Forms of Business Ownership GOALS UNDERSTAND THE THREE MAJOR FORMS OF BUSINESS OWNERSHIP. DETERMINE WHEN EACH FORM OF BUSINESS OWNERSHIP IS MOST APPROPRIATE. RECOGNIZE OTHER SPECIALIZED BUSINESS OWNERSHIP FORMS

Key Terms  Proprietorship – business owned and run just by one person.  Partnership - business owned and controlled by two or more people who have entered into an agreement.  Corporation – separate legal entity formed by documents filed with a state.  Partnership agreement – a written agreement among all owners.  Articles of incorporation – a written legal document that defines ownership and operating procedures and conditions for the business  Franchise – a written contract granting permission to operate a business to sell products and services in a set way. Chapter 5 2

BUSINESS OWNERSHIP  Proprietorship  Partnership  Corporation Chapter 5 3

BUSINESS OWNERSHIP  Proprietorship - business owned and run just by one person.  Gives owner sole control over all business decisions.  Owner receives all profits made by the business.  Can determine how those profits are used.  Responsible for all debts of the business.  If the business fails, the owner has almost no shelter from creditors.  Any money and other assets owned by the proprietor, whether used in the business or not, can be claimed by creditors to pay the business debts. Chapter 5 4

WTBS…  Would you like to own your own business?  Why are interested in owning your own business?  Why are you not interested in owning your own business? Chapter 5 5

BUSINESS OWNERSHIP  Partnership - business owned and controlled by two or more people who have entered into an agreement.  Owners are both responsible for key business decisions and functions.  Partners both share investments and profits based on the terms of the agreement.  Each partner is liable for all of the debts of the business should if fail. Chapter 5 6

WTBS…  Effective partners compliment each other in that one offers skills and abilities the other does not possess.  Write down 3 skills and abilities you might look for in a partner that would compliment your skills and abilities? Chapter 5 7

BUSINESS OWNERSHIP Corporation – separate legal entity formed by documents filed with a state. ▫ Owned by one or more shareholders and managed by a BOD.  Several owners who invest in business by purchasing shares of stocks.  More difficult to form. Must meet legal requirements. Not all owners have direct involvement in decision- making.  Do not have access to profits unless the BOD approves. Chapter 5 8

9 Forms of Ownership Source: Internal Revenue Service

CHOOSING A FORM OF BUSINESS OWNERSHIP  Choosing a proprietorship  Choosing a partnership  Choosing a corporation Chapter 5 10

Choosing a Proprietorship  Freedom of working for themselves.  Total control of business.  When starting a business:  No business name needed (if operating for several years & this is your primary job, need required gov’t licenses and permits.  Account for income and expenses, pay taxes on profits.  Starting a proprietorship is so easy, it often leads to business failure.  Without careful thought and planning, the proprietor may not be well prepared for the challenges he or she will likely face. Chapter 5 11

Choosing a Proprietorship  Advantage  Being in control  Making your own decisions, and investing your money to make a profit.  Tax Advantage  All income is taxed as personal income.  Business expenses can be used to reduce the income.  Disadvantage  Having sole responsibility for the success of the business.  Making a profit.  If business fails, the owner may lose almost everything to cover any debts of the business. Chapter 5 12

Choosing a Partnership  Can be formed by verbal agreement.  Partnership agreement – a written agreement among all owners that details the rules and procedures that guide ownership and operation.  Identifies business name, investments, & other contributions of each partner.  Shows how profits and losses will be divided.  Defines the authority and responsibilities granted to each person and how the partnership can be dissolved. Chapter 5 13

Choosing a Partnership  Advantage  Two or more people can contribute to the investments needed to start the business.  Disadvantage  No protection for personal assets for each partner.  If a partner chooses to leave the partnership or dies, the partnership normally dissolves Chapter 5 14

Choosing a Corporation  Most popular form of ownership for large businesses.  Subject to many more laws & are more difficult to form than partnership & proprietorship.  To form a corporation, must file articles of incorporation.  Written legal documents defines ownership and operating procedures and conditions for the business. Chapter 5 15

Choosing a Corporation  Business must create corporate bylaws:  Operating procedures for the corporation.  Must name a BOD:  The people who will make the major policy and financial decisions for business.  Corporation issues shares of stock to the investors & details how more investments can be made. Chapter 5 16

Choosing a Corporation  Advantages  Liability of any owner is limited to the amt. of money invested.  People can invest in the business and receive some of the profit w/o having to take part in day-to-day mgmt & operations.  Disadvantages  Decision-making is shared among managers, BOD, & shareholders.  More records are required and more laws regulate operations.  Must pay corporate taxes on profits.  Investors pay taxes on their individual earnings from the business. Chapter 5 17

OTHER FORMS OF OWNERSHIP  Specialized partnerships and corporations  Cooperatives and franchises Chapter 5 18

Specialized Partnerships  Limited liability partnership  Identifies some investors who cannot lose more than the amount of their investments.  They are not allowed to participate in the day-to-day management of the business.  Difficult and costly to set up.  Joint venture  Unique business organized by tow or more other businesses to operate for a limited time and for a specific project. Chapter 5 19

Specialized Corporations  S-corporation  Favored by small businesses.  Offers limited liability of a corporation.  All income is passed through to the owners based on their investments and is taxed on their indiv. tax returns.  Limited liability company (LLC)  Combines best features of partnership and cooperation.  A simpler set of organizing and operating requirements than a corporation.  No articles of incorporation or bylaws or needed.  Simple doc. like a partnership agreement must be developed. Chapter 5 20

Specialized Corporations  Nonprofit corporation  Group of people who join to do some activity that benefits the public.  Ex. Education, health care, charity, or the arts.  Free from corporate income taxes.  Raise funds by receiving grants and donations from indiv. and businesses.  Must organize as a corporation.  Gov’t must approve their purpose and operations. Chapter 5 21

Franchises  Written contract granting permission to operate a business to sell products and services in a set way.  Company that owns the product or service grants the rights to another business (franchiser)  Company purchasing the rights to run the business is the franchisee.  A way to expand a business using the investments of others while maintaining control over the name, product quality, and operating procedures. Chapter 5 22

Franchises  Maintains day-to-day operations and receives the profits of the business.  Pays a fee and percentage of profits to the franchiser in return for operating assistance.  Ex. Jiffy Lube, Century 21 real estate, Mail Boxes etc. Chapter 5 23