Types of Business Ownership Chapter 7 Types of Business Ownership Sole Proprietorships and Partnerships 7.1 Corporations 7.2

Discuss the sole proprietorship legal form. 7.1 Discuss the sole proprietorship legal form. Explain the partnership legal form. Section 7.1 Sole Proprietorships and Partnerships

7.1 Entrepreneurs need to understand the advantages and disadvantages of various forms of business ownership so they can choose the most appropriate form for their business. Section 7.1 Sole Proprietorships and Partnerships

sole proprietorship liability protection unlimited liability 7.1 sole proprietorship liability protection unlimited liability partnership general partner limited partner Section 7.1 Sole Proprietorships and Partnerships

Sole Proprietorship The easiest and most popular form of business ownership is the sole proprietorship. sole proprietorship a business that is owned and operated by one person Section 7.1 Sole Proprietorships and Partnerships

Sole Proprietorship The owner of a sole proprietorship: receives the profits incurs any losses is liable for the debts of the business Section 7.1 Sole Proprietorships and Partnerships

Sole Proprietorship In a sole proprietorship the owner must decide how much liability protection he or she needs. liability protection insurance against the debts and actions of a business Section 7.1 Sole Proprietorships and Partnerships

Sole Proprietorship Advantages Sole proprietorship is easy and inexpensive to create. The owner has complete authority over all business activities. It is the least regulated form of business ownership. The business pays no taxes; income is taxed at personal rate of owner. Section 7.1 Sole Proprietorships and Partnerships 9

Sole Proprietorship Disadvantages The owner has unlimited liability. Raising capital is more difficult. The business is totally reliant on skills and abilities of owner. The death of owner dissolves the business unless there is a will to the contrary. Section 7.1 Sole Proprietorships and Partnerships 10

Disadvantages The biggest disadvantage of a sole proprietorship is financial.   In this form of business ownership, the owner has unlimited liability. unlimited liability full responsibility for all debts and actions of a business Section 7.1 Sole Proprietorships and Partnerships

Partnerships A partnership draws on skills, knowledge, and financial resources or more than one person. partnership an unincorporated business with two or more owners who share the decisions, assets, liabilities, and profits Section 7.1 Sole Proprietorships and Partnerships

General Versus Limited Partners The law requires that all partnerships have at least one general partner. general partner a participant in a partnership who has unlimited personal liability and takes full responsibility for managing the business A partnership may be set up so that all of the partners are general partners. Section 7.1 Sole Proprietorships and Partnerships

General Versus Limited Partners Some partnerships include a limited partner. limited partner a partner in a business whose liability is limited to his or her investment; a limited partner cannot be actively involved in managing the business Section 7.1 Sole Proprietorships and Partnerships

Partnerships Advantages Partnerships are inexpensive to create. General partners have complete control. Partners can share ideas. Partners can share ideas and secure investment capital more easily and in greater amounts. Section 7.1 Sole Proprietorships and Partnerships 15

Partnerships Disadvantages It is difficult to dissolve one partner’s interest without dissolving the partnership. There may be personality conflicts. Partners can be held liable for each others’ actions. Section 7.1 Sole Proprietorships and Partnerships 16

Making Partnerships Work Share responsibilities Put things in writing Be honest on how the business is doing Section 7.1 Sole Proprietorships and Partnerships

Discuss the advantages and disadvantages of a C-corporation 7.2 Explain how the corporate form gives owners more protection from liability. Discuss the advantages and disadvantages of a C-corporation Describe a Subchapter S corporation. Compare nonprofit corporations to C-corporations. Explain the limited liability company. Discuss how to decide which legal form to use. Section 7.2 Corporations

7.2 In a corporation, the owners of the business are protected from liability for the actions of the company. Section 7.2 Corporations

Subchapter S corporation limited liability company (LLC) 7.2 corporation C-corporation shareholders limited liability Subchapter S corporation limited liability company (LLC) nonprofit corporation Section 7.2 Corporations

What Is a Corporation? There are three types of corporations: corporation a business that is registered by a state and operates apart from its owners; it issues shares of stock and lives on after the owners have sold their interest or passed away C-corporation Subchapter S corporation nonprofit corporation Section 7.2 Corporations

C-Corporation A C-corporation is the most common corporate form. C-corporation an entity that pays taxes on earnings; its shareholders pay taxes as well Section 7.2 Corporations

C-Corporation In smaller corporations, the founders generally are the major shareholders. shareholders an owner of shares of stock in a corporation Section 7.2 Corporations

ability to raise investment money C-Corporation Advantages status limited liability ability to raise investment money perpetual existence employee benefits tax advantages Section 7.2 Corporations 24

Advantages Corporate shareholders have limited liability, but some banks require officers to personally guarantee the debts of the company. limited liability partial responsibility of a corporate shareholder; he or she is responsible only up to the amount of the individual investment Section 7.2 Corporations

C-Corporation Disadvantages expensive to set up income is more heavily taxed subject to double taxation on income pays taxes on profits stockholders pay taxes on dividends Section 7.2 Corporations 26

Subchapter S Corporation An entrepreneur can avoid the double taxation of a C-corporation by setting up a Subchapter S corporation. subchapter S corporation a corporation that is taxed like a partnership; profits are taxed only once at the shareholder’s personal tax rate Section 7.2 Corporations

Nonprofit Corporation A nonprofit corporation must fall within one of four categories: nonprofit corporation a legal entity that makes money for reasons other than the owner’s profit; it can make a profit, but the profit must remain within the company religion charity public benefit mutual benefit Section 7.2 Corporations

Limited Liability Company There are many benefits to forming a limited liability company (LLC) limited liability company (LLC) a company whose owners and managers have limited liability and some tax benefits, but avoids some restrictions associated with Subchapter S corporations Section 7.2 Corporations

Making the Decision Before deciding on a legal form, ask yourself key questions about: your skills capital expenses willingness to assume liability level of control wanted length of time you expect to own the business Section 7.2 Corporations

Entry Level E-Commerce Big companies can afford to spend millions of dollars developing their e-commerce sites.   However, there are ways that allow small businesses to ease into e-commerce at a slower, less-expensive pace. Section 7.2 Corporations 31