Objective 2.01 Understand the types of business ownership. 1

Types of Business Ownership Sole Proprietorship Partnership Corporation Specialized partnership Specialized corporations Cooperative Franchise 2

Sole Proprietorship A business owned and run by one person The business is typically managed by the owner. Formation varies by state. 3

Sole Proprietorship Advantages For owner Easy to start up Complete control of the business Owner receives all the profits Limited taxes (one time taxation) 4

Sole Proprietorship Disadvantages Limited capital (money) Unlimited liability (responsible for ALL debt) Lack of business skills Limited to the lifetime of owner 5

Liabilities Anything that a company owes Unlimited liability Types of liabilities Financial Employment Firing of an employing that missed too many days Accidents and injuries on premises Customer breaks a leg while on business property Company vehicle-related Driver runs into a building while driving company’s car Product-related Toys easily injure toddlers Errors and omissions Employee accidentally damages a customer’s property

Sole Proprietorship Termination How is a sole proprietorship terminated? By decision By death of owner What are some sources that may be used for investment? Personal, gifts, and loans 7

Partnerships Business owned by two or more persons who share the risks and rewards A business owned and controlled by two or more people who have entered into a written agreement The management of the company depends on the partnership agreement. 8

Partnership Agreement Contract that outlines the rights and responsibilities of each partner How much each partner will invest How to share profits How to divide workload How to end partnership Actions of the partners, bankruptcy, death and/or court order

Partnership Advantages Easy to start More capital and credit available Work load more evenly shared Losses are also shared Partners bring different skills to the business Low taxes 10

Partnership Disadvantages Profits are shared Responsible for each others decisions Share unlimited legal and financial liability Disagreement between partners 11

Limited Liability Partnership Identifies some investors who cannot lose more than the amount of their investment Investors are not allowed to participate in the day-to-day business management

Types of Partnerships Dormant partner plays no role and is not known to the public. General partner plays an active role and has unlimited liability (every partnership must have at least one general partner). Limited partner participate as investors and have limited liability. Secret partner plays an active role but is secret from the public. Silent partner does not have an active role but is known to the public.

Types of Partners Type of Partner Participation in the Business Relationship to the Public Degree of Liability DormantNot activeUnknownUnlimited GeneralActiveKnownUnlimited LimitedNot activeKnownLimited SecretActiveUnknownUnlimited SilentNot activeKnownUnlimited 14

Corporation Business owned by many people, but treated by law as one person Stockholders Owners of a corporation Get share of the profits (dividend) Get to vote on how the business is run One share of common stock equals one vote Board of Directors Control the corporation Hire officers who run day-to-day activities (Ex. CEO) Charter License to run a corporation issued in state of HQ 15

Corporation Advantages Capital easy to obtain (sell stock or bonds) Limited liability for shareholders Indefinite lifetime 16

Corporation Disadvantages Double taxation: profits and earnings Government regulations Operations controlled by shareholders and board of directors instead of original owner(s) Ex: 10 years after founding Apple, Steve Jobs was fired by the board of directors. Difficult to start; complicated to run 17

Corporation How is the life of a corporation terminated? Determined by charter or indefinite lifetime What is the source of investment for corporations? Stocks and bonds 18

Specialized Corporations S-Corporation, also known as Subchapter “S”, treats stockholders as individuals by taxing them once. Limited Liability Company (LLC) Blends elements of corporation and partnership Why do small businesses operate as LLCs? To receive limited liability protection Nonprofit Corporation Does not pass profits onto shareholders Who benefits from services of nonprofit corporation? Benefits the public and is exempt from taxation 19

Types of Corporations Domestic – chartered in a specific state Examples located in North Carolina: Bank of America Corporation Lowe’s Home Improvement Store Foreign – chartered in one state, but doing business in another state Alien – chartered in another nation, but doing business in a state 20

Types of Corporations Public Established for a governmental purposes Examples National Science Foundation Export-Import Bank of the United States Private Established by individuals for business or charitable purposes. Examples IBM American Cancer Society 21

Types of Corporations Public Stock available to general public through stock markets. Private Stock owned internally by employees of company.

Cooperatives Owned by members, serves their needs, and is managed in their interest Purchase goods and services cheaper as a group than as individuals Greater bargaining power than as individuals 23

Franchise Permission to operate a business to sell products and services in a set way Begins with a parent company who owns the product or service and grants the right to another business Franchiser: the company that owns the product Franchisee: the company purchasing the right to run the business

Types of Franchises Business-format Requires franchisee to sell products or service in a specific format Product trade-name Allows franchisee to sell specific products. This format is usually formed by automobile, appliance, and petroleum product

Franchise Advantages Easy to start Proven methods and product(s) of parent company Rely on the name of the parent company Disadvantages Strict terms of how the business is run Limited as to what products and services are offered