Ch. 5
Forms of Business Ownership
Forms of Business Ownership
1. Sole Proprietorship
owned by one person
2. Partnership
Usually owned by two or more partners
3. Cooperative
Owned by its workers or by members who buy from the business
4. Franchise
One business licenses (allows) another to use its name, operating
procedure, etc.
Can have any form of ownership
5. Corporation
Business is an artificial “person” created by law and owned by
shareholders
Sole Proprietorship
Simplest form of business ownership
One owner of a business
Sole Proprietorship
A business owned by one person
– Small firms - Less than 50 people employed
– Can easily be managed by owner
– Few legal requirements
– Sole control
– Owner receives all profits & debts!
More than 2/3 (66%) of U.S. businesses are
operated as sole proprietorships
– Most common form
Requirements for Starting
Knowledge of industry area
– What type of small business is going to be
successful and profitable?
– What goods/services do consumers need?
Equipment
– For physical facility
– For creating goods
Business name? Permit or license?
Little capital needed
Sole Proprietorship
Must account for income and expenses
Pay taxes on profits
– Tax advantage
All income is taxed as a part of your personal
income
Business expenses can be used to reduce the
income (tax write-offs)
Sole Proprietorship
Advantages
 Keep all the profits
 Make all the decisions
 You are your own
boss
 (i.e Financial
information can be
kept secret. from
competitors), but not
the government
Disadvantages
 Unlimited Liability
 Facing personal and
financial risks and
challenges on your
own
 Borrowing money
may be more difficult
 Huge time
commitment
Sole Proprietors
Examples may include individuals who are:
Artists
Authors
Carpenters
Computer specialists
Digital designers
Ecotourism guides
Farmers
Industrial designers
Photographers
Web designers
Chefs or Bakers
Hair stylists
Partnership
More complex and needs a written agreement
Owned by 2 or more people
Partners must discuss and agree on issues
such as:
 how much time and money each partner will put
into the business
 How the profits will be shared
 Who will make decisions about different aspects of
the business
 Who will manage the employees
 How the partnership might be ended
Partnership Agreement
All partners must sign the partnership agreement which
includes:
 the name and location of the business
 Its purpose
 The amount of partner’s investment
 The way that the profits and losses are to be
divided
 The duties and responsibilities of each partner
 The procedures for ending the partnership
Partnerships
Advantages
 Inexpensive to set up
and organize ($1000)
 Two people to invest and
it is easier to borrow from
a bank
 More brains filled with
different knowledge,
experience, skills
 Shared responsibility
eases stress and
workload
 Share debt and can more
easily take a vacation
Disadvantages
 Unlimited liability
Your personal assets
(home, care etc may
need to be used to pay
off business debts)
 Conflicts between
partners that can not be
worked out
Typical Partnerships
Small independent service or retail businesses.
bakeries, hair salons, flower shop, convenience
store, landscaping or décor store, consignment
shop, restaurants, retail stores,plumbers,
electricians, mechanics, carpenters
Professional Designations or Apprenticeships
accountants, lawyers, doctors, veterinarians,
mechanics, plumbers, electricians, carpenters
Co-operatives
Also called Co-ops
Business owned and operated by a group of
people with a strong common interest
Start-up costs are shared among members
Members own and control and make all the
business decisions
Examples of Coops
Farmers
Belong to producer co-ops
Members bring crops to a central location to sell them
Coop monitors the supply of the crop and controls its
sale and price
Farmers do not compete against each other or undercut
other’s prices
Farmers can combine to buy equipment and reduce
costs and share expertise
Example: Saskatchewan Wheat Pool sells products all
over the world.
Consumer Co-ops
Join together to operate a business that
provides them with goods and services
Profits are divided among the members in
proportion to the amount of business that
each member does
Examples: Omish Community Furniture
Co-ops
Credit Unions/ Caisses Populaires
Financial co-ops
Like banks but profits are distributed annually to
their members
Co-operatives
Advantages
 Shared skills and experiences
 Less risk than for sole
proprietor and partnership
 Liability is limited to the
amount of your share in the
capital of the coop
 Each member gets one vote –
equal decision making and
influence
 If you have more shares, you
still get one vote, but more
share of the profits
 Coops get discounts due to
volume purchasing by many
people
 Control sale and price of
goods
Disadvantages
 Individual members hesitant to
invest more – only one vote
 Decision-making can be
difficult because of multiple
members
 Commitment of members may
vary because some have more
money at stake and some may
take things more seriously than
others
Corporations
A business owned by a number of people and
operated under written permission from the
sate in which it is located
– Articles/Certificate of Incorporation
Corporation’s Name
Corporation’s Purpose
Location
Amount of stock to be issued
Names of the Board of Directors
Invisible, intangible and existing only in the eyes of the
law (an individual)
– Few compared to sole proprietorships
Only 15%-20% of businesses are corporations
Over 80% of all business is done by corporations
Corporation
Legal entity that exists independently of its owners who
are the shareholders.
Has the same rights and obligations under U.S.
law as a natural person
It can be found guilty of committing a crime
Corporations
Ability to:
– Borrow or loan money
– Buy and sell goods
– Make contracts
– Sue or be sued
Ownership in a corporation:
– Individuals (stockholders) can share in profits by
buying shares of stock
Represent ownership in the corporation
Stockholders risk only the amount they invest
Shareholders receive dividends (part of the profit
earned by the corporation)
Advantages of Corporations
Limited liability
– Only responsible for your personal investment in
the company (your personal assets are not at
stake)
Unlimited life
– The corporation will still survive with changing
personnel (owners)
Easy to transfer ownership
– Through selling stock - ownership
Skilled personnel
– Highly trained and prepared
Financial power
Owners/Shareholders
(Elect Board of Directors)
Board of Directors
(hire officers)
STRUCTURE OF A
CORPORATION
Officers
i.e. CEO
(Chief Executive Officer)
(set corporate
objectives and hire managers)
Managers
(Supervise Employees)
Employees
Disadvantages of Corporations
Difficult to form and operate
Separate owners and managers
– Varied opinions and strategies = +, -
More complex requirements (govt.)
Taxation
– The corporation is taxed twice
At the individual’s level with owning shares
At the corporate level for the business entity
The Franchise
One of the fastest growing forms of business
ownership
The franchisor sells to another person (the
franchisee) the rights to use the business name
and to sell a product or service in a given
territory.
Available in many different sectors (fast food,
wine, funeral homes)
Franchise can be any form of business
ownership (i.e. sole proprietorship, partnership,
corporation)
Franchise Agreement
Written contract between the franchise seller
and buyer
Permit the franchisee to use the franchisor’s
name, products, packaging
Franchisor will specify how the franchise is to be
operated, what products can be sold, the
advertising, etc.
Provide more than 1 million jobs directly, many
more indirectly
Annual sales of $100 billion
Franchises
Advantages
 Proven track record and
nationally or
internationally recognized
name
 Personal ownership like a
sole proprietorship
 Less stress in initial set
up as most issues like
process, products and
location, equipment,
décor are spelled out by
the franchisor
Disadvantages
 Expensive to buy
 Must pay royalties for
your sales
 Little say in many of the
business decisions
 If the franchisor fails, so
does the franchisee
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