Chapter Five
Choosing a Form
of Business
Ownership
Sole Proprietorships
• business owned & operated by one person
• simplest form of business ownership & easiest to
start
• Common in retailing & services
• most widespread form of business ownership
(72% of all businesses)
20% - Corporations
Sole Proprietorships - 72%
8% - Partnerships
Advantages of Sole Proprietorships
– Ease of start-up and shut down
– Sole retention of profits
– Possible Tax Advantages-tax for business paid on
your personal return-no corporation tax
– Pride of ownership
– Flexibility to adapt quickly to change in marketplace
Disadvantages of Sole Ownership
– Unlimited liability
business owner personally responsible for all the
debts of the business
– Lack of continuity
if owner dies, business dies
– Lack of money
only one source for funding
– Limited management skills
many hats and long hours
– Difficulty in hiring employees
no room for advancement and few perks
Partnerships
• A voluntary association of two or more
persons who act as co-owners of a business
• Less common form of ownership than sole
proprietorship or corporation (8%)
• No legal limit on the maximum number of
partners; many have only 2
• Usually a pooling of special talents (law
firms) or the result of a sole proprietor taking
on a partner
Types of Partners-not all are equal
• General partner
– A person who assumes responsibility for operating a
business
– Personally liable for his and other partners actions
– Can represent the entire firm
– Collects a salary +% of profits.
• Limited partner
– A person who contributes capital to a business
– has no management responsibility or liability for
losses beyond the amount he or she invested in the
partnership
– Gets tax benefit and % of profits.
Advantages of Partnerships
– Ease of start-up
– Availability of capital and credit -2 or more
investors
– Personal retention of profits-motivation to
succeed
– More concern for ethical business dealings-liable
for each other’s actions
– Combined business skills and knowledge-less
hats
– Possible tax advantages-only pay on your share
of the profits-no corporate taxes
Disadvantages of Partnerships
– Unlimited liability-personally liable for business
failure
– Lack of continuity-but can buy each other’s
interest in the business
– Management disagreementshuman interaction/friction
– Frozen investment-can’t remove your investment
from the business without it dissolving
Corporations
• An artificial person created by law with the legal
rights of a real person
–
–
–
–
–
can start and operate a business
can buy or sell property
can borrow money
can sue or be sued
can enter into binding contracts
Corporations
• There are 5.1 million corporations in the U.S.
• They comprise only 20% of all businesses, but they
account for 84.4 % of sales revenues
• Four biggest in 2006: Walmart –351 B
Exxon - 347 B
Shell 319 B
BP274 B
Saudi Arabia-309B
Greece=244B S Africa=255 B
Corporate Ownership
Stock - The shares of ownership of a corporation
– Closed (private) corporation
• A corporation whose stock is owned by a few people
and is not sold to the general public
– Open (public) corporation
• A corporation whose stock is bought and sold on
security exchanges and can be purchased by any
individual-format of most large firms
NYSE
Stockholders’ Rights
– Common stock
• Stock owned by individuals or firms who vote on
corporate matters (one share=one vote) but whose
claims on profit and assets are subordinate to the
claims of preferred stockholders
– Preferred stock
• Stock owned by individuals or firms who do not have
voting rights but whose claims on dividends are paid
before those of common-stock holders
– Dividend
• A distribution of earnings to the stockholders
Advantages of Corporations
–Limited Liability
• Each owner’s financial liability is limited to the amount of money he
paid for the corporation’s stock
–Ease of Raising Capital
don’t need to incur debt; can sell stock
–Easy Ownership Transferjust put your stock up for sale
–Perpetual Life
when you die, corporation does not
–Specialized Management
one hat/person & bigger salaries offered = better people
Disadvantages of Corporations
– Difficulty and Expense of Formation• much paperwork & legal fees
– More Overhead • must report to stockholders periodically
– Double Taxation• corporate and personal
– Lack of Secrecy
• competitors know your operations
– Limited Business Activities
• can only do those spelled out in your charter
Special Types of Business Ownership
• S-corporations
– Corporation taxed as though it were a partnership
(taxed only as personal income of stockholders)
– Advantages
• Avoids double taxation of a corporation
• Retains corporation’s legal benefit of limited liability
– S-corporation criteria
• No more than 100 stockholders allowed
• Stockholders must be individuals, estates, or
exempt organizations – no corporations
Other Types of Business Ownership
• Government-Owned Corporations
– A corporation owned and operated by a local,
state, or federal government
– Purpose
• To ensure that a public service is available-many run
at a monetary loss
– Examples
• Chicago Transit Authority (CTA)
• National Aeronautics & Space Administration (NASA)
• the Federal Deposit Insurance Corporation (FDIC)
Other Types of Business Ownership
• Not-for-Profit Corporations
– Corporations organized to provide social,
educational, religious, or other services, rather
than to earn a profit
– Ex - museums, private schools, colleges
• organized as not-for-profits primarily to ensure limited
liability
Other Types of Business Ownership
• Cooperatives
– Associations of individuals or firms whose purpose is to
perform some business function for its members
– Members benefit from the efficiencies of the
cooperatives’ activities
• reducing unit costs by making bulk purchases
– Most prevalent in farming
• Ex-Ocean Spray, Sunkist
• Answers questions about which legal form is best
and how to get financing are provided at:
http://www.sbaonline.sba.gov