corporation Stockholders form a board of directors to make decisions about the business & managers carry out these decisions Separation of ownership & management provides more opportunity for irregularities or misunderstandings Dual taxation Corporation is taxed on profits from the company Shareholders are taxed on the dividends they earn on their investments

Hybrid forms of Business Ownership Limited Liability Company (LLC) Limited Liability Partnership (LLP) Both combine various elements of sole proprietorships, partnerships, & corporations into one package

Advantages of Hybrid Businesses Cost to start & operate Generally less expensive than corporations No dual taxation - requires less paperwork & regulation LLPs are designed for business professionals such as lawyers & doctors Partners might need to carry a required amount of liability insurance Limited Liability Personal assets cannot be used to pay business debt Owners (members) lose only what they have invested in the business if it fails

Advantages of Hybrid Businesses cont. Taxation LLCs & LLPs pay taxes on personal income-tax returns Since they are not considered separate entities (like corporations) they are not subject to dual taxation Combined resources Often have more owners & tend to have a wider pool of financial resources, skills, talents, & contacts Life span Hybrids are required to dissolve after a specific time period Depending on the state registered in, usually between 30 & 40 years Owners can decide if they want to reorganize or let it dissolve

Advantages of Hybrid Businesses cont. Flexibility Number of members permitted in LLCs are unlimited Sub S corporations must have 100 or fewer shareholders Most states require only one member to establish a business as a hybrid Members are permitted to run the company or to allow others to manage it Membership changes do not automatically dissolve the company

Disadvantages of hybrids Verification of each state’s statutes can be costly Requirements & laws to establish & operate hybrids vary from state to state Problematic for businesses that operate in more than one state No universal guidelines from state to state

3.06B Select form of business ownership

Objectives Demonstrate procedures for selecting a form of business ownership.

Steps to Choosing Ownership Type 1)Determine the nature of the business a)Can you manage on your own or will you need to hire help? a)If starting small – sole proprietorship b)If you start small you can reorganize later 2)Assess your desired level of independence or control a)If wanting total control - sole proprietorship b)If not comfortable with all decisions & desire input from others – partnerships or hybrids

Steps to Choosing Ownership Type 3)Evaluate financial needs a)If ample financial resources on your own – sole proprietorship b)Need a lot of capital in savings, etc. – partnership, corporation, or hybrid c)Lots of expensive equipment & other costs – corporation so you can sell stock 4)Examine willingness to assume risk a)If you are a risk taker – sole proprietorship or general partnership a)Risking all personal assets b)Not a risk taker – corporation, limited partnership, or hybrid a)Only risking what you invest

Steps to Choosing Ownership Type 5)Analyze your experience & abilities a)Do you have all of the skills & abilities to run the business – sole proprietorship b)Lack a major skill - partnership 6)Implement steps to legalize the business a)Obtain copyright, trademark, or patent for a new idea or product b)Check on any state certification requirements for certain professions a)Ex. CPAs, attorneys, educators, hairstylists

Steps to Legalizing Your Business  Sole Proprietorships  Verify professional certifications  Register your business name by completing a “Doing Business As” (DBA) form with County government  Obtain permits & meet health & safety requirements as mandated by your local government

Steps to Legalizing Your Business  General Partnerships  Determine each partners rights & responsibilities  Best to develop a partnership agreement with an attorney’s help  Limited partnerships must file a partnership agreement  Information in standard partnership agreement includes:

Steps to Legalizing Your Business  Corporation  Apply for a charter with the N.C. Secretary of State  File an “Articles of Incorporation”  Includes business name, purpose, location, amount of stock to be issued, classes & values of stock, stockholder voting guidelines, names of the board of directors, general powers, limitations, & activities of the business  Pay incorporation fee  Pay attorney & any government fees

Steps to Legalizing Your Business  LLPs & LLCs  More complicated than sole proprietorships & partnerships, but less complicated than corporations  Register in state where located  May have various initial & annual fees  Some states require operating agreement (similar to partnership agreement)  Although not required it is recommended consulting an attorney

BUSINESS LAW Business law or commercial law is a body of laws that governs conducting a business. The primary reason that governments regulate business activities is to protect the well-being of individuals and businesses

BUSINESS LAW  A business that fails to protect its employees from unnecessary risk or health hazards on the job may be sued for negligence.

Business Laws  Business law is applicable to both small and big businesses  Because of its broad coverage, several branches of it are categorized to avoid confusion  Contract law  Sales law  Property law  Intellectual property & computer law  Bankruptcy law  Tax law

Contract Law  Designed to provide stability, predictability, as well as certainty, for buyers and sellers in the marketplace.  Necessary to ensure compliance with a promise or to entitle the innocent party to some form of relief.

Contract Law  A legally enforceable contract requires:  An Offer (I’ll mow your lawn this weekend, if you pay me $35)  An Acceptance (You’ve got a deal)  Consideration (The value received and given – the money and the lawn mowed)  A contract is a legal agreement negotiated between two persons that creates an obligation to perform (or not perform) a particular duty  A “person” may be either a human being or an entity, such as a corporation, created by law.

Contract Law  What law governs contracts?  Common Law of Contracts – Service Contracts.  Mainly deals with real estate, service, insurance, intangible assets and employment contracts.  Uniform Commercial Code (UCC) - Sale and lease contracts  Mainly concerned with sale of goods and securities.

Sales Law  The sale of a good, or item of value, is a transaction designed to benefit both buyer and seller. Sales laws relate to the transfer of ownership of property from one person to another for value

Sales Law  What law governs sales?  The Uniform Commercial Code (UCC)  All 50 states and territories have enacted some version of UCC.  Once a state's legislature adopts and enacts UCC, it becomes a state law and is codified in the state's statutes.

