Sole Proprietorships
Sole Proprietorship is a business that is owned
(and usually operated) by one person.
• Simplest form of ownership and easiest to start.
• Allows the owner to pick and choose what
assignments to work on.
• Possible to make more money than when working
for a salary for another business.
Advantages of Proprietorships
Ease of Start-Up
Requires no contracts, agreements or other
legal agreements
Register the name and purchase a license or
permit to operate
No minimum capital requirements
Firm may be closed as easily as opened
Creditors must be paid, but no legal procedure
to close business
Advantages of Proprietorships
(continued)
Pride of Ownership
Owner can take pride in spending a great deal
of time and hard work ‘growing’ his business.
Deserves credit for assuming the risks and
solving the daily problems of the business.
However, owner will also be blamed if the
business fails.
Advantages of Proprietorships
(continued)
Retention of All Profits
All profits become the personal earnings
(salary) of the owner.
Great incentive to succeed.
Advantages of Proprietorships
(continued)
Flexibility
Owner is free to make decisions about how the
business will operate.
Owner is free to decide when to open or close
shops or move to other locations.
Owner is free to make changes in business
hours of operation.
Disadvantages of Proprietorships
Unlimited Liability
A legal term which holds the business owner
personally responsible for all debts of the
business.
Debts of the business are considered personal
debts of the owner.
If the owner is sued or the business fails, the
owner’s personal assets can be sold to pay the
expenses owed.
Disadvantages of Proprietorships
(continued)
Lack of Continuity
Since the owner is the business, if he/she dies
or retires, the business goes with him/her.
However, if the business is successful, the heirs
can sell or continue it.
Disadvantages of Proprietorships
(continued)
Lack of Money
 Owner may have a limited ability to borrow money
from banks.
 Banks worry that a single owner will not be able to pay
back the loan because personal money may have been
used for other loans as well.
 Banks worry about continuity of the business if
something happens to the owner – who will pay back
the money?
 Banks are concerned about the large number of sole
proprietorships that fail.
Disadvantages of Proprietorships
(continued)
 Limited Management Skills
 The most experienced manager is unlikely to
have expertise in all areas of management.
 May have to assume the role of buyer,
salesperson, accountant, IT specialist, etc.
 So the owner’s ability to hire individuals who
have the expertise he/she lacks is critical.
Disadvantages of Proprietorships
(continued)
Difficulty in Hiring Employees
 Potential employees may feel that there is little room
for advancement in a small business.
 Employees may move after 1 or 2 years to larger
companies after getting experience in a small company
which affects continuity of management and service.
They want to assume more responsibility and will be
paid higher salaries and benefits in a larger company.
Pros and Cons of Sole Proprietorships
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Advantages
Easy to Start
Pride of Ownership
No Profit Sharing
Flexibility in Decision
Making
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Disadvantages
Unlimited Liability
Lack of Continuity
Lack of Money
Limited Management
Skills
Difficulty in Hiring
and Keeping
Employees
Partnerships
A Partnership is a voluntary association of
two or more persons to act as co-owners of
a business for profit.
Usually represents a collection of people with
special managerial skills and talents.
Types of Partnerships
General Partner – a person who assumes full or shared
responsibility for operating a business.
 May enter into contracts on behalf of other partners.
 Has unlimited liability for business debts made by him/her and also
by other general partners, even if he/she is unaware or did not give
approval for these debts.
 If he/she leaves the partnership, notice must be given to all
creditors, customers and suppliers to avoid future liabilities created
by other general partners.
General Partnership - a business co-owned by two or more
general partners who are liable for everything the business
does.
Types of Partnerships
(continued)
Limited Partner – a person who contributes capital to a
business but who has no management responsibility or
liability for losses beyond his/her investment in the
partnership.
Limited Partnership – a business co-owned by one or more
general partners who manage the business and limited
partners who invest in it.
 Special legal rules apply concerning details of the partnership and
liability to be reported to agency providing the operating license.
 At least one general partner must be responsible for the debts of
the limited partnership.
Types of Partnerships
(continued)
Master Limited Partnership (MLP) – a
business partnership owned and managed
like a corporation but taxed like a
partnership.
Units of the partnership can be sold to investors
to raise capital.
