Forms of
Ownership
of Small
Businesses
Chapter Three
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
1. Name the legal forms of ownership a small business
can have.
2. Explain the reasons for and against forming a
proprietorship.
3. Explain the reasons for and against forming a
partnership.
4. Explain the reasons for and against forming a
corporation.
5. Discuss some other legal forms a business can take.
3-2
Relative Position of U.S. Proprietorships,
Partnerships, and Corporations
3-3
Questions
• What is the different between revenue and
profit?
• Is form of ownership reflecting the size of the
business?
3-4
3-4
Considerations on the forms of business
ownership
1. Three basic forms of business ownership:
a. Sole proprietorship
b. Partnership
c. Corporation
2. Several issues to be considered when forming business
ownership:
a. To what extent do you want to be personally liable for
financial and legal risk?
b. Who will have controlling interest of the business?
c. How will the business be financed?
d. Nature of the business
e. Vision regarding size of the business
3-5
Proprietorship
A. Proprietorship
 business that is owned and operated by one
person.
• Independence
• Easy to set up
• Easy to close
• Unlimited liability
• Limited capital
• Limited skills
• Lack of continuity
Advantages
Disadvantages
3-6
Forms of business ownership
B. Partnership
 An association of two or more persons to carry on as coowners of a business for profit.
 Two types of partnerships:
a. General partnership
 each partner actively participates as an equal in
managing the business
 Each partner being liable for the acts of other partners.
b. Limited partnership
 one or more general partners conduct the business.
 one or more limited partners contribute capital but do
not participate in management and are not held liable
for debts of the general partners.
3-7
Partnership Organization
Advantages
• Pooled talent
• Pooled resources
• Easy to form
Disadvantages
• Unlimited liability
• Potential for management conflict
• Less independence than proprietorships
• Continuity or transfer of ownership
3-8
Articles of Partnership
 Articles of Partnership
1. The contract between partners of a business that
defines obligations and responsibilities of the business
owners.
2. It helps to prevent problems from arising between
partners and provides a mechanism for solving any
problems that do arise.
3-9
Corporation
C. C Corporation (Inc or Ltd)
 A business structure that creates an entity separate
from its owners and managers.
 Two types of corporation
a. Closely held corporation: Owned by a limited
group of people. Its stock is not traded publicly.
b. Public corporations: Sells shares of stock to the
public and is listed on a stock exchange.
3-10
Corporation
Advantages
• Limited liability
• Increased access to resources
• Transfer of ownership
Disadvantages
• Expensive to start
• Complex to maintain
• Double Tax
ADVANTAGES DISADVANTAGES
3-11
Articles of Incorporation
Articles of
incorporation
is an instrument
by which a
corporation is
formed under the
corporation laws
of a given state
Corporation’s
name
Names of the
organizers
Stock or no
stock
Organization
“will”
Purpose
Profit or notfor-profit
Stock
authorization
Initial board
members,
Initial
directors
Home office
location
3-12
Corporate Charter & Buy-sell Agreement
 Corporate charter
 Buy-sell agreement
 states what the
 explains how
business can do and
provides other
organizational and
financial information.
stockholders can buy
out each other’s
interest.
3-13
How a Corporation Is Governed
Stockholders
Corporate
Officers
Board of
Directors
3-14
The S Corporation
 S corporation
 special type of corporation fewer than 100
shareholders
 exempted from multiple taxation as stockholders
pay taxes at their individual rates.
3-15
Other Forms of Business
 Limited liability company (LLC)
 The number of partners does not exceed fifty
partners.
 Each partner shall only be liable to the extent of
his share in the capital.
 The company shall not be incorporated nor its
capital be increased nor any borrowing be made
through public subscription.
3-16
Other Forms of Business
 Professional service corporation (PSC)
 Must be organized for the sole purpose of
providing a professional service for which each
shareholder is licensed.
 Nonprofit corporation
 formed for civic, educational, charitable, and
religious purposes
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Other Forms of Business
Joint venture
 a form of temporary partnership whereby two or
more firms join in a single endeavor to make a
profit.
 usually an option where neither party can
achieve its purpose alone.
3-18
Question
What is the most likely form of business for
family firm? Why?
3-19
3-19