Types of
Business
Ownership
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Types of Business Ownership
Chapter 7
Types of Business
Ownership
7.1
Sole Proprietorships and
Partnerships
7.2
Corporations
2
Types of Business Ownership
7.1
Discuss the sole proprietorship legal form.
Explain the partnership legal form.
Section 7.1 Sole Proprietorships and Partnerships
3
Types of Business Ownership
7.1
Entrepreneurs need to understand the advantages
and disadvantages of various forms of business
ownership so they can choose the most appropriate
form for their business.
Section 7.1 Sole Proprietorships and Partnerships
4
Types of Business Ownership
7.1
sole proprietorship
liability protection
unlimited liability
Section 7.1 Sole Proprietorships and Partnerships
partnership
general partner
limited partner
5
Types of Business Ownership
Sole Proprietorship
The easiest and most
popular form of business
ownership is the sole
proprietorship.
Section 7.1 Sole Proprietorships and Partnerships
sole proprietorship
a business that is owned
and operated by one
person
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Types of Business Ownership
Sole Proprietorship
The owner of a sole proprietorship:
receives the profits
incurs any losses
is liable for the debts of the business
Section 7.1 Sole Proprietorships and Partnerships
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Types of Business Ownership
Sole Proprietorship
In a sole proprietorship the
owner must decide how
much liability protection
he or she needs.
Section 7.1 Sole Proprietorships and Partnerships
liability protection
insurance against the
debts and actions of a
business
8
Sole Proprietorship
Advantages
Sole proprietorship is easy and inexpensive to create.
The owner has complete authority over all business activities.
It is the least regulated form of business ownership.
The business pays no taxes; income is taxed at
personal rate of owner.
Section 7.1 Sole Proprietorships and Partnerships
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Sole Proprietorship
Disadvantages
The owner has unlimited liability.
Raising capital is more difficult.
The business is totally reliant on skills and abilities of owner.
The death of owner dissolves the business unless
there is a will to the contrary.
Section 7.1 Sole Proprietorships and Partnerships
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Types of Business Ownership
Disadvantages
The biggest disadvantage
of a sole proprietorship is
financial.
unlimited liability
full responsibility for all
debts and actions of a
business
In this form of business
ownership, the owner has
unlimited liability.
Section 7.1 Sole Proprietorships and Partnerships
11
Types of Business Ownership
Partnerships
A partnership draws on
skills, knowledge, and
financial resources or more
than one person.
Section 7.1 Sole Proprietorships and Partnerships
partnership an
unincorporated business
with two or more owners
who share the decisions,
assets, liabilities, and
profits
12
Types of Business Ownership
General Versus
Limited Partners
The law requires that all
partnerships have at least
one general partner.
general partner a
participant in a partnership
who has unlimited
personal liability and takes
full responsibility for
managing the business
A partnership may be set up
so that all of the partners are
general partners.
Section 7.1 Sole Proprietorships and Partnerships
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Types of Business Ownership
General Versus
Limited Partners
Some partnerships include
a limited partner.
Section 7.1 Sole Proprietorships and Partnerships
limited partner a partner
in a business whose
liability is limited to his or
her investment; a limited
partner cannot be actively
involved in managing the
business
14
Partnerships
Advantages
Partnerships are inexpensive to create.
General partners have complete control.
Partners can share ideas.
Partners can share ideas and secure investment capital more
easily and in greater amounts.
Section 7.1 Sole Proprietorships and Partnerships
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Partnerships
Disadvantages
It is difficult to dissolve one partner’s interest without
dissolving the partnership.
There may be personality conflicts.
Partners can be held liable for each others’ actions.
Section 7.1 Sole Proprietorships and Partnerships
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Types of Business Ownership
7.1
1. Discuss the sole proprietorship legal form.
Sole proprietorship is the easiest and most
popular form of business to create. The owner
receives the profits, incurs any losses, and is
liable for the debts of the business.
Section 7.1 Sole Proprietorships and Partnerships
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Types of Business Ownership
7.1
2. Explain the partnership legal form.
A partnership is an unincorporated business with two or
more owners. The partners share the decisions, assets,
liabilities, and profits. The partnership can draw on the
skills, knowledge, and financial resources of more than
one person, which is an advantage when seeking loans.
Section 7.1 Sole Proprietorships and Partnerships
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Types of Business Ownership
7.2
Explain how the corporate form gives owners more
protection from liability.
Discuss the advantages and disadvantages of a
C-corporation
Describe a Subchapter S corporation.
Compare nonprofit corporations to C-corporations.
Explain the limited liability company.
Discuss how to decide which legal form to use.
Section 7.2 Corporations
19
Types of Business Ownership
7.2
In a corporation, the owners of the business
are protected from liability for the actions of
the company.
Section 7.2 Corporations
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Types of Business Ownership
7.2
corporation
C-corporation
shareholders
limited liability
Section 7.2 Corporations
Subchapter S corporation
limited liability company (LLC)
nonprofit corporation
21
Types of Business Ownership
What Is a Corporation?
There are three types of
corporations:
C-corporation
Subchapter S
corporation
nonprofit corporation
Section 7.2 Corporations
corporation a business
that is registered by a state
and operates apart from its
owners; it issues shares of
stock and lives on after the
owners have sold their
interest or passed away
22
Types of Business Ownership
C-Corporation
A C-corporation is the
most common corporate
form.