Investors are free to sell their units of
ownership at any time.
Partnership Agreement
Articles of Partnership – a written or oral
agreement listing and explaining the terms
of the partnership.
Partnership Agreement
(continued)
Partnership Agreement should include:
 Name of all partners
 Type of business, name of business, address of business
 Length of partnership
 Investment of all partners
 Duties of all partners
 Salaries, withdrawals, profit sharing terms
 Termination of partnership
 Signatures of all partners
Recommend that legal assistance be used to draft the agreement.
Advantages of Partnerships
Ease of Start-Up
No legal requirements
Register the company name and securing the
necessary licenses or permits
Written articles of partnership are not required
legally
Advantages of Partnerships
(continued)
Availability of Capital and Credit
Partners can pool their capital and secure a
better credit rating.
Partners have a better chance of getting
approval for loans because banks see that more
than one person is responsible for the debt
created by the partnership.
Advantages of Partnerships
(continued)
Retention of Profit
Partners share directly in the profits and are
therefore highly motivated to do their best to
make the business a success.
Partnership agreement should state how much
profit each partner receives or the amount of
loss for which each is responsible.
Advantages of Partnerships
(continued)
Personal Interest
General partners are very concerned about the
operation of the business because each is
responsible for the actions of the other general
partners.
Advantages of Partnerships
(continued)
Combined Business Skills and Knowledge
The weaknesses of one partner will be picked
up by the other partner(s).
More opportunity to discuss important
decisions with others concerned leads to better,
more effective decision making.
Disadvantages of Partnerships
(continued)
Unlimited Liability
 Each general partner is liable for all debts of the
business.
 Each partner is legally and personally responsible for
the debts and actions of any other general partner.
 Limited partners risk only their original investment.
 Limited-liability partnership (LLP) is usually only
allowed for doctors, dentists, accountants and attorneys.
In an LLP, all partners may have limited liability for the
malpractice of other partners.
Disadvantages of Partnerships
(continued)
Effects of Management Disagreements
Trust is critical in a partnership.
When partners disagree about decisions, ethics,
or overall policies, distrust happens and it may
become impossible to operate the business.
Disadvantages of Partnerships
(continued)
Lack of Continuity
 Terminated if any one of the general partners dies,
withdraws or is declared legally incompetent.
 If partner who dies or leaves has specialized
management or technical skills which cannot be
replaced easily, the partnership is not likely to survive.
 However, Partnership Agreement may allow remaining
partners to ‘buy out’ the share of the deceased or
leaving partner and continue the business.
Disadvantages of Partnerships
(continued)
Frozen Investment
Easier to invest capital in a business than to get
it out.
Other partners may not be willing to ‘buy out’ a
partner who wishes to leave.
Other partners may not be willing to accept a
new partner from outside who is willing to ‘buy
out’ the partner wishing to leave.
Pros and Cons of Partnerships
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Advantages
Easy to Start Up
More Capital and
Credit Available
Profit Sharing
Personal Interest
Increased Business
Skills and Knowledge
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Disadvantages
Unlimited Liability
Lack of Continuity
Management
Disagreement Effects
Frozen Investment
Corporations
A Corporation is an artificial person created by law
with most of the legal rights of a real person,
including the rights to:
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start and operate a business
buy or sell property
borrow money
sue or be sued
enter into binding contracts
A corporation exists only on paper.
Corporate Ownership
Corporations are owned by
Stockholders – people (sometimes called
shareholders) who own a piece of the corporation
in the form of
Stock – which is a share in the company in the form
of a certificate.
Stock is sold to individuals or companies that want
to invest in the newly formed corporation.
Corporate Ownership
(continued)
Closed Corporation is one whose stock is
owned by relatively few people and is not
sold to the general public.
If a stockholder wishes to sell his stock, a
private sale will be arranged with another
stockholder or a very close acquaintance.
Corporate Ownership
(continued)
Open Corporation is one whose stock is
bought and sold on a Stock Exchange and
can be purchased by individuals.
Stockholders may number in the hundreds of
thousands or even millions.
Forming A Corporation
Incorporation is the process of forming a
corporation.
