Understanding Economics Topic: Forms of Business Ownership

Forms of Business Ownership The Classic 3 Forms of Business: Sole Proprietorship Partnership Corporation

Sole Proprietorship The most prevalent form of small business ownership Accounts for 75% of all businesses in U.S. Has one owner Can’t use “Inc.” after the name Uses “Company” “Enterprises” “International” “Group” etc etc

Sole Proprietorship Management chart You (Owner) l Management (Pres, VP of this and that) Mid-level (Proj Mgr, Mfg Mgr, Mktg Mgr) Line personnel

Sole Proprietorship Startup process: Come up with a name Establish a bank account/checking account Obtain a business or trade license if that’s necessary Just start doing business – making your product and selling it. Come up with a logo and letterhead, and gradually establish lines of credit with your suppliers.

Sole Proprietorship Advantages: Easy to get started. It’s private: you don’t have to share proprietary information with shareholders or partners. Cheap to get going. Just pay income taxes on your own tax return, using Schedule ‘C’.

Sole Proprietorship Disadvantages: Can be harder to raise serious amounts of capital. Unlimited personal liability for business debts. Limited life of the business. It doesn’t succeed you automatically. A succession plan can be made, however.

Partnership Two or more persons own the business. The partners draw up a private Partnership Agreement, dealing with all aspects of running the business. Commonly used for accountants, law firms, small medical practices. P-ships account for less than 10% of businesses in the U.S.

Partnership Management chart General Partners l Limited Partners Management (Pres, VP of this and that) Employees

Partnership Startup process: Find a partner you want to form a business with. Decide how you’re going to divide the profits and expenses of the business Decide who’s going to contribute start-up capital and/or assets. Draw up a Partnership Agreement Come up with a name, logo, letterhead, etc Obtain business or professional licensing if needed Start doing business

Partnership Advantages: Easy to get started. It’s a private agreement between individuals. May be easier to raise serious capital. It’s private: you don’t have to share proprietary information with outside people. Cheap to get going. Pay income taxes on Form 1065. Easy to do. You can add partners if you need to later on.

Partnership Disadvantages: Partners fight and disagree over business matters all the time. Friendships are strained. Each partner is liable for the business debts (and losses) Adding partners (or leaving a partnership) can be clunky. The Partnership Agreement may need to be modified, which may not be easy.

General Partnership Everyone is equal. Each partner is liable for the debts and losses of the business. Scary thought. Any general partner can sign contracts and obligate the business. The other partners might not know immediately. GP might be preferable over LP, however.

Limited Partnership Has 1 or more General Partners, who have unlimited personal liability for the firm’s debts and losses. Then has many Limited Partners, who have “limited” personal liability, up to the amount of their investment. Limited Partners can inspect the books and share in the profits, but are not given full decision-making powers in running the business.

Corporation An artificial business entity created with the State of California (or any other State). A separate legal entity. Has life of its own, separate from its founders. Can enter into contracts, own property, buy & sell, and be sued - just like any natural person. Almost all really-big firms are Corporations.

Corporation Management chart Shareholders l Directors Officers (CEO, COO, CFO, CIO) Management (Pres, VP of this and that) Mid-level (Proj Mgr, Mfg Mgr, Mktg Mgr) Line personnel

Corporation Startup process: Come up with a business idea. Come up with a business name. Go downtown to the California Secretary of State office and file Articles of Incorporation and pay $100. Go home and draw up the Bylaws. Forms you can download for free. Appoint initial Corporate Directors & Officers. In Calif. you need minimum of CEO, CFO, & Corp. Sec’y. (you can be all 3 if you want). Buy all your Corporate forms online or at Office Depot Or just pay an attorney $2,000 to do the paperwork.

Corporation Startup process (cont.): 7. Come up with a logo, letterhead, etc. 8. Open a bank account/checking account under the Corporation’s name. 9. Obtain business or professional license if needed. 10. Start doing business – make your product and sell it. 11. File and pay your Corporate income taxes on Schedule 1120 by the due date each quarter.

Corporation You then sell “stock” in your corporation to other people. They buy shares of stock and pay the Corporation money. They then own a portion of the business. Sometimes the issuance of stock is done simultaneously with the founding of the corporation. If done through an investment bank on a public stock exchange, it’s called an “IPO” - Initial Public Offering. Stock owners (“shareholders”) get to vote for the Directors at the annual shareholders’ meeting. Each “share” entitles you to 1 “vote”. The Directors are responsible for overseeing the business and hiring the business Officers.

Corporation By selling stock, you have a method of raising capital for your business. But, you’re diluting your ownership stake at the same time. You can maintain absolute control by always owning 51% of the stock. With huge Corporations, even owning 10% or 15% of the shares gives you effective control.

Corporations Advantages and Disadvantages? Discuss….