Introduction to Business

Business Ownership
Module Learning Outcomes

Distinguish among the forms of business ownership

7.1: List and explain the important factors in choosing an organizational ty

pe
7.2: Discuss the advantages and disadvantages of sole proprietorships
7.3: Discuss the advantages and disadvantages of partnerships
7.4: Discuss the advantages and disadvantages of corporations
7.5: Discuss the advantages and disadvantages of hybrid forms of busines
s ownership
7.6: Discuss the advantages and disadvantages of franchises
7.7: Describe the two types of mergers and acquisitions
Choosing an Organizational Type
Learning Outcomes: Choosing an Organizational
Type
7.1: List and explain the important factors in choosing an
organizational type
7.1.1: List the important factors in choosing an organizational type
7.1.2: Explain the important factors in choosing an organizational type
Forms of Business Ownership

• Business Organizational Options:

• Sole proprietorship
• General partnership
• Franchise
• Limited partnerships and limited liability partnerships (LLP)
• Limited liability company (LLC)
• C Corporation
• S Corporation
• Each type of business has its own set of risks and rewards, costs and
benefits.
• Picking the best type depends on the nature of the business opportunity
and the level of personal exposure to risk the owner is willing to accept.
Considerations in Choosing an Organizational
Type
• Cost of start up
• Control vs. responsibility
• Do you want to share the
profits?
• Taxation
• Entrepreneurial ability
• Risk tolerance
• Financing
• Continuity and transferability
Practice Question 1

Which of the following is a

downside of choosing a business
structure where the owner has full
control?
A. The owner must hire a CPA for the
business
B. The owner has full responsibility
and liability for the business
C. The owner must work all hours the
business is open
D. The owner cannot use their real
name when obtaining a business
license
Sole Proprietorship
Learning Outcomes: Sole proprietorship

7.2: Discuss the advantages and disadvantages of sole

proprietorships
7.2.1: Define sole proprietorship
7.2.2: Discuss the advantages and disadvantages of sole proprietorships
Defining Sole Proprietorship

• Sole proprietorships are:

• Owned and run by one person
• Have no distinction between the business
and the owner
• Businesses where the owner is entitled to
all business profits and is responsible for all
business debts, losses, and liabilities
• The simplest and most common legal
structure for a business
Advantages and Disadvantages of Sole
Proprietorship
Advantages Disadvantages
• Easy and inexpensive to form • Unlimited personal liability for the
• Profits all go to owner sole proprietor
• Direct control of the business • Difficulty raising capital
• Freedom from government • Limited managerial expertise
regulation • Trouble finding qualified
• No special taxation employees
• Ease of dissolution • Personal time commitment
• Unstable business life
• Losses are the owner’s
responsibility
Practice Question 2

What would be an advantage of

choosing a sole proprietorship
over other legal structures of
business?
A. The sole proprietorship can live
long after its founder moves on
B. The sole proprietorship is
protected from all liability
C. The sole proprietorship pays no
taxes
D. The sole proprietorship would be
cheaper to set up
Partnerships
Learning Outcomes: Partnerships

7.3: Discuss the advantages and disadvantages of partnerships

7.3.1: Define partnerships as a form of business
7.3.2: Describe the difference between general and limited partnerships
7.3.3: Discuss the advantages and disadvantages of partnerships
Defining Partnerships

• Partnerships are businesses in

which two or more people share
ownership and responsibility.
• Each partner contributes to all
aspects of the business,
including money, property,
labor, or skill.
• Each partner shares in the
profits and losses of the
business.
Types of Partnerships
Limited Partnerships (also
General Partnership known as Limited Liability
Partnerships)
• Assume that profits, liability, and • More complex than general
management duties are divided partnerships.
equally among partners. • Allow partners to have limited
• If you opt for unequal liability as well as limited input
distribution, the percentages with management decisions.
assigned to each partner must • Limited partnerships are
be documented in the attractive to investors of short-
partnership agreement. term projects.
Forming a Partnership and Partnership Taxes

