Types of Business Ownership Chapter 7 Sole Proprietorship
Types of Business Ownership Chapter 7
Sole Proprietorship • Owner is the only one responsible for business’s activities • Easiest and most popular form of business to create • Nearly 76% of all business in US
What is a sole proprietorship? • Owner is the only one responsible for liability • Money owed to others • Easy to start quickly • Most switch to a form that affords more personal financial protection as the company grows
Advantages • Easy and inexpensive to create • Owner has complete authority over all business’s activities/least regulated form of ownership • Owner receives all profit • Business itself pays no taxes since it’s not separate from owner • Personal tax rate is lower than other forms of ownership
Disadvantages • Top disadvantage is financially – owner has unlimited liability • Debts incurred by a firm may have to be paid from the owner’s personal assets • Owner’s car, home, and bank account could be at risk • Difficult to raise capital • May not have sufficient assets to qualify for a loan • Total reliance on abilities and skills of owner • Death of owner automatically dissolves the business
Setting Up a Sole Proprietorship • Come up with a name for the business • Apply for a Certificate of Doing Business Under an Assumed Name (called DBA – “doing business as”) • Can get from the government offices • Ensure you are the only person doing business in the area with that name • Need Employer Identification Number (EIN) • Comes from Internal Revenue Service • Used for tax purposes – tracks federal income tax withheld and federal income tax returns
Partnership • More than 1 person shares the business decisions and outcomes • Sole Proprietorship with more than one owner • Two or more people own a business and share assets, liabilities, and profits • Partners don’t have to share business equally • Top 8 business partnerships that worked
Types of partnerships • General partner – unlimited personal liability • Take full responsibility for management • Must have at least one general partner • Limited partner – liability limited to investment • Cannot be actively involved in managing the business
Other types of partnerships • Joint venture – two companies join to complete a specific project • Act like partners for specified period of time • Example –real estate developers join with a financial source to design and build a construction project • Strategic Alliance – two businesses work together for mutual benefit • Example – you may form with a manufacturer that agrees to produce product for you
Advantages/Disadvantages • Advantages • Inexpensive to create • General partners have complete control • Share ideas and secure investment capital easier and in greater amounts • Disadvantages • Fragile entity • Difficult to dissolve one partner’s interest without dissolving partnership • Personality conflicts • Bound by the laws of agency (held liable for each other’s actions)
Making a Partnership Work • Important for partner’s to consider each other’s needs before committing • Plan for disagreements • Greatest chance of survival if: • Share business responsibilities • Put things in writing • Always be honest about how the business is doing • Establish a partnership agreement in advance
Sole Proprietorship or Partnership Commercial • In groups of 4 write a 30 -second television commercial about your business. • Must come up with a company as a group and get approval from me before planning the commercial • Content must be classroom appropriate • Emphasize at least 3 advantages and 3 disadvantages of your sole proprietorship or partnerships and how they relate to the customer • Assign parts and record the commercial • Evaluate the results. Do you think your ad would be effective and increase sales? Why or why not? How does your video showcase the advantages of a sole proprietorship or partnership? Must be 1 paragraph in length (5 -7 sentences) • Refer to Textbook – pg. 112
Corporate Forms • Corporation – business that is chartered, or registered, by a state • Legally operates apart from its owner or owners • Lives on after owners have sold their interests or pass away • 3 major types: • C-Corporation • Subchapter S Corporation • Nonprofit Corporation
C-Corporation • Most common corporate form • Protects the entrepreneur from being sued for actions and debts • Stock certificates indicate the amount of equity, or ownership, each investor has in the business • Must have a board of directors who makes policy decisions
C-Corporation Cont. • Advantages • Raise money by issuing shares of stock • Common stock • Voting rights • Preferred stock • First to receive investment back if business fails • Limited liability – liable only up to amount invested • Can create pension and retirement funds • Offer profit sharing to • Disadvantages • Expensive to set up • Income is heavily taxed • Pays taxes on profits • Stockholders must pay income taxes on their dividends
Subchapter S Corporation • Taxed like a sole proprietorship or partnership • Profits pass through corporation and taxed only once • Often they are cash businesses – problems arise if business has enough taxable profit but not enough to cover taxes
Nonprofit Corporation • Legal entities that make money for reasons other than the owners’ profit • Benefits a certain cause in the community • Can make a profit but must remain within company • 4 categories of non profits: • Charity – feeding the hungry and providing job training for unemployed • Public benefit – foundations created to advance science, education, and the arts • Religion – money received by churches and temples goes toward paying bills and advancing their causes • Mutual benefit – trade associations, amateur
Limited Liability Company (LLC) • Most recent form of business organization • Protects partners • Combines the best of all worlds • Limited liability of a corporation • Not liable for company’s debts • Same tax advantages of a partnership • Shareholders only taxed once
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