CONTENT/TEACHING OUTLINE
Unit B: Overview of Small Business
COMPETENCY:
3.00
Explain the legal environment of small business.
OBJECTIVE:
3.01
Compare forms of business ownership.
A. Explain the three basic forms of business ownership.
1. Sole proprietorship: A business owned and operated by one person. A
sole proprietorship is the easiest and most popular form of business
ownership. Approximately 76 percent of all businesses in the United
States are sole proprietorships.
2. Partnership: A form of business ownership in which two or more people
share the assets, liabilities, and profits.
a. General partnership: A partnership in which all partners have
unlimited personal liability and take full responsibility for the
management of the business.
b. Limited partnership: A partnership in which the partners’ liability is
limited to their investment.
c. Joint venture: A partnership in which two companies join to
complete a specific project. The partnership ends after a specified
period of time.
d. Strategic alliance: A partnership in which two businesses work
together for mutual benefit. (Example: A business forms a
partnership with a manufacturer that agrees to produce the
business’s products.)
3. Corporation: A business that is chartered by a state and legally operates
apart from its owners.
a. C-corporation: The most common form of corporation. It protects
the entrepreneur from being personally sued for the actions and
debts of the corporation.
b. Subchapter S corporation: A corporation that is taxed like a sole
proprietorship or partnership.
c. Nonprofit corporation: Legal entities that make money for reasons
other than the owner’s profit. (Examples: churches, charities,
education foundations, trade associations)
d. Limited Liability Company (LLC): A new form of business ownership
that provides tax advantages and limited liability. (Examples: law
and medical firms)
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B. Describe advantages and disadvantages of each basic form of business
ownership.
1. Sole proprietorship
a. Advantages
(1) Proprietorships are easy and inexpensive to create.
(2) The owner has complete authority over all business decisions
and activities.
(3) The owner receives all profits.
(4) This is the least regulated form of business ownership.
(5) The business itself pays no taxes. Taxes are paid as personal
income of the owner.
b. Disadvantages
(1) The owner has unlimited liability for all debts and actions of the
business. Unlimited liability means that the debts of the
business must be paid from the personal assets of the owner.
(2) It is often difficult to raise capital.
(3) A sole proprietor is limited by his/her skills and abilities.
(4) The death of the owner automatically dissolves the business.
2. Partnership
a. Advantages
(1) Partnerships allow for shared decision-making and management
responsibilities.
(2) It is easier to raise capital than in a sole proprietorship.
(3) There are few government regulations.
(4) All partners share business losses.
b. Disadvantages
(1) Partnerships may lead to disagreements.
(2) Some entrepreneurs are not willing to share responsibilities and
profits.
(3) Some entrepreneurs fear being held legally liable for the error of
their partners.
(4) Each owner has unlimited liability.
3. Corporation
a. Advantages
(1) A corporation can raise money by issuing shares of stock.
(2) A corporation offers its owners limited liability. Limited liability
means that the owners are liable only up to the amount of their
investments.
(3) People can easily enter or leave the business by buying or
selling their shares of stock.
(4) The business can hire experts to professionally manage each
aspect of the business.
b. Disadvantages
(1) Legal assistance is needed to start a corporation.
(2) Start-up can be costly.
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(3) Corporations are subject to more government regulations than
partnerships or sole proprietorships.
(4) Much paperwork is involved in running a corporation.
(5) Income is taxed twice.
C. Explain alternate approaches to starting a business.
1. Buy an existing business.
a. Advantages
(1) The existing business already has customers, suppliers, and
procedures.
(2) The seller of the business may be willing to train the new owner.
(3) There are existing financial records.
(4) Financial arrangements may be easier.
b. Disadvantages
(1) The business may be for sale because it is not making a profit.
(2) Problems may be inherited with the purchase of an existing
business.
(3) Many entrepreneurs may not have the capital needed to
purchase an existing business.
2. Enter a family business.
a. Advantages
(1) There is a certain sense of pride and accomplishment that
comes from being part of a family endeavor.
(2) A business can remain in the family for generations.
(3) Some people enjoy working with relatives.
(4) The efforts of running a family business give one the benefit of
knowing that their efforts are helping those whom they care
about.
b. Disadvantages
(1) Senior management positions are often held by family members
who may not be the best qualified.
(2) It may be difficult to retain qualified employees who are not
members of the family.
(3) Family politics may affect decisions regarding the business.
(4) It is often difficult to separate business life and private life in
family-run businesses.
(5) It is often difficult to set policies and procedures and to make
decisions.
3. Own a franchise business.
a. Franchise: A legal agreement that gives an individual the right to
market a company’s products or services in a particular area.
b. Franchisee: A person who purchases a franchise agreement.
c. Franchisor: The person or company who sells a franchise.
d. Initial franchise fee: The fee the franchise owner pays in return for
the right to run the business.
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e. Advantages of purchasing a franchise business
(1) An established product or service is being provided.
(2) Franchisors often offer management, technical, and other
assistance.
(3) Equipment and supplies may be less expensive.
(4) A guarantee of consistency attracts customers.
f. Disadvantages of purchasing a franchise business
(1) The cost of franchises may be high, which can reduce profits.
(2) Franchise owners are limited in the decisions they can make
regarding the business.
(3) The performance of other franchises impact on the franchisee.
(4) The franchise agreement may be terminated by the franchisor.
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