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

8% - PartnershipsSole Proprietorships - 72%

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 disagreements-

human 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

BP- 274 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 Capitaldon’t need to incur debt; can sell stock

–Easy Ownership Transfer- just 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