Forms of Business Ownership Edited by: Noémi Piricz Based on: Thomas W. Zimmerer – Norman M. Scarborough: Essentials of Entrepreneurship and Small Business Management, Pearson Education International 2005, Chapter 4

Piricz Noémi: Business Economic and Indusrtial Relations l. Critical Considerations Prior to the Final Selection of Form of Ownership 1. Tax considerations The graduated tax rates under each from of ownership can be differentiated and entrepreneurs must calculate in advance. 2. Liability Certain forms of ownership offer owners greater protection from personal liability that might result from financial problems, faulty products or other difficulties. Piricz Noémi: Business Economic and Indusrtial Relations

Piricz Noémi: Business Economic and Indusrtial Relations 3. Start-up capital requirements Forms of ownership differ in their ability to raise start-up capital. 4. Control By choosing certain form of ownership, entrepreneurs automatically give up some control over company. 5. Business goals Form and amount of profit can be influenced by the chosen form of ownership. Piricz Noémi: Business Economic and Indusrtial Relations

Piricz Noémi: Business Economic and Indusrtial Relations 6. Management succession plans When choosing a from of ownership, business owners must look ahead to the day when they will pass their companies on the next generation or to a buyer. Some forms make this transition much smoother than others. 7. Cost of formation Certain forms of ownership are much more costly and involved to create than others. Piricz Noémi: Business Economic and Indusrtial Relations

ll. The Sole Proprietorship The simplest and most popular form of ownership Definition: a business owned and managed by one individual. They are also part of the national as well global economy 73 % of all U.S. businesses are sole proprietorships Piricz Noémi: Business Economic and Indusrtial Relations

ll.1. The Advantages Sole Proprietorship Simple to create He (She) simply obtains the necessary licenses from state, or county government and begins operation. Least costly form of ownership to begin The fee of filling the application form is nominal. Piricz Noémi: Business Economic and Indusrtial Relations

Piricz Noémi: Business Economic and Indusrtial Relations Profit incentive Once the owner pays all the company’s expenses, he/ she can keep the remaining profits. Total decision-making authority Because the sole proprietor is in total control of operations, he/ she can respond quickly to changes. This freedom is often a major motivational force. Easy to discontinue due to total (personal) liability. Piricz Noémi: Business Economic and Indusrtial Relations

ll.2. The Disadvantages Sole Proprietorship Unlimited personal liability: a situation in which the sole proprietor is personal liable for ALL of the business’s debts. Limited skills and capabilities The sole proprietor should have the wide range of skills so as to manage a successful business Piricz Noémi: Business Economic and Indusrtial Relations

Piricz Noémi: Business Economic and Indusrtial Relations Feeling of isolation Running a business alone allows maximum flexibility but also increases feeling of isolation; there is no one else to turn for help in solving problems or getting feedback on a new idea. Limited access to capital Many proprietors have already put all they have into their businesses. Unfortunately many sole proprietorships cannot meet the borrowing requirements of banks, especially in the early days of operation. Piricz Noémi: Business Economic and Indusrtial Relations

Piricz Noémi: Business Economic and Indusrtial Relations lll. The Partnership A partnership is an association of two or more people who co-own a business for the purpose of making profit. (In US) The law doesn’t require a partnership agreement but it is wise to make it with an attorney. The partnership agreement is a document that states in writing all of the terms of operating the partnership and protects each partner involved. Piricz Noémi: Business Economic and Indusrtial Relations

lll.1. Limited Partnership A limited partnership composed of at least one general and at least one limited partner. While a general partner has unlimited personal liability, a limited partner's liability is limited to the amount of his or her investment in the company. Piricz Noémi: Business Economic and Indusrtial Relations

lll.2. Limited Liability Partnership A limited liability partnerships is a special type of limited partnership in which all partners are limited partners. It gives the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a traditional partnership. It has both corporate and partnership characteristics. Piricz Noémi: Business Economic and Indusrtial Relations

Piricz Noémi: Business Economic and Indusrtial Relations lll.3. Corporation A corporation is a legal entity which has a separate legal personality from its members. In addition to its legal personality, the modern business corporation has at least three other legal characteristics: (i) transferable shares (shareholders can change without affecting its status as a legal entity), (ii) perpetual succession capacity, (iii) and limited liability. Piricz Noémi: Business Economic and Indusrtial Relations

Key Definitions (of Chapter 4): sole proprietorship unlimited personal liability partnership partnership agreement limited partnership limited liability partnerships corporation Piricz Noémi: Business Economic and Indusrtial Relations