3.

00 Acquire knowledge of
business ownership to
establish & continue
business operations
3.06B Select form of business
ownership
Objectives

Summarize the advantages and

disadvantages of the most common
types of business ownership.
 Three basic forms of business
ownership
Your choice depends on your needs &
goals
Sole proprietorship

Partnership

Corporation
Sole proprietorship

A business owned
and operated by
one person.
 Advantages of sole proprietorships
Easy and inexpensive to create.
Unless you need certification or
local permits, government
intervention is minimal
Owner makes all business decisions &
has control over all aspects of the
business.
Flexibility in scheduling to meet
owners needs
Advantages of sole proprietorships
cont.
Owner receives all profits.
Privacy owner is the only one who
knows details of the business
Secret ideas, formulas, or
recipes
Ability to act quickly in making
decisions no checking with others
 Advantages of sole proprietorships
cont.
Tax advantages
Business itself pays no taxes
Taxes are paid as personal income of owner
which is usually lower than corporate taxes
Many business expenses are deductible

Easy to close/dissolve
Pay employees and creditors
Sell your equipment
Notify customers if possible
 Disadvantages of sole proprietorships
Owner has unlimited liability for all debts and
actions of the business.
Unlimited liability: The debts of the business may be paid
from the personal assets of the owner.
If you cannot pay business debt with business income, bill
collectors can take your personal assets (home, car)

Difficult to raise capital.

Banks/lenders consider sole proprietorships to be a high-
risk investment
Needs include paying employees, purchasing equipment &
inventory, & running the business
Expansions can be delayed or halted causing you to lose
business to your competition
Disadvantages of sole proprietorships

Sole proprietorship is limited by

his/her skills and abilities.
Uncertain life
You are it illness or injury that prevents you
from working may cause you to close
Bankruptcy or incarceration will dissolve your
business
The death of the owner automatically dissolves
the business.
Partnership

A form of business
ownership in which
two or more people
share the assets,
liabilities, and profits.
Advantages of partnerships
Fairly easy & inexpensive to start
May pay attorney if you develop a partnership agreement
Combined resources
Team with partners with different skills, experience, contacts, &
capital
Sharing responsibilities makes business run more efficiently &
smoothly
Increase the amount of capital to run the business. Lenders may
be more willing to lend or extend credit
Decreased Competition
Combining like businesses will decrease or eliminate
competition
Advantages of partnerships cont.
Reduced expenses
When two or more businesses combine expenses are no longer
being duplicated
Ex. promotion, office space, supplies, utilities
Business losses are shared by all partners.
The partnership does not pay income tax on profits.
Each partner pays income tax on her/his individual share of the
profit
Disadvantages of partnerships
Unlimited liability
Each owner in a general partnership has unlimited liability.
Each partner can lose personal assets to pay business debt
In a limited partnership, the liability is limited to the amount
invested in the business
Limited Capital
Although partners may bring more capital to the business than sole
proprietors, it is still limited to what each can contribute
Some lenders may still be reluctant to lend large amounts
Difficulty in ending
Withdrawing can be complicated if there is no written partnership
agreement
By law profits must be divided equally if no agreement
Disadvantages of partnerships cont.
Partnerships may lead to disagreements.
May disagree on business goals, finances, responsibilities, &
division of profits
Can affect the efficiency of the business, morale of employees, &
success or failure of the venture
Developing a detailed partnership agreement often
helps resolve the conflict because it addresses many
issues that cause potential disagreements
In 1916, the U.S. government developed the Uniform Partnership
Act (updated in 1997) which serves as a guide for legally
formulating a general partnership agreement
A limited partnership is more formal & specific in nature & is
governed by the Uniform Limited Partnership Act (ULPA)
Disadvantages of partnerships cont.

Uncertain life/Transferability
Unless specified in a detailed
partnership agreement,
bankruptcy, death & the
withdrawal or admittance of a new
partner dissolves the partnership
Remaining partners may start a
new partnership if they have the
money to buy the former partners
share
 Corporation
A business that is chartered by a
state and legally operates apart
from its owners.
Owned by stockholders who
have purchased units or shares
of the company
Types of corporations
C-corporation: The most common form of
corporation. It protects the entrepreneur from
being personally sued for the actions and debts
of the corporation
Subchapter S corporation: A corporation that is
taxed like a sole proprietorship or partnership.
Nonprofit corporation: Legal entities that make
money for reasons other than the owners profit.
Limited Liability Company (LLC): A form of
business ownership that provides limited
liability and tax advantages.
Advantages of corporations
Financial Power
Can raise money quickly by issuing shares of stock.
Because it is closely regulated by the government,
financial institutions are more willing to lend larger
amounts of capital
Limited Liability
Owners are liable only up to the amount of their
investments. Personal assets cannot be used to pay
business debt
Unlimited life
May exist indefinitely
The death or withdrawal of an owner/stockholder does
not affect the life span of the corporation
Advantages of corporations cont.

Easy-to-transfer ownership
Ownership simply transferred by selling stock to
someone else
New stock certificate is issued in the name of new
stockholder. No permission is required by others
The business can hire experts to
professionally manage each aspect of the
business.
Can result in a more efficiently run organization
Disadvantages of corporations
Difficulty in forming & operating
Legal assistance is needed to start a corporation
Lawyer fees can be very expensive
Must request approval from the State & register the Articles of
Incorporation
Decisions about value & class of stock & shareholder voting rights
Corporations are subject to more government
regulations than partnerships or sole proprietorships.
Reporting & taxation requirements vary from state to state
Required to keep detailed reports for stockholders & to keep them
informed of certain corporate transactions, meetings, & voting rights
New charter must be approved if corporate activities change
Disadvantages of corporations
Dual taxation
Corporation is taxed on profits
from the company
Shareholders are taxed on the
dividends they earn on their
investments
Separate owners & managers
Stockholders are not generally involved in the day-to-day operation
of the corporation
Stockholders form a board of directors to make decisions about
the business & managers carry out these decisions
Separation of ownership & management provides more opportunity
for irregularities or misunderstandings
Hybrid forms of Business Ownership

Limited Liability Company (LLC)

Limited Liability Partnership (LLP)
Both combine various elements of sole
proprietorships, partnerships, &
corporations into one package
Advantages of Hybrid Businesses
Cost to start & operate
Generally less expensive than corporations
No dual taxation - requires less paperwork & regulation
LLPs are designed for business professionals such as
lawyers & doctors
Partners might need to carry a required amount of liability insurance

Limited Liability
Personal assets cannot be used to pay business debt
Owners (members) lose only what they have invested in
the business if it fails
Advantages of Hybrid Businesses cont.
Taxation
LLCs & LLPs pay taxes on personal income-tax returns
Since they are not considered separate entities (like
corporations) they are not subject to dual taxation
Combined resources
Often have more owners & tend to have a wider pool of
financial resources, skills, talents, & contacts
Life span
Hybrids are required to dissolve after a specific time
period
Depending on the state registered in, usually between 30 & 40
years
Owners can decide if they want to reorganize or let it
dissolve
Advantages of Hybrid Businesses cont.
Flexibility
Number of members permitted in LLCs are
unlimited
Sub S corporations must have 100 or fewer
shareholders
Most states require only one member to
establish a business as a hybrid
Members are permitted to run the company or
to allow others to manage it
Membership changes do not automatically
dissolve the company
 Disadvantages of hybrids
Requirements & laws to establish & operate
hybrids vary from state to state
Problematic for businesses that operate in more than
one state
No universal guidelines from state to state

Verification of each states

statutes can be costly