Types of Business Ownership Own It Your Way Types of Business Ownership Business Law LAP 1

Objectives Explain the most common forms of business ownership in a private enterprise system. A Discuss business start-up strategies. B

Explain the most common forms of business ownership in a private enterprise system.

The form of ownership affects: Business activities Risks Responsibilities

Importance of Ownership Your choice depends on: Personal circumstances Financial needs Type of business

Importance of Ownership Your choice affects: Taxation Liability Ownership control

Sole Proprietorship Types of Ownership: One owner who assumes all profits and risks (unlimited liability) Usually fewer than 50 employees Often found in small, local, and home-based businesses Receives minimal government intervention Business and personal taxes are not separate

Partnership Types of Ownership: Two or more owners who combine capital, experience, and abilities Partners share chance for profits and risk of loss Two types: General—each partner has unlimited liability Limited—partners have limited liability

Corporation Types of Ownership: An “artificial being, invisible, intangible, and existing only in contemplation of the law” (U.S. Supreme Court) Can borrow and lend money Can buy and sell goods Can make contracts Can sue or be sued Has an unlimited life span

Corporation Types of Ownership: Owners purchase shares of stock The more shares a person owns, the more control the person has Minority of U.S. businesses, but generate majority of sales Subject to more government regulation Governed by a board of directors

Types of Corporations: Private (Close) May have just a few shareholders who operate and manage the business Usually not required to make financial activities public Prepare reports for the state in which they operate Subject to dual taxation: Taxed on profits Shareholders taxed on dividends

Types of Corporations: “C” Corporation Public corporation that can sell unlimited shares to unlimited owners Subject to more government regulation and taxation Must provide financial information to the public (annual report) Subject to dual taxation

Types of Corporations: “S” Corporation Shareholders Private corporation with special benefits designed to help small businesses Taxed as a partnership to avoid dual taxation To qualify, must have 100 or fewer shareholders and adhere to a number of government policies

Types of Corporations: Nonprofit Operates to accomplish a specific mission other than making a profit Usually helps society—charitable, educational, religious, scientific, etc. Income used to fund programs and cover operational expenses Generally not taxed by the federal government Many rely on donations and grants

Ways Corporations Grow Merger Two businesses combine to form a company Usually happens when a larger company purchases a smaller one (acquisition) Consolidation—acquiring many smaller companies Expansion—growing operations with new capital from: Selling more stock Reinvesting profits Obtaining bank loans

Hybrid Structure LLP LLC Types of Ownership: Allows members to enjoy advantages of corporations and either sole proprietorships or partnerships Can be structured in one of two forms: Limited liability partnership (LLP) Limited liability company (LLC) LLC

Hybrid Structure LLP LLC Types of Ownership: Members determine how to manage company and share profits Characteristics include: Limited liability Limited life Limited taxation Unlimited owners/partners LLC

Discuss business start-up strategies.

Franchising Method of distributing recognized goods/services through a legal agreement Franchisor—parent company who owns company name or trademark Franchisee—acquires rights to operate using parent company’s name Franchisor’s product has established brand and reputation

Franchising You may be responsible for: Costs related to facility construction/leasing, equipment, insurance, legal fees A royalty fee based on a percentage of your profits Fees to cover advertising expenses Expensive to start but can be very profitable in the long run

Types of Franchises Business-format franchise: Franchisors often provide: Training Financial guidance Supply channels Franchisees benefit from franchisor’s national advertising programs Franchisees are limited in their goods/services, vendors, operating hours, etc. 

Types of Franchises Piggyback franchising (within business-format franchise) Retail franchise operates within facilities of another store (host) Host increases its product line Franchisee has access to host’s customers 

Types of Franchises Product trade-name franchise: Independent sales relationship to stock and sell a specific line of products Also called dealership or exclusive distributorship Products bought on consignment or straight from the supplier Business name chosen by franchisee

Multi-Level Marketing Business Distributors work independently and receive payouts from the sales of people under them Most distributors can get started for little money Commission and bonus structures differ between companies Income is based on time and energy developing contacts Beware of pyramid schemes!

Licensing An owner’s authorization for another entity to use trademarked, copyrighted, or patented material Licensor—owner of the material Licensee—buyer Licensee pays royalties to licensor in addition to initial licensing fee

Joint Venture Also called strategic alliance Two or more businesses enter into a relationship by combining resources Relationship is usually short term and involves a single project or transaction Can help businesses reach new target markets and develop new profit centers for less money

Name one example of each type of business in your town: Sole proprietorship Partnership Corporation Nonprofit corporation Franchise Which would you like to own and why?

Although shutting out smaller investors is not illegal, do you think it is unethical?

Acknowledgments Original Developers: Christopher C. Burke, Aaron McMahon, MBA Research Version 2.0 Copyright © 2016 MBA Research and Curriculum Center

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