Goals:

• Understand the three major forms of business ownership
• Determine when each form of business ownership is most appropriate
• Recognize other specialized business ownership forms

Key Terms:

• proprietorship
• partnership
• corporation
• partnership agreement
• articles of incorporation
• franchise

Forms of Business Ownership

• Business Ownership – Many people think they would like to own a business. The chance to be in control, make decisions, invest money and make a profit. Thousands of people own businesses. The amount of control they have, the decisions they make, the sources of money for the business, and control over profits is not the same for every business owner. The form of business ownership affects every aspect of the business.
  There are three major forms of business ownership – proprietary, partnership, and corporation.
• Proprietorship –is a business owned and run by just one person.
• It is the easiest form of business to start and to end.
• Very few legal requirements regarding the business ownership or capital needs
• Gives the owner sole control over all business decisions
• Owner receives all profits made by the business
• Owner determines how business profits are used
• Owner is responsible for all debts of the business
• If the business fails, the owner has virtually no shelter from creditors
  • Any money or other assets owned by the proprietor, whether used in the business or not, can be claimed by creditors to pay the business debts.
• Partnership – is a business owned and controlled by two or more people who have entered into an agreement.
• Similar to a proprietorship in many ways
  • Easy to start
  • Owners are responsible for key business decisions and functions
  • Partners share both investments and profits based on the terms of the partnership agreement
  • Each partner is liable for all of the debts of the business should it fail.
• Corporation – is a separate legal entity formed by documents filed with a state.
• Owned by one or more shareholders and managed by a board of directors
• More difficult to form than either a proprietorship or a partnership
• Must meet more legal requirements
• Not all owners have direct involvement in decision making about business functions
• All owners do not have access to business profits unless the board of directors approves it
• Liability of the stockholders is limited to only the amount of money they have invested

Most U.S. Businesses are organized as proprietorships (72%). Proprietorships have a very small percentage of business revenues (5%).

• Choosing a Form of Business Ownership – when a new business is started, the owner should carefully consider the form of ownership. It is possible to change the form of ownership, however it is better to decide which form to use both for the short-term and for the long-term.
• Choosing a Proprietorship – most businesses begin as a proprietorship and remain so for the life of the owners.
• Proprietors prefer the freedom of working for themselves and want to be in total control
• Many new business owners have a limited knowledge of the forms of business ownership and want to begin their business as soon as possible
• Starting a proprietorship is easy
  • Begin buying and selling as a business
  • Don’t even need a business name
  • Obtain required licenses and permits
  • Account for income and expenses
  • Pay taxes on profits
  • When you choose to name your business, you will need to register the name with local, state, and federal governments
  • Provides tax advantages and disadvantages  for the owner
  • All income is taxed as part of your personal income
  • Business expenses can be used to reduce income
  • In the eyes of the law, the owner is the same as the business
  • Any debts of the business are the responsibility of the owner
  • Personal assets of the owner that are not connected to the business will be used to pay business debts if  the assets of the business are not adequate to cover those debts.
  • A failed proprietorship may result in the owner losing everything.
• Choosing a Partnership  -  a partnership is a bit more complex and formal than a proprietorship. In many states, a partnership can be formed by the verbal agreement of two or more people. It is usually better to have a written partnership agreement.
• Partnership Agreement – a written agreement among all owners.
  • Details the rules and procedures that guide ownership and operations.  
  • Identifies the business name
  • Identifies the investments
  • Identifies other contributions of each partner
  • Shows how profits and losses will be divided among the partners
  • Defines authority and responsibilities granted to each person
  • Defines how the partnership can be dissolved
  • Most states require that partnerships register the business name and the name of each person in the partnership
• Advantages and disadvantages of a partnership
  • Two or more people can contribute to the investment needed to start the business
  • Two or more people can contribute to the expertise needed to run a business
  • Each partner is responsible for decisions made by all other partners
  • No protection for the personal assets of any partner
  • If a partner chooses to leave the partnership or dies, the partnership normally has to be dissolved.
• A partnership is a good ownership form for people who share an idea for a business
• Choosing a Corporation -  most people think of a corporation as very large businesses. Corporations are the most popular form of business ownership – for nw and small businesses as well. Corporations are subject to many more laws and are more difficult and costly to form.
• Advantages and disadvantages of a corporation
  • Treated as an “individual” by governments
  • Must follow the laws of the state in which the corporation is organized
  • Must file articles of incorporation – a legal document that defines ownership and operating procedures and conditions for the business. Each state has specific information that must be included
  • Must create corporate bylaws – the operating procedures for the corporation
  • Must name a board of directors – the people who will make major policy and financial decisions for the business
  • The corporation also issues stock to investors
  • The liability of any owner is limited to the amount of money invested
  • The amount of debt owed by the business does not matter
  • People can invest in a company and receive some of the profit without having to take part in the daily management and operations
  • The business can be easily expanded and ownership changed by the sale of stock
  • Decision making is shared.
  • Many more records are required. More laws regulate operations
  • Must pay corporate taxes on profits earned
  • Investors also pay taxes on the individual earnings from the business.
  • Other Forms of Ownership – there are other choices of ownership. Some are specialized forms of partnerships and corporations. Others are totally unique forms.
  • Specialized Partnerships and Corporations
  • Limited Liability Partnership – identifies some investors who cannot lose more than the amount of their investment, but they are not allowed to participate in the day-to-day management of the business. Difficult and costly to set up.
  • Joint Venture – a unique business organized by two or more other businesses to operate for a limited time and for a specific project – a type of partnership.
  • S-corporation – offers the limited liability of a corporation. All income is passed through to the owners based on their investment. Income is taxed on the partners individual tax returns.
  • Limited Liability Company (LLC) – provides liability protection for the owners. Simpler set of organizing and operating requirements than a corporation. No articles of incorporation or bylaws are needed.
  • Nonprofit Corporation – a group of people who join to do some activity that benefits the public. Work in education, health care, charity or the arts. Free from corporate income taxes. Raise funds by receiving grants and donations. Must organize as a corporation. The government must approve their purpose and organization.
  • Cooperatives and Franchises
  • Cooperative – a group of people who formed to provide goods and services that they all need. Owned by the members, serves their needs and is managed in their interest. Members form cooperatives so they can purchase goods and services cheaper as a group than they could individually.
  • Franchise – a written contract granting permission to operate a business to sell products and services in a set way. The company that owns the product or service and grants the rights to another business is known as the franchiser. The company purchasing the right to run the business is the franchisee. A franchise is a way to expand a business using the investments of others while maintaining control over the name, product quality, and operating procedures.
  • The franchisee maintains day-to-day operations and receives the profits from the business. It pays a fee and percentage of profits to the franchiser in return for operating assistance.

Assignment:

Working individually, students will complete the assignment -  Business Ownership: How Sweet It can Be ! (see link below)