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3.00 Acquire Knowledge of Business Ownership To Establish & Continue Business Operations

The document discusses the key advantages and disadvantages of different forms of business ownership: sole proprietorships, partnerships, corporations, and hybrid forms (LLCs and LLPs). Sole proprietorships are easy to start but owners have unlimited liability. Partnerships allow for more resources but partners have unlimited liability. Corporations can raise capital through stock but are more regulated and subject to double taxation. Hybrid forms provide liability protection with fewer regulations than corporations. The optimal choice depends on an owner's needs and goals.

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Issa Chavez
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0% found this document useful (0 votes)
52 views26 pages

3.00 Acquire Knowledge of Business Ownership To Establish & Continue Business Operations

The document discusses the key advantages and disadvantages of different forms of business ownership: sole proprietorships, partnerships, corporations, and hybrid forms (LLCs and LLPs). Sole proprietorships are easy to start but owners have unlimited liability. Partnerships allow for more resources but partners have unlimited liability. Corporations can raise capital through stock but are more regulated and subject to double taxation. Hybrid forms provide liability protection with fewer regulations than corporations. The optimal choice depends on an owner's needs and goals.

Uploaded by

Issa Chavez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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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 owner’s
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
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 partner’s 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 owner’s profit.
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
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
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 state’s statutes


can be costly

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