Chapter 3 - Presentation 2

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Chapter 3

All businesses have liability, but the type of ownership selected to run that business will determine how much liability to the owner of the business.

Sole Proprietorship a legally defined type of business ownership in which a single individual: Owns the business Collects all profits from the businessHas unlimited liability for its debtMost small businesses operate as a sole proprietorship and the majority of all businesses in the United States are sole proprietorships.

There are various advantages of sole proprietorships: Simplest and least expensive to startBusiness income and expenses are reported on the owners personal income tax statementSole decision maker of the business

There are also many disadvantages of sole proprietorships: Has unlimited liability for the businessDifficult to borrow money or attract investorsDifficult to expand the business with limited capital

Most communities require a business license, at least in order for you to set up a sole proprietorship.

Naming the BusinessA person may use their own name to describe the sole proprietorship Any name other than the owners name is referred to as a trade name or DBA (Doing Business As)

Tax ID NumberThe federal government and some states require a business to have a Tax ID Number for tax purposes. Business owners can use their Social Security Number if there is no other employeesIf employees are hired, an entrepreneur must obtain a Employer Identification Number (EIN)

Partnership A legally defined type of business organization in which at least two individuals share: Management Profitliability

General Partnerships All partners have unlimited liability and are responsible for business debtAll partners assume personal financial risk

Limited Partnerships Structured so that at least one partner (general partner) has limited liability for the business debtsOther partners have no say in companys day to day operations

Advantages of Partnerships Generally the same as setting up a sole proprietorship in terms of taxes and paperworkThe general partner can rely on the entrepreneurial skills and financial backing of at least two individuals instead of just oneCan generate more funds from investors Offer an incentive to employees that they can possibly be one day partners of the business

Disadvantages of Partnerships Profit is split between the partners Each partner is responsible for the business related actions of all the othersPartners could have trouble agreeing on direction of the business

Partnership Agreement A legal document that clearly defines how the work, responsibilities, rewards, and liabilities of a partnership will be shared by the partners

It also specifies:What happens if a business owner diesHow the business could dissolveHow the profits and responsibilities will be split up