2. The Main Idea
Entrepreneurs need to understand the advantages and disadvantages of various types of businesses so that they can choose the one that best suits their needs.

3. Sole Proprietorship
The easiest and most popular form of business ownership is the sole proprietorship.
sole proprietorship
a business that is owned and operated by one person

4. is liable for the debts of the business.
Sole Proprietorship
The owner of a sole proprietorship:
receives the profits,
incurs any losses, and
is liable for the debts of the business.

5. Sole Proprietorship
In a sole proprietorship the owner must decide how much liability protection he or she needs.
liability protection
insurance against the debts and actions of a business

6. Sole Proprietorship Advantages
Sole proprietorship is easy and inexpensive to create.
The owner has complete authority over all business activities.
It is the least regulated form of business ownership.
The business pays no taxes; income is taxed at the personal rate of the owner. 6

7. Sole Proprietorship Disadvantages The owner has unlimited liability.
Raising capital is more difficult.
The business is totally reliant on the skills and abilities of the owner.
The death of owner dissolves the business unless there is a will to the contrary. 7

8. Disadvantages
The biggest disadvantage of a sole proprietorship is financial.
In this form of business ownership, the owner has unlimited liability.
unlimited liability
full responsibility for all debts and actions of a business

9. Partnerships
A partnership draws on the skills, knowledge, and financial resources of more than one person.
partnership
an unincorporated business with two or more owners who share the decisions, assets, liabilities, and profits

10. General versus Limited Partners
The law requires that all partnerships have at least one general partner.
A partnership may be set up so that all of the partners are general partners.
general partner
a participant in a partnership who has unlimited personal liability and takes full responsibility for managing the business

11. General versus Limited Partners
Some partnerships include a limited partner.
limited partner
a partner in a business whose liability is limited to his or her investment; a limited partner cannot be actively involved in managing the business

12. Partnerships Advantages Partnerships are inexpensive to create.
General partners have complete control.
Partners can share ideas.
Partners can secure investment capital more easily and in greater amounts. 12

13. Partnerships Disadvantages
It is difficult to dissolve one partner’s interest without dissolving the partnership.
There may be personality conflicts.
Partners can be held liable for each others’ actions. 13

14. The Main Idea
In a corporation, the owners of the business are protected from liability for the actions of the company.

15. What Is a Corporation? There are three types of corporations:
C-corporation
Subchapter S corporation
nonprofit corporation
corporation
a business that is registered by a state and operates apart from its owners; it issues shares of stock and lives on after the owners have sold their interest or passed away

16. C-Corporation A C-corporation is the most common corporate form.
an entity that pays taxes on earnings; its shareholders pay taxes as well

17. C-Corporation
In smaller corporations, the founders generally are the major shareholders.
shareholders
the owners of a corporation

18. ability to raise investment money
C-Corporation
Advantages
status
limited liability
ability to raise investment money
perpetual existence
employee benefits
tax advantages 18

19. Advantages
Corporate shareholders have limited liability, but some banks require officers to personally guarantee the debts of the company.
limited liability
partial responsibility of a corporate shareholder; he or she is responsible only up to the amount of his or her individual investment

20. C-Corporation Disadvantages expensive to set up
income more heavily taxed
subject to double taxation on income
pays taxes on profits
stockholders taxed on dividends 20

21. Nonprofit Corporation
A nonprofit corporation must fall within one of four categories:
religion
charity
public benefit
mutual benefit
nonprofit corporation
a legal entity that makes money for reasons other than the owner’s profit; it can make a profit, but the profit must remain within the company

22. Limited Liability Company
There are many benefits to forming a limited liability company (LLC).
limited liability company (LLC)
a company whose owners and managers have limited liability and some tax benefits, but which avoids some restrictions associated with Subchapter S corporations

23. Making the Decision your skills access to capital expenses
Before deciding on a legal form, ask yourself key questions about:
your skills
access to capital
expenses
willingness to assume liability
level of control wanted
length of time you expect to own the business