3.00 Acquire Knowledge of Business Ownership To Establish & Continue Business Operations
3.00 Acquire Knowledge of Business Ownership To Establish & Continue Business Operations
00 Acquire knowledge of
business ownership to
establish & continue business
operations
3.06B Select form of business
ownership
Objectives
•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.
•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
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
•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
•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