…and Their Implications Business Structures …and Their Implications

Learning Goals Understand the 3 main forms of ownership. Determine when each form is most appropriate

Main Types: Specialized Types: Common Business Structures Main Types: Specialized Types: Sole Proprietorship Partnership Corporation Franchises LLC’s Non-Profits

Sole Proprietorship Owned by one person limited start-up capital Owner receives all profits and makes all decisions (you are your own boss); no one to share profits with, but also no one share risks Easiest type of business to start owner experiences unlimited liability

Unlimited Liability Owner is responsible for ALL debts associated with the business. Responsible to the extent of losing personal property if the business fails. Any money and other assets owned by the proprietor can be used to pay business debts.

Partnerships Business owned and operated by a small group of people (usually 2 -3) who have entered into a written partnership agreement Partners share profits (or losses) as stated in the terms of their agreement More startup capital and skills available Each partner is liable for all debts if the business fails, they experience Unlimited Liability

Corporations After writing articles of incorporation, a business can be owned by a number of people, known as stockholders or shareholders Profits (or losses) are shared by stockholders Ownership can be easily transferred by selling stock, and the business can easily expand by selling more stock Owners experience Limited Liability

Limited Liability Owners are liable only up to the amount of their investment. If the business is sued or fails, the personal property of owners is not in direct risk. Owners of a corporation (stockholders) experience limited liability Owners of a partnership or sole-proprietorship can organize as an LLC (limited liability company)

You are starting a business. Are you a: Sole Proprietor? Partnership? Corporation? Why is that form of ownership best for you?

More About Corporations The Board of Directors makes major policy and financial decisions Managers (sometimes multiple managers) carry out their duties as in any business Owners (stockholders) share in some decisions, but generally not day to day ones A corporation becomes its own separate Legal Entity and acts on the behalf of its owners, separate from them.

Paying of Dividends Dividends are the part of profits that are paid to shareholders (stockholders) The Board of Directors votes to decide how much of profits will be paid out as dividends

“Stock Options” or “Profit Sharing” The managers and other employees will receive their yearly salary regardless of the Board of Directors decision on dividends IF the employees are also stockholders, they will receive dividends in addition to their salary Employees often receive special opportunities to own shares of stock as part of their fringe benefits package

Franchises A contract that allows a business to sell someone else’s product or service with specific guidelines. Usually a “chain” business such as a hotel, restaurant, or realtor. The owner, or “franchisee”, purchases the right to sell the “franchisor’s” goods. The franchisee runs the business and receives profits, but pays fees and a percentage of profits to the franchisor.

Special Types of Business: Non-Profit Corporations A non-profit corporation forms when a group of people join to do an activity that benefits the public Unlike a business corporation, stock is not sold and dividends are not paid Usually, funds are raised through grants, donations, and government assistance. Examples include the Red Cross, The Boy Scouts, Museums, and several educational groups

Questions to Consider… What type of business structure is the easiest to start? What risk is associated with the failure of a sole proprietorship or partnership? How does one transfer ownership of a sole proprietorship? What about a corporation?

More Questions to Consider… Who is the owner of a corporation? What are 2 costs associated with starting and operating a franchise? What are 2 disadvantages of a sole proprietorship? How would you want to structure your business?

Scenario 1: You are the owner of a partnership that sells used cars. One of the cars you sell turns out to be a lemon, and the person who bought it sues the business for the price of the car and damages. Who is responsible for all legal fees, including any costs incurred as part of a settlement? You and your partners

Scenario 2: You are an owner of stock in a large, national corporation that builds houses. You learn that managers of the corporation have found a loophole that allows them to use illegal aliens to do labor at wages below the minimum wage requirement. You are displeased with this unethical activity and want the managers to cease it immediately. How much decision-making authority do you have to stop these practices? Little to none – at most you could request that the issue be discussed at a board of directors meeting What is likely to be your only course of action to distance yourself from these business practices? Sell your stock

Scenario 3: You are a partner with 2 others who have been operating a very successful soccer training facility. You would like to expand and build a larger facility, but don’t have enough capital to fund it yourselves, or enough equity to get the size of loan you would need. What is a potential option for expansion? gain a certificate of incorporation and offer stock for sale What are the future implications for this decision? Less of managerial control, increased paperwork, legal fees, increased sharing of profits, etc.

My Learning Scales I understand the three main forms of ownership. 4.Yes! 3.Yes, but… 2. No, but… 1.No! I understand when each form is most appropriate.

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