1. 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. 1 5-2

2. 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

3. BUSINESS OWNERSHIP  Proprietorship  Partnership  Corporation Chapter 5 3

4. 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

5. 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

6. 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

7. 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

8. 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. 9 Forms of Ownership Source: Internal Revenue Service

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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

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

19. 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

20. 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

21. 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

22. 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

23. 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