Forming a partnership: To form a partnership, you must:

• Register your business with the state
• Establish your business name
• Once your business is registered, you must also obtain licenses and
permits

Partnership taxes: Most businesses will need to register with the IRS,
register with state and local revenue agencies, and obtain a tax ID number.
In addition, partnerships must file an annual information return to report
income, deductions, gains, and losses from the business’ operations, but the
business itself does not pay income tax. Partners include their respective
share of the partnership’s income or losses on their personal tax returns.
Advantages and Disadvantages of Partnerships

Advantages Disadvantages
• Easy and inexpensive to form • Joint and individual liability
• Shared financial commitment • Disagreements among partners
among partners • Shared profits
• Complementary skills / utilize the
expertise of each partner
• Partnership incentives for
employees
Class Discussion: Going into Business with a
Friend
• Is it a good idea to form a partnership business with a friend?
• What are some of the considerations to think about if you decide to do
so?
Practice Question 3

Caitlin is invited to join a

business as a partner due to her
expertise in the field. She is
asked to sign a partnership
agreement that gives her 40% of
the profits, full control of the
marketing activities, but final say
on all other decisions goes to the
original owner. She is joining:
A. A limited partnership
B. A general partnership
C. A dual proprietorship
D. An S corporation
Practice Question 4

The following are all advantages of

business partnerships EXCEPT:
A. Partnerships shield the individual
partners from debt and liability
B. Partnerships are relatively easy and
inexpensive to set up
C. Partnerships pool the resources of
the partners to obtain capital
D. Partnerships can take advantage of
the various skills, strengths, and
experiences of each of the partners
Corporations
Learning Outcomes: Corporations

7.4: Discuss the advantages and disadvantages of corporations

7.4.1: Summarize the difference between C and S corporations
7.4.2: Explain the purpose and requirements of a benefit corporations (B
corp)
7.4.3: Discuss the advantages and disadvantages of corporations
Background on Corporate Rights

Corporate personhood: the legal notion that corporations, apart from

their associated human beings (like owners, managers, or employees), have
some, but not all, of the legal rights and responsibilities enjoyed by natural
persons (physical humans). Corporations have the right to enter into
contracts with other parties and to sue or be sued in court in the same way
as natural persons or unincorporated associations of persons.

Since the Supreme Court’s ruling in Citizens United v. Federal Election

Commission in 2010, upholding the rights of corporations to make political
expenditures under the First Amendment, there have been several calls for a
U.S. Constitutional amendment to abolish corporate personhood. While the
Citizens United majority opinion makes no reference to corporate
personhood or the Fourteenth Amendment, Justice Stevens’ dissent claims
that the majority opinion relies on an incorrect treatment of corporations’
First Amendment rights as identical to those of individuals.
Types of Corporations

Three types of corporations:

1. C corporations
2. S corporations
3. B corporations
C Corporations

• Independent legal entities owned by shareholders

• More complex than other business structures because of
• Costly administrative fees
• Complex tax and legal requirements
• When you form a corporation, you form a separate tax paying
entity, unlike sole proprietorships or partnerships
• Income paid as dividends is taxed twice
Advantages and Disadvantages of
C Corps

Advantages Disadvantages
• Limited liability: shareholder’s • Time and money: costly and time
personal assets are protected. consuming to start and operate
Shareholders can generally only be • Double taxing: In some cases,
held responsible for their corporations are taxed twice—first,
investment in stock in the company when the company makes a profit,
• Ability to generate capital and again when dividends are paid
through sale of stock to shareholders.
• Corporate tax treatment: • Additional paperwork: There are
Corporations file taxes separately increased paperwork and record-
from their owners. keeping burdens associated with
• Attractive to potential this entity.
employees
S Corporations