Section 7.2 Corporations
C-corporation an entity
that pays taxes on
earnings; its shareholders
pay taxes as well
23
Types of Business Ownership
C-Corporation
In smaller corporations, the
founders generally are the
major shareholders.
Section 7.2 Corporations
shareholders an owner
of shares of stock in a
corporation
24
C-Corporation
Advantages
status
limited liability
ability to raise investment money
perpetual existence
employee benefits
tax advantages
Section 7.2 Corporations
25
Types of Business Ownership
Advantages
Corporate shareholders
have limited liability, but
some banks require officers
to personally guarantee the
debts of the company.
Section 7.2 Corporations
limited liability partial
responsibility of a
corporate shareholder; he
or she is responsible only
up to the amount of the
individual investment
26
C-Corporation
Disadvantages
expensive to set up
income is more heavily taxed
subject to double taxation on income
pays taxes on profits
stockholders pay taxes on dividends
Section 7.2 Corporations
27
Types of Business Ownership
Subchapter S Corporation
An entrepreneur can avoid
the double taxation of a
C-corporation by setting up a
Subchapter S corporation.
Section 7.2 Corporations
subchapter S
corporation a
corporation that is taxed
like a partnership; profits
are taxed only once at
the shareholder’s
personal tax rate
28
Types of Business Ownership
Nonprofit Corporation
A nonprofit corporation
must fall within one of four
categories:
religion
charity
public benefit
mutual benefit
Section 7.2 Corporations
nonprofit corporation
a legal entity that makes
money for reasons other
than the owner’s profit; it
can make a profit, but
the profit must remain
within the company
29
Types of Business Ownership
Limited Liability Company
There are many benefits to
forming a limited liability
company (LLC)
Section 7.2 Corporations
limited liability
company (LLC)
a company whose
owners and managers
have limited liability and
some tax benefits, but
avoids some restrictions
associated with
Subchapter S
corporations
30
Types of Business Ownership
Making the Decision
Before deciding on a legal form, ask yourself key
questions about:
your skills
capital
expenses
Section 7.2 Corporations
willingness to assume liability
level of control wanted
length of time you expect to
own the business
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Types of Business Ownership
7.2
1. Explain how the corporate form gives owners
more protection from liability.
A corporation offers limited liability. In other
words, shareholders are liable only up to the
amount of their individual investments.
Section 7.2 Corporations
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Types of Business Ownership
7.2
2. Discuss the advantages and disadvantages
of a C-corporation.
Advantages: A corporation has a more professional appearance,
its shareholders are liable only up to the amount of their individual
investment, it can raise money by issuing shares of stock, it has
perpetual existence, it is structured to accommodate employee
benefits, and it has tax advantages.
Disadvantages: A corporation is expensive to set up and its
income is more heavily taxed.
Section 7.2 Corporations
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Types of Business Ownership
7.2
3. Describe a Subchapter S corporation.
The Subchapter S corporation is taxed like a partnership;
profits are taxed only once at the shareholder’s personal
tax rate. Therefore, the Subchapter S corporation is not a
tax-paying entity. Generally, it can have no more than 75
stockholders who must be U.S. citizens. It can have only
one class of stock.
Section 7.2 Corporations
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Types of Business Ownership
7.2
4. Compare nonprofit corporations to Ccorporations.
Nonprofit corporations can make a profit, but the profit
must remain within the companies and not be distributed to
shareholders. Any type of business can be a corporation,
but a nonprofit must be formed for religious or for
charitable purposes, public benefit, or religious purposes.
C-corporations are created to make a profit for its owners,
or shareholders.
Section 7.2 Corporations
35
Types of Business Ownership
7.2
5. Explain the limited liability company.
The limited liability company protects owners with the
limited liability of a corporation. That is, the company’s
owners are not liable for its debts. It also provides passthrough tax advantages; shareholders are taxed only once.
There are no limitations on the number of members or on
their status.
Section 7.2 Corporations
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Types of Business Ownership
7.2
6. Discuss how to decide which legal
form to use.
You should consider your skills, capital, living expenses,
willingness to assume personal liability for any claims
against the business, control desired. Also, ask yourself:
do you expect to have initial losses, or will the business
be profitable from the beginning? Do you expect to sell
the business some day?
Section 7.2 Corporations
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Types of Business Ownership
Entry Level
E-Commerce
Big companies can afford to spend millions of
dollars developing their e-commerce sites.
However, there are ways that allow small
businesses to ease into e-commerce at a slower,
less-expensive pace.
Section 7.2 Corporations
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Types of Business Ownership
Tech Terms
hosted shopping cart
a business that offers e-commerce services for a monthly fee; users
can upload product information and have their business launched
instantly
online auction
an auction that takes place on a Web site such as eBay
Section 7.2 Corporations
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Types of Business Ownership
Tech Terms
open-source software
software applications that are distributed free of charge; a number of ecommerce shopping cart programs are available as open-source
software
virtual store
an online storefront that allows entrepreneurs to sell products they do
not own.
Section 7.2 Corporations
40
End of
Types of
Business
Ownership
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