Ch 7: Type of Business Ownership

Sole Proprietor

Business is owned and run by one individual Nearly 76% of all businesses

Owner receives all of its profits and bear all of its losses.

Sole Proprietor

Owner is personally liable for all of the companies debt Debt is money that it owes to

other businesses or people

Sole Proprietor

Advantages Easy to start Inexpensive to create Gives the owner complete

authority over all business decision

Receives all of the profits

Sole Proprietor

Advantages Least regulated for of

ownership Business itself pays no taxes

because it is not separate from the owner▪ Income is taxed at the personal

rate of the owner▪ Personal rate is lower than the

corporate rate

Sole Proprietor

Disadvantages The owner has unlimited

liability▪ Means that the owner is fully

responsible for all debts and actions of the business▪ Personally responsible from the

owner’s personal assets▪ Assets – things that you own

Raising Capital▪ Money

Sole Proprietor

Disadvantages Owners abilities and skills are

limited Death of the owners

automatically dissolves the business unless there is a will.

Sole Proprietor

How to start Is as simple as coming up

with a company name▪ When using a name other than

your own, you must apply for a Certificate of Doing Business Under an Assumed Name▪ Often called: DBA – doing business

as Obtain from local government

offices Purpose is to ensure that the name

is not being used in the area

Sole Proprietor

How to start If you are going to hire

employees▪ Need an Employer Identification

Number (EIN)▪ Comes from the IRS (Internal

Revenue Service)▪ Used for tax purposes to track

federal income tax withheld and federal income tax returns

Sole Proprietor

How to start ▪ If you are going to be a vendors

or retailer (sell items)▪ Sales Tax Identification Number

Assigned by state’s Department of Revenue Retailer acts as an agent for the

state by collecting and remitting the required amount

Partnership

Unincorporated business with two or more owners

Most common business organization

Partners share decisions, assets, liabilities, and profits

Requires a DBA (Doing Business As) when the last names are not used in naming the business

Partnership

Advantages Can draw on the skill,

knowledge, and financial resources of more than one person

Partnership

Two types of Partnership1. General

Participant has unlimited personal liability and takes full responsibility for managing the business

Any partner can bind the partnership on contracts

Partnership

Two types of Partnership2. Limited

Partners liability is limited to his or her investment

Cannot be actively involved in managing the business

Partnership

Advantages of Partnership Inexpensive to create Share Ideas Secure investment capital

more easily and in greater amounts

Partnership

Disadvantages of Partnership Difficult to dissolve Personality conflicts▪ Usually over authority▪ Must have clear roles

Technical Disadvantages▪ Can be held liable for other

partners actions▪ Bound by contracts other

partner signs

Partnership

Planning for Successful Partnership

1. Share business responsibilities

2. Put things in writing3. Be honest about how the

business is doing4. Establish partnership

agreement before the business is started

Partnership

Planning for Successful Partnership

1. Have a legal written agreement

a. How profits will be sharedb. How responsibilities will be

dividedc. What happens if one

partner dies or quits

What is a Corporation

Corporation Business that is registered by

a state and operates apart from its owners

Lives on after the owners have sold their interests or passed away

Types of Corporation

1. C-Corporation2. Subchapter S Corporation3. Nonprofit Corporation

C-Corporation

Pays taxes on earnings Shareholders pay taxes as

well File Certificate of

Incorporation with the state

Issue stocks Shareholders – Owners of

Corporation Required to have a Board

of Directors

C-Corporation

Advantages Status – Corporations get

help getting loans Limited Liability – Only liable

up to the amount of their individual investment

Perpetual Existence – Continuous life

C-Corporation

Advantages Owners can create pension

and retirement funds and offer profit sharing

Tax Advantage – Deduct certain expenses from their reported income (Salaries and Contribution to benefit plans)

C-Corporation

Disadvantages Expensive to start up – Cost

$500 to $2500 to create Taxed – Corporations income

is heavily taxed▪ Corporation pay tax on profits▪ Shareholders pay tax on

dividends

Subchapter S Corporation

Taxed like a partnership Avoids double taxation

Advantage Profits taxed only once at

shareholders personal tax rate

S Corp is not a taxpaying entity

Subchapter S Corporation

Disadvantage Can have no more than 75

stockholders who must be US citizens

Only have one class of stock Cash businesses are S Corps▪ If business produces enough

cash, the form works▪ If business shows a large

taxable profit but has not generated enough cash to cover the taxes, the owners must pay out of their earnings

Nonprofit Corporation

Businesses that benefit certain causes in the community

Make money for reasons other than the owner’s profit

Business can make profit, however, the profit must remain within the company and not be distributed to shareholders

Limited Liability Company

Company whose owners and managers enjoy limited liability and some tax benefits, but it avoids some restrictions associated with S Corporation

Limited Liability Company

Benefits Simpler to start up than a

corporation Allows for flexibility of a

partnership structure Protects it owners with the

limited liability of a corporation

Not subject to double taxation

Not limited on the number of members or their status

Public Corporation

Is a company with publicly traded shares that anyone can buy in a stock market.

Is also legally separated from the stockholders (people that own the stock) and the managers that run it

Stock holders own the company

Corporation Advantages

Stockholders are not responsible for the company’s debt

A corporation continues to exist even if the stockholders or managers change

Stockholders can easily sell their ownership shares through the stock market

Private Corporation

May be owned by an individual

Or privately sell stocks to fund the business

Stocks are not sold publicly on the stock market

Stocks

Initial Public Offering – IPO Initial sale of stock to the

public by investment bankersUnderwriter – Investment

banker that buys an entire new securities issue from a company and resells it

Stock Exchanges

3 Major stock markets1. NYSE – New York Stock

Exchange2. NASDAQ – National

Association of Securities Dealer Automated Quotation

3. AMEX- American Stock Exchange

Types of Stock

Common Stock Preferred Stock

Common Stock

Shares of the company do not guarantee a dividend (Part of the companies profit that are shared with the stockholder)

Dividend may be more then preferred stock holders

Right to vote for Board of Directors

Right to vote at Annual Meeting

Preferred Stock

Guaranteed dividend No voting rights

Regulating Agency

Securities and Exchange Commission (SEC)

Stock Terms

Earnings – The amount of money that remains after subtracting the companies expenses from its revenue

Investor – Someone who risks funds with the hope of it increasing in value