• Special type of corporation created through an IRS tax election

• An eligible domestic corporation can avoid double taxation by electing to
be treated as an S corporation
• Profits and losses can pass through to your personal tax return
• The business is not taxed; instead, only the shareholders are taxed
• Any shareholder who works for the company must pay herself a
“reasonable compensation”
Advantages and Disadvantages of
S Corps

Advantages Disadvantages
• Tax savings: Only the wages of the • Stricter operational processes:
S corp shareholder who is an As a separate structure, S corps
employee are subject to require scheduled director and
employment tax. shareholder meetings, minutes from
• Business expense tax credits: those meetings, adoption and
Some expenses that updates to by-laws, stock transfers,
shareholder/employees incur can and records maintenance.
be written off as business • Shareholder compensation
expenses. requirements: A shareholder must
• Independent life: An S corp receive reasonable compensation.
designation also allows a business
to have an independent life,
separate from its shareholders.
Benefit (B) Corporations
• Type of for-profit corporate entity, authorized by thirty U.S. states and the
District of Columbia, that creates a general public benefit, which is
defined as a material positive impact on society and the environment. This
can include positive impact on society, workers, the community, and the
environment.

• Transparency provisions require benefit corporations to publish annual

benefit reports on their social and environmental performance using a
comprehensive, credible, independent, and transparent third-party-standard.

• Differ from traditional C corporations in purpose, accountability, and

transparency, but not in taxation. B Corps elect to be taxed as a C or an S
corp.
Advantages and Disadvantages of
B Corps

Advantages Disadvantages
• Protection of mission: Becoming a B • Transparency and reporting
Corp gives companies more options and requirements: B Corps must provide
protections if they decide to sell the an annual benefit report according to a
business to someone else or take it third-party standard and make the
public report available on their company
• Reputation: B Corps stand out as Websites.
businesses that have a social • Annual fees to retain certified B
conscience and aspire to a standard Corp status
they consider higher than maximizing • Compliance and governance
profit obligations: Most states require
• Creation of value: B Corps may publicly traded companies with a B corp
create value via employee engagement designation to have a “benefit director”
and customer loyalty, thereby who is responsible for ensuring that the
improving results for all stakeholders corporation meets its stated public
purpose.
Practice Question 5

The most significant differences

between C and S corporations
have to do with:
A. Supply chain structure,
compliance standards, and
taxation
B. Taxation, operation, and
incorporations
C. Administration, employee
benefits, and taxation
D. Taxation, administration, and
shareholder compensation
Hybrid Forms of Ownership
Learning Outcomes: Hybrid Forms of Ownership

7.5: Discuss the advantages and disadvantages of hybrid forms of

business ownership
7.5.1: Define limited liability company (LLC) as a form of business
7.5.2: Discuss the advantages and disadvantages of LLCs
7.5.3: Define limited liability partnerships (LLP) as a form of business
7.5.4: Discuss the advantages and disadvantages of LLPs
LLC (Limited Liability Company)

• Hybrid business structure allowed by state statute

• Provides the limited liability features of a corporation
• Provides tax efficiencies and operational flexibility of partnerships
• Owners of an LLC are called members.
• Unlike shareholders in a corporation, LLCs are not taxed as a separate
business entity: instead profits and losses are “passed through” the
business to each member of the LLC
Advantages and Disadvantages of
an LLC

Advantages Disadvantages
• Limited Liability: Members are • Possible Limited Life: When an
protected from personal liability for LLC is formed, the members must
business decisions decide on the duration of the LLC.
• Less Record Keeping compared • Self Employment Taxes:
to an S Corporation Members of an LLC are considered
• Sharing of Profits: Members self-employed and must pay the
distribute profits as they see fit. self-employment tax contributions
towards Medicare and Social
It’s up to the members to decide
Security.
who has earned what percentage of
the profits or losses
LLP (Limited Liability Partnership)

• A partnership in which some or all partners have limited liabilities

• One partner is not responsible or liable for another partner’s misconduct
or negligence
• Some states require one partner to be a “general partner” with unlimited
liability
• Partners may manage the company directly without electing a board of
directors
• Profits are allocated among the partners for tax purposes, avoiding the
problem of “double taxation” often found in corporations
Advantages and Disadvantages of
an LLP