The Corporate Charter
Corporate Charter is a contract between
the corporation and the state, in which the
state recognizes the formation of the
‘artificial’ person that is the corporation.
Before the corporate charter can be
approved, the Articles of Incorporation
must be submitted to the state officials.
The Corporate Charter
(continued)
The following information is required:
Name and address of the business
Names and addresses of the incorporators
Purpose of the corporation
Maximum amount and type of stock to be
issued
Rights and privileges of stockholders
Length of time the corporation is to exist
Stockholders’ Rights
Common Stock Holders – individuals or
firms who may vote on corporate matters
but whose claims on profit and assets are
second to claims of others.
Preferred Stock Holders – individuals or
firms who usually do not have voting
rights but whose claims on dividends are
paid before those of common-stock owners.
Stockholders’ Rights
(continued)
Dividend is a distribution of earnings to the
stockholders of a corporation.
Other rights include: receiving information about
the company, voting on changes to the corporate
charter, and attending the Annual Stockholders’
meeting where they may vote on issues.
Proxy is a legal form listing issues to be voted on
which allows stockholders to transfer their voting
rights to someone else.
Organizational Meeting
At this meeting, the incorporators and the
original stockholders meet to elect the
Board of Directors.
This Board is directly responsible to the
stockholders for the way they operate the
business.
Corporate Structure
Board of Directors
(elected by Stockholders)
Corporate Officers
(appointed by the Board)
Employees
(hired by Officers)
Board of Directors
The Board of Directors is the top
governing body (including the
President and Executive Vice
Presidents) of a corporation elected
by the stockholders.
Responsibilities include:
setting
company goals and developing
plans (or strategies) to meet those
goals.
Responsible for the overall operation
of the company and for appointing
the Corporate Officers.
Corporate Officers
Corporate Officers include the Chairman of the
Board, President, Executive Vice Presidents,
Corporate Secretary, Treasurer and any other top
executive appointed by the Board of Directors.
They are responsible for the day-to-day operation
of the business by carrying out the strategies of the
Board, hiring employees, reporting to the Board of
Directors monthly, and reporting to the
stockholders at the annual meeting.
Advantages of Corporations
Limited Liability
Each owner’s liability is limited to the amount
of money he/she has paid for the corporation’s
stock.
If the corporation fails, creditors have a claim
only on the corporation’s assets, not on the
owners’ personal assets.
Advantages of Corporations
(continued)
Ease of Raising Capital
Banks are more eager to lend money to large
corporations because the assets are greater.
Corporations may also raise capital by selling
shares to individuals and other businesses.
Individuals may sell their shares easily if they
choose to do so.
Advantages of Corporations
(continued)
Ease of Transfer of Ownership
It is very easy to sell stock on the Stock
Exchange through a stockbroker.
Can sell anytime and take advantage of the
price of the stock going up on any given day.
No restrictions apply to the buying and selling
of stock.
Advantages of Corporations
(continued)
Perpetual Life
A corporation exists independently of its
owners since it is considered an ‘artificial’
person.
The withdrawal or death of a key person does
not mean the corporation will end.
Advantages of Corporations
(continued)
Specialized Management
Corporations are able to recruit specialized and
talented managers because they are able to offer
larger salaries and more benefits.
They are able to offer more opportunity for
individuals to advance in rank.
Disadvantages of Corporations
Difficulty and Expense of Formation
Fees for forming a corporation might include:
charter fees, registration fees, attorney’s fees,
costs associated with selling stocks, etc.
A great deal of time and money can be involved
in setting up the Corporate Charter.
Disadvantages of Corporations
(continued)
Government Regulation
Government has many regulations to be
satisfied before stock can be offered for sell.
Business reports must be filed periodically with
various levels of government.
Government requires that various reports be
made to the stockholders.
Disadvantages of Corporations
(continued)
Lack of Secrecy
Because
government
agencies
require
corporations to file reports to their agencies and
to the stockholders, it is difficult to keep some
operations secret.
Pros and Cons of Corporations
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Advantages
Limited Liability
Easy to Raise Capital
Transfer of Ownership
Easy
Perpetual Life
Specialized
Management
Disadvantages
• Difficulty and
Expense of Formation
• Government
Regulation
• Lack of Secrecy