Types of Business Ownership Which type is Best for Your Venture? 1

Forms of Business Ownership One of the first decisions that you will have to make as a business owner is how the company should be structured 2

Consider These Criteria The vision of ownership regarding the size and nature of the business The vision of ownership regarding the size and nature of the business The level of control owners wish to have The level of control owners wish to have The level of "structure“ owners are willing to deal with The level of "structure“ owners are willing to deal with The business's vulnerability to lawsuits. The business's vulnerability to lawsuits. 3

Consider These Criteria Tax implications of the different ownership structures Tax implications of the different ownership structures Expected profit (or loss) of the business Expected profit (or loss) of the business Whether or not owners need to re- invest earnings into the business Whether or not owners need to re- invest earnings into the business Your need for access to cash out of the business for yourself Your need for access to cash out of the business for yourself 4

What Are The Choices? A legally constructed business may take one of the following forms: Sole Proprietorship PartnershipCorporationFranchise 5

Sole Proprietorships The vast majority of small business start out as sole proprietorships The vast majority of small business start out as sole proprietorships These firms are owned by one person These firms are owned by one person Usually the individual looks after the day-to-day running the business. Usually the individual looks after the day-to-day running the business. 6

Sole Proprietorships Sole proprietors own all the assets of the business and the profits generated by it Sole proprietors own all the assets of the business and the profits generated by it They also assume complete responsibility for any of its liabilities or debts They also assume complete responsibility for any of its liabilities or debts In the eyes of the law and the public, you are one in the same with the business In the eyes of the law and the public, you are one in the same with the business 7

Sole Proprietorships ADVANTAGESDISADVANTAGES  quick, easy, and inexpensive to establish  limited in terms of employee compensation plans  only requires registration and appropriate licenses  all business income is taxable  owner makes all decisions  profits may be taxed at a higher rate than for an incorporated organization  owner includes all business profits/losses with personal income  harder to raise capital than for a partnership or a corporation 8

Partnerships In a Partnership, two or more people share ownership of a single business. In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. Like proprietorships, the law does not distinguish between the business and its owners. All partners may or may not be actively involved in the day-to-day operation of the venture. All partners may or may not be actively involved in the day-to-day operation of the venture. 9

Partnerships Each partner contributes something toward the partnership: Each partner contributes something toward the partnership:  Startup money  Material resources  Talent  Specialized skill  Experience  Specific knowledge  Business contacts. 10

Partnership Agreements Partners should create a legal partnership agreement that outlines: The time and capital each will contribute How decisions will be made How profits will be shared (percentage) How disputes will be resolved How future partners will be admitted to the partnership How partners can be bought out Terminating the partnership 11

Types of Partnerships General Partnership Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement. Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently. Equal shares are assumed unless there is a written agreement that states differently. 12

Types of Partnerships Limited Partnership Most of the partners have limited liability based on the extent of their investment Most of the partners have limited liability based on the extent of their investment Limited input regarding management decisions Limited input regarding management decisions Most partners are investors for short term projects, or for investing in capital assets Most partners are investors for short term projects, or for investing in capital assets 13

Types of Partnerships Limited Partnership This form of ownership is not often used for operating retail or service businesses This form of ownership is not often used for operating retail or service businesses Forming a limited partnership is more complex and formal than that of a general partnership Forming a limited partnership is more complex and formal than that of a general partnership 14

Types of Partnerships Joint Venture Acts like a general partnership, but is clearly for a limited period of time or a single project Acts like a general partnership, but is clearly for a limited period of time or a single project If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership 15

Types of Partnerships Silent Partnership One or more visible people One or more visible people A person might invest money in the partnership but do not take an active part in the management of it A person might invest money in the partnership but do not take an active part in the management of it 16

Partnerships ADVANTAGESDISADVANTAGES  quick, easy, and inexpensive to establish  general partners assume unlimited liability for all debts/obligations incurred by the partnership  each partner may deduct business losses (in proportion to the amount invested in the business) from whatever is earned within the business  both business and personal income are taxed  favourable tax treatment, especially for startup losses  profits may be taxed at a higher rate than for an incorporated organization  combines the talents and resources of two or more people  unless otherwise stated in a partnership agreement, the partnership is automatically dissolved when one of the partners dies  if the partners can’t agree on the day-to-day operation of the partnership, decisions become difficult to make 17

Corporations A corporation is constituted by law and is considered to be a distinct legal entity from its shareholders A corporation is constituted by law and is considered to be a distinct legal entity from its shareholders This means it is separated and apart from those who own it This means it is separated and apart from those who own it A shareholder’s liability for the corporations debts are limited to his or her investment A shareholder’s liability for the corporations debts are limited to his or her investment 18

Corporations The goal of a corporation is to operate a business for profit and to distribute the profits among the shareholders The goal of a corporation is to operate a business for profit and to distribute the profits among the shareholders A corporation can be taxed; it can be sued; it can enter into contractual agreements A corporation can be taxed; it can be sued; it can enter into contractual agreements The owners of a corporation are its shareholders The owners of a corporation are its shareholders 19

Corporations The shareholders elect a board of directors to oversee the major policies and decisions of the corporation The shareholders elect a board of directors to oversee the major policies and decisions of the corporation The corporation has a life of its own and does not dissolve when ownership changes The corporation has a life of its own and does not dissolve when ownership changes 20

Corporations ADVANTAGESDISADVANTAGES  corporations have an unlimited life, so day-to-day business continues despite the illness or death of their owners  more costly to set up because of government fees, name searches, legal fees  ownership is easily transferred  requires more formal annual activities (annual meeting, minutes, report)  profits can be removed from the corporation in the form of dividends, which can be a tax benefit to the owner  losses cannot be used by the owner to offset personal income  the corporation can arrange for employee benefits such as group insurance or registered pension plans  owner’s personal assets can still be seized by the lending agency if he or she has put up personal collateral for a business loan 21

Franchises A firm expands into new markets by selling the rights to use the company's name and products to individuals A firm expands into new markets by selling the rights to use the company's name and products to individuals Franchising company provides training services and an advertising campaign for the purchaser of the franchise Franchising company provides training services and an advertising campaign for the purchaser of the franchise 22

Franchises Purchaser agrees to meet certain quality standards, provide certain products, and pay a franchise fee to the franchising organization Purchaser agrees to meet certain quality standards, provide certain products, and pay a franchise fee to the franchising organization 23

Franchises ADVANTAGESDISADVANTAGES  Smaller than usual capital investment  Possible high franchiser fee  Prior public acceptance of product  Some loss of independence  Better than average profit margins  Possible difficulties in canceling contract  Management assistance 24