CHAPTER 16: TYPES OF BUSINESS OWNERSHIP Ms. Baumgartner Inc. presents… CHAPTER 16: TYPES OF BUSINESS OWNERSHIP

16.1 Goals/Objectives Identify advantages and disadvantages of a sole proprietorship Explain difference between general partners and limited partners Identify advantages and disadvantages of a partnership

Types of Business Ownership 3 legal forms: Sole Proprietorship Partnership Corporation

Sole Proprietorship Owned by 1 person Oldest and most common form of ownership 75% of businesses in the U.S. are these Starter of the business is an ENTREPRENEUR EX: auto repair, house cleaning, plumbing, etc. Operate out of homes or small offices/stores Many go out of business Example of successful SP: Debbie Fields Mrs. Fields Cookies

Advantages of Sole Proprietorship Freedom to make all decisions (total control) Receive all profits Pay tax 1 time per year (as individual, not company) Easy set-up (little paperwork, low costs) Simple Licensing (easy to get business license) Must apply for Business Name Apply for a Certificate of Doing Business under an assumed Name—DBA You need an Employer Identification Number Assigned by IRS for tax purposes You need this if you plan on hiring 1 or more employees

Disadvantages of S.P. Limited capital (you have to either use your own money or get a loan yourself) Unlimited liability (responsibility) Owner is responsible to pay debts out of their personal assets (out of what they own) EX: if business does bad, you may lose your car Limited Human Resources (you must be good at all parts of business—pricing, advertising, selling, transporting, etc.) Limited Life (situation where a business’s life span is determined by owner’s life span or decision to close the business

Partnerships Owned by 2 or more people Agree to operate business for profit Sign a partnership agreement Written document that says how partnership will work Agreement includes Names of partners Name and type of business Amount that each partner invested in the beginning Duties, rights and responsibilities of each partner Procedures for sharing profits and losses How assets will be split up if partnership is ended 5% of all businesses in the U.S. are partnerships EX: Campbell Soup Company

General Partners vs Limited Partners 2 basic types of partnerships General Partners Business partner who has authority to make decisions, is active in the business operations and has unlimited liability for all losses or debts of business EVERY partnerships has at least 1 general partner All general partners have mutual agency power (right to sign contracts that are legally binding) Limited Partners Does not take an active role in decision making or running of the business Liability is limited to the amount they invested only

Advantages of Partnership Easy set-up (like sole proprietorships) More skills and knowledge (since people have different areas of strengths, the more the people, the more strengths are being used) Available Capital (several people can invest money; easier to get a loan with 2 people Total control by partners (both people to blame for good OR bad that happens) Profits taxed only once (taxed once a year and not taxed as a business; each partner pays personal income taxes based on what they made)

Disadvantages of Partnership Unlimited liability for each General Partner Each partner is responsible for all debts and losses of business. Both people must pay debts out of their own pocket if business cannot afford Disagreement among Partners If you don’t get along, business could suffer Shared Profits Profits must be shared—even if you do more work Limited Life (can end for several reasons) If a partner dies or decides to remove from business because of illness; may be a disagreement; may want to add new partners

16.2 Goals/Objectives Describe 2 types of corporations Summarize the process of forming a corporation List advantages/disadvantages of corporation

What is a Corporation? A business organization that operates individually that is separate from its owners and is treated by law as if it were an individual person Can do everything the other 2 can do It can sue or be sued 20% of businesses in the U.S. are corporations They produce 90% of total business revenue

Starting a Corporation File an application with state for permission to operate (called ARTICLES OF INCORPORATION) You must write a set of corporate bylaws (rules that a corporation must operate to) Then state issues a corporate charter A license to operate a corporation; states the purpose of the business and lists the laws and guidelines

Issuing Stock Ownership divided into small units (shares) Bought by people called stockholders Stockholders are legal owners of the company Each receives a stock certificate—which is proof of ownership Closely held corporations: private corporation who has a small amount of stockholders; not traded in open markets Public Corporations: sells stocks openly in market Going Public: when a corporation decides to sells stocks in the open market

Advantages of Corporations Ability to raise money easily By selling stocks Limited Liability If the corporation has $ problems, the owners only lose the amount of their investment—their stock price Continued Life If a stockholder changes, the business does not end (unlike sole proprietorships) Separate Ownership and Management Owners do not run the business Instead, they elect a board of directors who are responsible for overseeing general operations.

Disadvantages of Corporations Complex, Expensive Set-Up Must complete many forms, file reports and obey many laws, pay legal fees, licensing costs, and stock certificate fees Slow Decision-Making process People discuss issues and debate them before making any decisions—takes time! Taxes It must pay state and federal taxes on its profits and dividends

Limited Liability Company Also called an LLC A business that operates and pays taxes like a partnership but has limited liability for owners Combines some of partnership and corporation The owner’s liability is only what they invested This form of business can only be used if the business is small

Franchise An agreement to sell a company’s products or services in a designated geographic area EX: McDonald’s, Subway, Burger King, Wendy’s, Taco Bell When you open a franchise, you decide if your business is going to be a S.P, Partnership, Corporation or LLC. Then purchase a franchise license from the parent corporation (EX: Burger King) McDonald’s costs about $350,000 to start

Chapter 16 Review Activities Reviewing Key Concepts: 1-6 (pg 544) Your Financial portfolio (pg 547) Worksheet to organize partnership (pg 188-89)