Forms of Business Ownership Business Management A – Chapters 5 and 6

Getting Started  Characteristics of Entrepreneurs  Assumes risk for sake of profit  Enjoy freedom and independence of being their own boss  Self-starters  Have plenty of energy  Enjoy working on their own  Like to take charge  Work hard and work long hours  Be able to make decisions

 Prepare a Business Plan – a written document that describes the nature of the business, its goals and objectives, and how they will be reached  Requires a great deal of thought and planning  Strategies for achieving goals  Inspire others to invest  Plan is realistic  SBA – Small Business Administration –government supported agency that counsels, assists, and protects interests of small businesses  Provides SBA loan guarantees to small businesses that have strong business plans or need help after disasters  Small Business Development Development Centers – provide services to entrepreneurs who need help researching and writing business plans

Proprietorship  A business owned and managed by one person  Also called Sole proprietorship  Most common form of business organization  Proprietor – the owner/manager  Performs day to day tasks  Can hire employees  Furnishes expertise, money, and management  Entitled to all profits earned by the business  Has full claim to the assets or property owned by the business  If the proprietor has debts, creditors (those to whom money is owed) have first claim against the assets

Advantages of a Proprietorship  Owner is boss  Pride and satisfaction  Can be inventive and creative  Owner receives all profits  More likely to work overtime  continually think of ways business can operate more efficiently  Owner personally knows employees and customers  “family” atmosphere/relationships with employees/customers  Owner can act quickly in decision making  Can make decisions without consulting others/flexible decision making  Can take advantage of unusual opportunities  Owner is free from “red tape”  Can begin or end business activities without legal formality (usually)  Can be organized easily  Pays less income tax than a corporation

Disadvantages of Proprietorships  Owner may lack necessary skills and abilities  Most people not skilled at everything necessary to run a successful business  Owner may lack funds  Additional funds (capital) often needed for emergencies  Large-scale financial assistance often difficult for a single owner to obtain  Expansion of business may be slowed because of lack of capital  Owner bears all losses  Assume a great deal of risk  If business fails, owner must pay all debts of the business  Creditors have a claim against the owner’s personal assets (unlimited liability)  Illness or death may close the business

Businesses suited to being proprietorships  Primarily concerned with providing personal services  Dentists, accountants, landscape gardeners, carpenters, painters, barbers, beauty salons, computer consultants  Selling merchandise or services on a small scale  Newspaper and magazine stands, roadside markets, family restaurants, flower shops, gas stations, small grocery stores, craft sellers  Part-time Proprietorships – up to 1/3 of all proprietorships are run as part-tim businesses  Appealing to stay-at-home parents  Business is small enough to be managed by the proprietor or a few hired employees AND  Does not require a large amount of capital

Partnership  A business owned by two or more people – no set limit on number of partners  Created with a partnership agreement  Businesses suited to being a Partnership:  Car dealerships  Sales department  Service department  Businesses that operate in more than one location  Professional services  Lawyers  Doctors  Accountants  Financial consultants

Advantages of Partnerships  Skills and abilities pooled  Can draw on the skills and abilities of two or more people  Sources of capital increased  More money can be obtained if there are partners  Credit position improved  Usually has a better credit reputation since more than one person is responsible financially  Contribution of goodwill  More people will know the owners - goodwill  Increased concern in business management  Each owner will have greater interest as a partner rather than just as an employee  Greater financial responsibility in the business as an owner makes for more interest  Lower tax burden than corporations  Usually have a tax advantage over corporations  Pay only personal income tax on individual share of the profit

More Advantages - Partnership  Reduction in competition  Can decrease or eliminate competition  Retirement from management  If sole proprietor wants to retire but not close the business, they can allow a partner to manage the business  Operating economies  Possible to operate more efficiently by combining two or more businesses  Operating expenses can be reduced (advertising, supplies, equipment, fuel, rent)

Disadvantages of Partnership  Unlimited financial liability  Each partner is liable for all debts of the business, even personally  If one partner cannot pay debts, the other partners are responsible  Disagreement among partners  All partners must agree on decisions  Partners may feel they are not sharing in the management of the business  Each partner bound by contracts of others  If a partner makes a contract regarding the business, all partners are legally bound by the contract even if they were not in on the decision making.  Disagreements can lead to partnership failure  Uncertain life  If one partner dies, the partnership ends  Heirs of the deceased partner may claim the partner’s share of the business  Limited sources of capital  Difficult for a partnership to obtain enough capital to operate a large business  Some partners may not contribute financially but offer their skills/knowledge/reputation as assets (capital)

More Disadvantages - Partnership  Unsatisfactory division of profits  Profits may not be divided equally due to unequal investment by partners  Partnership agreement must address this before the business is started  If no provision is made, the law requires that profits be divided equally even if all partners are not equally invested in the business  Difficulty in withdrawing from partnership  May be hard to find another partner to buy you out if your want to leave the partnership and sell your investment  The new buyer (partner) may not be acceptable to the existing partners.

Limited Partnerships  Restricts the liability of a partner to the amount of the partner’s investment  Not all partners have unlimited financial liability for business debts  At least one partner must be a general partner who has unlimited liability  Useful in situations where one person wishes to invest in a business but doesn’t have the time or interest to participate actively in the management  Any business that is formed as a proprietorship can usually be formed as a limited partnership  A proprietorship or partnership may be named after its owner or owners  Uniform Limited Partnership Act – states have created similar regulations for controlling limited partnerships  A certificate of limited partnership must be filed in a public office of record and proper notice be given to each creditor