Forms of Business Ownership
Business Management A – Chapters 5 and 6
Getting Started
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Characteristics of Entrepreneurs
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Assumes risk for sake of profit
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Enjoy freedom and independence of being their own boss
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Self-starters
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Have plenty of energy
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Enjoy working on their own
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Like to take charge
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Work hard and work long hours
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Be able to make decisions
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Prepare a Business Plan – a written document that describes the nature
of the business, its goals and objectives, and how they will be reached
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Requires a great deal of thought and planning
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Strategies for achieving goals
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Inspire others to invest
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Plan is realistic
SBA – Small Business Administration –government supported agency that
counsels, assists, and protects interests of small businesses
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Provides SBA loan guarantees to small businesses that have strong business plans or
need help after disasters
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Small Business Development Development Centers – provide services to
entrepreneurs who need help researching and writing business plans
Proprietorship
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A business owned and managed by one person
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Also called Sole proprietorship
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Most common form of business organization
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Proprietor – the owner/manager
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Performs day to day tasks
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Can hire employees
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Furnishes expertise, money, and management
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Entitled to all profits earned by the business
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Has full claim to the assets or property owned by the business
If the proprietor has debts, creditors (those to whom money is owed)
have first claim against the assets
Advantages of a Proprietorship
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Owner is boss
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Pride and satisfaction
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Can be inventive and creative
Owner receives all profits
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More likely to work overtime
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continually think of ways business can operate more efficiently
Owner personally knows employees and customers
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“family” atmosphere/relationships with employees/customers
Owner can act quickly in decision making
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Can make decisions without consulting others/flexible decision making
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Can take advantage of unusual opportunities
Owner is free from “red tape”
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Can begin or end business activities without legal formality (usually)
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Can be organized easily
Pays less income tax than a corporation
Disadvantages of Proprietorships
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Owner may lack necessary skills and abilities
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Most people not skilled at everything necessary to run a successful business
Owner may lack funds
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Additional funds (capital) often needed for emergencies
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Large-scale financial assistance often difficult for a single owner to obtain
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Expansion of business may be slowed because of lack of capital
Owner bears all losses
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Assume a great deal of risk
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If business fails, owner must pay all debts of the business
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Creditors have a claim against the owner’s personal assets (unlimited liability)
Illness or death may close the business
Businesses suited to being proprietorships
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Primarily concerned with providing personal services
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Selling merchandise or services on a small scale
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Dentists, accountants, landscape gardeners, carpenters, painters, barbers, beauty salons,
computer consultants
Newspaper and magazine stands, roadside markets, family restaurants, flower shops, gas
stations, small grocery stores, craft sellers
Part-time Proprietorships – up to 1/3 of all proprietorships are run as part-tim
businesses
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Appealing to stay-at-home parents
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Business is small enough to be managed by the proprietor or a few hired employees
AND
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Does not require a large amount of capital
Partnership
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A business owned by two or more people – no set limit on number of partners
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Created with a partnership agreement
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Businesses suited to being a Partnership:
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Car dealerships
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Sales department
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Service department
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Businesses that operate in more than one location
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Professional services
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Lawyers
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Doctors
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Accountants
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Financial consultants
Advantages of Partnerships
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Skills and abilities pooled
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Sources of capital increased
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Usually has a better credit reputation since more than one person is responsible financially
Contribution of goodwill
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More money can be obtained if there are partners
Credit position improved
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Can draw on the skills and abilities of two or more people
More people will know the owners - goodwill
Increased concern in business management
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Each owner will have greater interest as a partner rather than just as an employee
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Greater financial responsibility in the business as an owner makes for more interest
Lower tax burden than corporations
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Usually have a tax advantage over corporations
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Pay only personal income tax on individual share of the profit
More Advantages - Partnership
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Reduction in competition
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Retirement from management
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Can decrease or eliminate competition
If sole proprietor wants to retire but not close the business, they can allow a
partner to manage the business
Operating economies
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Possible to operate more efficiently by combining two or more businesses
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Operating expenses can be reduced (advertising, supplies, equipment, fuel, rent)
Disadvantages of Partnership
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Unlimited financial liability
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Each partner is liable for all debts of the business, even personally
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If one partner cannot pay debts, the other partners are responsible
Disagreement among partners
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All partners must agree on decisions
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Partners may feel they are not sharing in the management of the business
Each partner bound by contracts of others
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If a partner makes a contract regarding the business, all partners are legally bound by the
contract even if they were not in on the decision making.
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Disagreements can lead to partnership failure
Uncertain life
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If one partner dies, the partnership ends
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Heirs of the deceased partner may claim the partner’s share of the business
Limited sources of capital
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Difficult for a partnership to obtain enough capital to operate a large business
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Some partners may not contribute financially but offer their skills/knowledge/reputation as
assets (capital)
More Disadvantages - Partnership
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Unsatisfactory division of profits
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Profits may not be divided equally due to unequal investment by partners
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Partnership agreement must address this before the business is started
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If no provision is made, the law requires that profits be divided equally even if all
partners are not equally invested in the business
Difficulty in withdrawing from partnership
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May be hard to find another partner to buy you out if your want to leave the
partnership and sell your investment
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The new buyer (partner) may not be acceptable to the existing partners.
Limited Partnerships
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Restricts the liability of a partner to the amount of the partner’s investment
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Not all partners have unlimited financial liability for business debts
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At least one partner must be a general partner who has unlimited liability
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Useful in situations where one person wishes to invest in a business but
doesn’t have the time or interest to participate actively in the management
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Any business that is formed as a proprietorship can usually be formed as a
limited partnership
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A proprietorship or partnership may be named after its owner or owners
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Uniform Limited Partnership Act – states have created similar regulations for
controlling limited partnerships
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A certificate of limited partnership must be filed in a public office of record and
proper notice be given to each creditor