Advantages Disadvantages
• Single taxation: The credits and • Duration: The business life of an
deductions of the company are LLP is unstable.
passed through to partners to file • Limitations of formation: Limited
on their individual tax returns. liability partnerships are not
• Limited liability: The LLP recognized as legal business
structure protects individual limited structures in every state.
partners from personal liability for • Partner control: If an LLP is formed
negligent acts of other partners or without a limited liability partnership
employees not under their direct agreement, individual partners are
control. not obligated to consult with other
• Flexibility: LLPs provide the participants in certain business
partners flexibility in business agreements.
ownership.
Practice Question 6

Warren is starting a business. His

biggest concerns are losing
everything he owns if something
goes wrong and being mired in strict
taxation and administrative
regulations. For those reasons, he
decides to start a(n):
A. C Corporation
B. S Corporation
C. Sole Proprietorship
D. LLC
Practice Question 7

This business legal structure can be

defined as having single taxation,
limited liability, and the flexibility to
let each individual in the business
decide how much responsibility and
participation they want. This is a(n):
A. LLP
B. LLC
C. B Corp
D. C Corp
Franchises
Learning Outcomes: Franchises

7.6: Discuss the advantages and disadvantages of franchises

7.6.1: Discuss franchises as a form of business
7.6.2: Discuss the advantages and disadvantages of franchising for the
franchisee
7.6.3: Discuss the advantages and disadvantages of franchising for the
franchisor
Defining Franchises

A franchise is a business model that

involves one business owner
(the franchisor) licensing trademarks
and methods to an independent
entrepreneur (the franchisee) for a
prescribed period of time.

For the franchisor, the franchise is an

alternative to expanding through the
establishment of a new location, which
avoids the financial investment and
liability of a chain of stores.
Advantages and Disadvantages
for the Franchisee

Advantages Disadvantages
• Less risk • Cost: Buying and running a
• Name/brand recognition: The franchise can be very expensive.
franchise has an established • Unequal partnership: The
image and identity already, which franchisor sets the rules, and the
can reduce or simplify marketing franchisee must follow them.
efforts. • Rules and enforcement:
• Access to expertise, ongoing Franchisor rules imposed by the
support: Franchisee often franchising authority are becoming
receives help with site selection, increasingly strict. Some franchisors
are using minor rule violations to
training materials, product supply,
terminate contracts and seize the
and marketing plans. franchise without any
• Relative autonomy reimbursement.
Advantages and Disadvantages
for the Franchisor

Advantages Disadvantages
• Access to capital for growth and • Lack of control: Despite the
expansion language of the franchise agreement,
• Cash flow for operations: In once the franchisee has established
addition to initial franchise fees that their location, the franchisor may
can range from $50,000 to $5 million, have difficulty ensuring that quality
franchisors receive payments in the standards are met and the franchise
form of royalties from each is operating in a manner that benefits
franchisee. the brand.
• Economies of scale: Once a • Trade secrets: If the success of a
franchise is established with multiple business is based on a trade secret,
locations, the company may be able special process, or innovative
to leverage its buying power to technology, establishing a franchise
realize economies of scale with may make the business vulnerable to
suppliers, advertisers, and vendors. knock-offs or imitation.
• Overexposure / Brand Dilution
Practice Question 8

The advantages of being a franchise are:

A. Risk reduction, brand recognition, and no
royalty payments
B. Risk reduction, brand recognition, and
relative autonomy
C. Brand recognition, no initial investment,
and access to expertise
D. Access to expertise, relative autonomy,
and startup funds
Practice Question 9

