Starting and Growing a Business Part 2 Starting and Growing a Business Part 2 of your textbook is: Starting and Growing a Business. © 2015 McGraw-Hill Education.

CHAPTER 4 CHAPTER 5 Options for Organizing Business Small Business, Entrepreneurship, and Franchising In chapter four, we consider the various options that are available for organizing a business. The organization of a business is very important as it affects how it operates, how much tax it pays, and how much control the owners have.

Learning Objectives LO 4-1 Define and examine the advantages and disadvantages of the sole proprietorship form of organization. LO 4-2 Identify two types of partnership, and evaluate the advantages and disadvantages of the partnership form of organization. LO 4-3 Describe the corporate form of organization, and cite the advantages and disadvantages of corporations. LO 4-4 Define and debate the advantages and disadvantages of mergers, acquisitions and leveraged buyouts. In this chapter, we will consider the primary forms of business ownership that include sole proprietorship, partnerships, and corporations. In addition, the advantages and disadvantages of each form of organization will be discussed. We also take a look at S corporations, limited liability companies and cooperatives. We will discuss some trends in business ownership.

Comparison of Sole Proprietorships, Partnerships and Corporations Introduction Comparison of Sole Proprietorships, Partnerships and Corporations Every student of business should be aware that there are three principle forms of organizing a business, whether it is a traditional “brick and mortar” organization, or a virtual corporation that does business exclusively through the Internet. The three primary forms of business that we will examine are Sole proprietorship, Partnership, and Corporation. This table compares a sole proprietorship, a partnership, a corporation, an S corporation and an LLC as they relate to ownership, taxation, liability and use. As different businesses have different needs, they must compare the advantages and disadvantages of each form of ownership to determine which form is best for them. The pie charts in this graphic compare the three types of ownerships relative to sales, net income and total number of each type of business. Proprietorships far outnumber corporations, but they net far fewer sales and less income. Partnerships are the least used form of business. Corporations account for the majority of all U.S. sales and income but represent a relatively small number of organizations in the United States.

Sole Proprietorships Sole Proprietorship Businesses owned and operated by one individual; the most common form of business organization in the United States Many focus on services rather than manufacturing Typically employ fewer than 50 people Comprise nearly three-quarters of all U.S. companies Men are twice as likely as women to start their own business Let’s begin our discussion on the forms of business ownership with the sole proprietor. Businesses owned and operated by one individual are considered sole proprietorships and they are the most common forms of business organizations in the United States. Many focus on services rather than manufacturing which requires large sums of money. Sole Proprietorships are typically small businesses employing fewer than 50 people. They comprise nearly three-fourths of all U.S. companies. Men are twice as likely as women to start their own business. Many restaurants are sole proprietorships.

Sole Proprietorships Advantages Unlimited liability Ease and cost of formation Allow a high level of secrecy Owner keeps all profits Flexibility and control of the business Government regulation is minimal Taxes paid only once Advantages Unlimited liability Scarce external funding Owners need diverse skills Success is tied to the owner Lack of qualified employees Higher taxation Disadvantages Each form of business ownership has advantages and disadvantages. The major advantages of a sole proprietorship are: They are easy and inexpensive to form. They allow a high level of secrecy as there is only one owner so trade secrets are safe. All profits belong to the owner. The owner has complete control over the business allowing them to respond quickly to changing business conditions. Government regulation is minimal, therefore owners have the most freedom of any type of ownership. Taxes are considered personal income and paid only once. The disadvantages include: The owner may have to use personal assets to borrow money as they have unlimited liability in meeting the debts of the business. Sources of external funds are difficult to find so it is more difficult to obtain funds to start or expand a sole proprietorship The owner must have many diverse skills such as marketing, finance, accounting and management. The survival of the business is tied to the life of the owner and his or her ability to work. Qualified employees are hard to find as it is difficult for small proprietors to pay competitive wages and benefits offered by large competing corporations. Wealthy sole proprietors pay a higher tax than they would under the corporate form of business.

Sole Proprietorships This entrepreneur opened his small business as a sole proprietorship As sole proprietor, he keeps his profits but is personally responsible for all risks and financial obligations This entrepreneur opened his small business as a sole proprietorship. As sole proprietor, he keeps his profits but is personally responsible for all risks and financial obligations.