Commercial Property Law  Governs the lease, sale and use of land as well as buildings that are mainly used for business purposes.  Includes shopping malls, office buildings, warehouses and grocery stores.  Looks after people who own and use commercial property.  Commercial property laws vary from jurisdiction to jurisdiction.

Intellectual Property & Computer Law  What is intellectual Property?  A product resulting from human creativity, an original work fixed in a tangible medium of expression.  Intellectual property laws protect the value of the investment in their creation and their economic potential into the future.

Intellectual Property & Computer Law  Types of Intellectual Property:  Patents - Inventions  Copyrights - Movies, Songs, Plays, Literary Works, Choreography, Paintings, drawings, Photographs  Trademarks - Products and Services  Trade Secrets - Formulas, Practice, Process, Patterns  Designs - Machines, Building, Products

Copyrights  Copyright law protects the expression of an idea but not the underlying idea itself, i.e. composers, artists, photographers.  Minimum term of life of author plus 70 years  95 years in case of anonymous or pseudonymous works  Published and unpublished works

Patents  Protection much stronger than copyright.  Holder has exclusive rights to produce  Must be an original idea.  Patents for Software are now available. Exclusive federal grant from U.S. Patent and Trademark Office to make, use and sell an invention for 20 years. – Cannot be renewed.

Trademarks  Trademark is a distinctive mark, symbol, or slogan or any combination of these used by a business to identify goods and to distinguish them from products sold by others.  Trademarks apply to products.  Trade name applies to companies and are protected by federal law as well.  Example: IBM, Coca-Cola, NBC.

Trademarks  Register with U.S. Patent Trademark Office  Registration allows use of “®” symbol.  Continuous use good forever.  Renew every 10 years.  General trademarks can be lost (Corn flakes and aspirin)

Trade Secrets  Includes business processes or information that cannot be patented, copyrighted or trademarked.  Includes: customer lists, plans, research, formulas, pricing information, marketing techniques.  Gives businesses protection from competitors.  Protection for trade secrets does not expire  Governed by the Uniform Trade Secrets Act.

Bankruptcy Law  Business owners who can't afford to pay back their creditors may file for bankruptcy.  Way to settle their debt & avoid costly legal action  Creditors may be prevented from collecting on debst until the bankruptcy process is completed.  Generally Two Forms of Bankruptcy Relief  Liquidation  Reorganization Forms are divided into Chapters: Chapter 7 – Liquidation (Personal or Business) Chapter 11 – Reorganization (Personal or Business) Chapter 12 – Reorganization (Family farmers or fishermen) Chapter 13 - Reorganization (Personal)

Bankruptcy Law Chapter 7 – Liquidation. Primarily for individuals but affect businesses operating as sole proprietorship Trustee will sell assets (business & personal) to satisfy outstanding debts Chapter 11 – Reorganization Applies to both individuals & small businesses Small businesses operate under increased scrutiny but may keep operating under a reorganization plan

BANKRUPTCY LAW Chapter 12 – Reorganization Family farmers & fishermen Chapter 13 – Reorganization Personal only. Trustee sets up a 3-5 year repayment plan. Debtor keeps more assets under this plan.

Tax Law  Businesses must consider:  Federal Tax Laws  State Tax Laws  Sometimes Local Tax Laws  N.C. businesses will need to obtain:  Federal Employer Identification number (EIN) from the IRS  State Employer Identification number from the N.C. Department of Revenue

Federal Tax Laws  Income taxes:  Tax on profits of the business  Determined based on the type of business ownership  Payroll taxes – tax on salaries and wages paid to employees  Social Security – paid by business & employee  Medicare – paid by business & employee  Federal income tax withholding – paid by employee only  Federal Unemployment tax – paid by business only  Excise taxes – broad category of taxes covering certain types of businesses  Environmental taxes.  Communications and air transportation taxes.  Fuel taxes.  Tax on the first retail sale of heavy trucks, trailers, and tractors.  Manufacturers taxes on the sale or use of a variety of different articles

State Tax Laws  Income taxes:  Tax on profits of the business  Determined based on the type of business ownership  Payroll taxes – tax on salaries and wages paid to employees  State income tax withholding – paid by employee only  State Unemployment tax – paid by business only  Worker’s Compensation Insurance – paid by business only  Sales & Use Taxes – collected from customers & remitted to N.C. Dept. of Revenue  Property taxes – tax on the assets of the business  Real estate  Personal property – trucks, equipment, etc.

Local Tax Laws  May vary County by County or Municipality to Municipality  Privilege License – license to operate a business in locality  Ensures a business is located in an area that is properly zoned  Permits, Zoning requests  Property Taxes

Picture Sources  Uniform Commercial Code Picture - uniform-commercial-code-5th-6th-practitioner-treatise- series/705/ /productdetailhttp://store.westlaw.com/white-summers- uniform-commercial-code-5th-6th-practitioner-treatise- series/705/ /productdetail  U.S. Patent Office Logo -  Coco Cola Trademark valuable-brands/ 10-valuable-brands/  Top Secret Folder - control-of-your-teaching/ control-of-your-teaching/  Bankruptcy Petition - bankruptcylawnetwork.combankruptcylawnetwork.com  Taxes with Hand - business.combusiness.com  Federal Tax Forms - myaccountantaz.commyaccountantaz.com  N.C. Dept. Of Revenue Logo - checktaxrefund.comchecktaxrefund.com  N.C. County Map - geocaching.comgeocaching.com