Chapter 6 Business Ownership Legal Forms of Business

Chapter 6 Business Ownership

Legal Forms of Business Ownership 3 different ways you can own a business: 1. Sole proprietorship 2. Partnership 3. Corporation

Sole Proprietorship = Business owned by one person that is not incorporated. No legal formalities required (no legal forms to fill out and register with the state)

Risks and Liabilities Law states the business and owner are one. The business cannot own property or any asset in its name, which means all “business” assets are the personal assets of the owner. Lawsuits will personally name the owner as the defendant

Advantages of sole proprietorships Easy to open Profits for the owner Pride and satisfaction of ownership Privacy Control and flexibility Tax advantages Easy to close Energy and resources can be devoted to business matters instead of legal necessities

Disadvantages of sole proprietorships Unlimited liability -- full responsibility for your company’s debts. --You could lose your personal savings, your property, or even your car if your business has debts it cannot repay. Limited capital Limited capabilities Uncertain life

Partnership: Business owned by two or more persons that is not incorporated. No legal formalities required Best thing partners can do is to prepare and use a written partnership agreement.

Partnership Agreement Describes the partner’s relationship to each other. Specific elements that should be included: 1. Name and location of the business 2. Purpose of the business 3. Identity of the partners 4. Capital contributions

Partnership Agreement continued. 5. Share of ownership 6. Sharing of profits and losses 7. Management of the business 8. Financial issues 9. Other issues

Risk and Liabilities Unlimited personal liability The other partners Each partner’s share of liability is not limited to his/her normal share of partnership losses

Advantages of general partnerships Easy to start Increased capital Combined capabilities Increased goodwill Decreased competition Reduced expenses Tax advantages

Disadvantages of general partnerships Unlimited liability Limited capital Difficult to share profits Disagreements Difficult to end Uncertain life

Corporations – business owned by many people but treated by law as a separate entity. Artificial person. Many legal formalities required to start Must obtain a corporate charter. To do so, Articles of Incorporation must be filed. Stock = shares of ownership in your corporation

Advantages of a Corporation Limited liability - shareholders have immunity from liabilities because of the corporate veil. ---The veil serves as a wall between the corporation and all corporate obligations on one side, while the shareholders and their individual assets are safe and protected on the other side. Unlimited life Easy to transfer ownership Skilled personnel Financial power

Disadvantages of a Corporation Difficult to form and operate Separate owners and managers More complex requirements Taxation

Other Ways to do Business Franchise = a contractual agreement to sell a company’s products or services in a designated geographic area. Nonprofit organization = type of business that focuses on providing a service rather than making a profit. A cooperative is an organization owned and operated by its members for the purpose of saving money on the purchase of certain goods and services

Types of Businesses Producer = a business that gathers raw products in their natural state. Example: farmer growing wheat Processors change raw materials into more finished products Example: wheat is turned into flour Manufacturers = businesses that make finished products out of processed goods. Example: automobile plant that makes car out of steal

Types of Businesses Continued Intermediary is any business in a distribution channel between the manufacturer and the consumer. 1. Wholesaler - distributes goods. Wholesalers buy goods from manufacturers in huge quantities and resell them in smaller quantities to their customers, usually other companies. 2. Retailer - purchases goods from a wholesaler and resells them to the consumer, or the final buyer of the goods. Service businesses provide services rather than goods. Examples are hairstyling or car repair.