These are the primary disadvantages for

the Franchisor in a franchise business
model.
A. Vulnerability of trade secrets, high cost of
entry, and lack of control
B. Increased investment risk, lack of control,
and overexposure of the brand
C. Lack of control, vulnerability of trade
secrets, and overexposure of the brand
D. Increased tax rate, lack of control, and
overexposure of the brand
Mergers and Acquisitions
Learning Outcomes: Mergers and Acquisitions

7.7: Describe the two types of mergers and acquisitions

7.7.1: Define merger as a business strategy
7.7.2: Define acquisition as a business strategy
7.7.3: Explain why companies undertake horizontal mergers and
acquisitions
7.7.4: Explain why companies undertake vertical mergers and acquisitions
Defining Mergers

• A merger is the consolidation of two

companies that, prior to the merger,
were operating as independent
entities.
• A merger usually creates one larger
company, and one of the
original companies ceases to exist.
• Mergers can be either horizontal or
vertical.
Two Types of Mergers

Horizontal Vertical
• Occurs between companies in • A merger of two organizations
the same industry that have a buyer-seller
• A consolidation of two or more relationship or
businesses that operated in the • Two or more firms that are
same market space, often as operating at different levels
competitors within an industry’s supply chain
• Common in industries with fewer • Logic behind the merger is often
firms where competition tends to that the two firms would operate
be higher more efficiently together rather
than separately
Defining Acquisitions

An acquisition occurs when a company purchases the assets of

another business (such as stock, property, plants, equipment) and usually
permits the acquired company to continue operating as it did prior to the
acquisition.

Acquisition usually refers to a purchase of a smaller firm by a larger one.

Sometimes a smaller firm will acquire management control of a larger

and/or longer-established company and retain the name of the latter for the
post-acquisition combined entity.
Reasons for Mergers and Acquisitions

• Obtaining quality staff or additional skills, knowledge of your industry or

sector, and other business intelligence
• Accessing funds or valuable assets for new development
• Your business is underperforming
• Accessing a wider customer base and increasing your market share
• Diversification of the products, services, and long-term prospects of your
business
• Reducing your costs and overheads through shared marketing budgets,
increased purchasing power, and lower costs
• Reducing competitions
• Organic growth
Practice Question 10

What is the biggest benefit to

businesses of horizontal
mergers and acquisitions?
A. Market valuation decreases
B. Competition is reduced
C. Customer feedback improves
D. Employee career paths
lengthen
Class Discussion: Business Ownership
As we have learned, businesses can have a variety of ownership structures
based on the vision, size, liability. and control wanted by the organization.
DIs it correct to assume that small businesses are set up as Sole
Proprietorships and evolve into C Corporations as they grow?
Match the company with its business structure:
1. American Airlines
2. IKEA
3. Intel
4. Exxon Mobile
5. Mars, Inc.
6. Apple
7. Dyson
8. Albertsons
Forms of Business Ownership Comparison
Sole Partnership LLC LLP Corporation S Corporation
Proprietorship

1 sole 2 or more 1 or more 2 or more 1 or more 1 or more

Owner(s)
proprietor partners members partners shareholders shareholders

No* No*
No*
Sole authority *Yes, if only *Yes, if only
Yes No *Yes, if only No
for decisions one sharehold one sharehold
one member
er er

Easy setup Yes Yes Yes Yes No No

Minimal
Yes Yes Yes Yes No No
regulations

Single
Yes Yes Yes Yes No Yes
taxation

Easy access
No Somewhat Somewhat Somewhat Yes Yes
to expertise

Easy access
No Somewhat Somewhat Somewhat Yes Yes
to capital

Limited legal
No No Yes Yes Yes Yes
liability

Unlimited life No No Possible Possible Yes Yes

Easy transfer
No No No No Yes Yes
of ownership
Quick Review

• What are the important factors in choosing an organizational type?

• What are the advantages and disadvantages of sole proprietorships and
partnerships?
• What are the advantages and disadvantages of corporations?
• What are the advantages and disadvantages of hybrid forms of business
ownership?
• What are the advantages and disadvantages of franchises?
• What are the two types of mergers and acquisitions?