The Main Idea

Types of Business Types of Business OwnershipOwnershipTypes of Business Types of Business OwnershipOwnership

Glencoe Entrepreneurship: Building a Business

Sole Proprietorships and PartnershipsSole Proprietorships and Partnerships

CorporationsCorporations

7.1Section

7.2Section

77


Sole Proprietorships and Partnerships

SECTIONSECTION 7.17.1

Chapter 7 Types of Business Ownership

Entrepreneurs need to understand the advantages and disadvantages of various types of businesses so that they can choose the one that best suits their needs.

The Main Idea





Sole Proprietorship

The easiest and most popular form of business ownership is the sole proprietorship.

sole proprietorship

a business that is owned and operated by one person

sole proprietorship

a business that is owned and operated by one person





The owner of a sole proprietorship:

receives the profits,

incurs any losses, and

is liable for the debts of the business.

Sole Proprietorship





Sole Proprietorship

In a sole proprietorship the owner must decide how much liability protection he or she needs.

liability protection

insurance against the debts and actions of a business

liability protection

insurance against the debts and actions of a business

Sole Proprietorship

6

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 thepersonal rate of the owner.

Sole Proprietorship

7

Disadvantages

The owner has unlimited liability.

Raising capital is more difficult.

The business is totally reliant on the skills and abilities of the owner.

The death of owner dissolves the business unless there is a will to the contrary.





Disadvantages

The biggest disadvantage of a sole proprietorship is financial.

In this form of business ownership, the owner has unlimited liability.

unlimited liability

full responsibility for all debts and actions of a business

unlimited liability

full responsibility for all debts and actions of a business





Partnerships

A partnership draws on the skills, knowledge, and financial resources of more than one person.

partnership

an unincorporated business with two or more owners who share the decisions, assets, liabilities, and profits

partnership

an unincorporated business with two or more owners who share the decisions, assets, liabilities, and profits





General versus Limited Partners

The law requires that all partnerships have at least one general partner.

A partnership may be set up so that all of the partners are general partners.

general partner

a participant in a partnership who has unlimited personal liability and takes full responsibility for managing the business

general partner

a participant in a partnership who has unlimited personal liability and takes full responsibility for managing the business





General versus Limited Partners

Some partnerships include a limited partner.

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

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

Partnerships

12

Advantages

Partnerships are inexpensive to create.

General partners have complete control.

Partners can share ideas.

Partners can secure investment capital more easily and in greater amounts.

Partnerships

13

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.

Corporations




In a corporation, the owners of the business are protected from liability for the actions of the company.

The Main Idea

Corporations




What Is a Corporation?

There are three types of corporations:•C-corporation•Subchapter S corporation•nonprofit corporation

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

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

Corporations




C-Corporation

A C-corporation is the most common corporate form.

C-corporation

an entity that pays taxes on earnings; its shareholders pay taxes as well

C-corporation

an entity that pays taxes on earnings; its shareholders pay taxes as well

Corporations




C-Corporation

In smaller corporations, the founders generally are the major shareholders.

shareholders

the owners of a corporation

shareholders

the owners of a corporation

C-Corporation

18

Advantages

status

limited liability

ability to raise investment money

perpetual existence

employee benefits

tax advantages

Corporations




Advantages

Corporate shareholders have limited liability, but some banks require officers to personally guarantee the debts of the company.

limited liability

partial responsibility of a corporate shareholder; he or she is responsible only up to the amount of his or her individual investment

limited liability

partial responsibility of a corporate shareholder; he or she is responsible only up to the amount of his or her individual investment

C-Corporation

20

Disadvantages

expensive to set up

income more heavily taxed

subject to double taxation on income

pays taxes on profits

stockholders taxed on dividends

Corporations




Nonprofit Corporation

A nonprofit corporation must fall within one of four categories:•religion•charity•public benefit •mutual benefit

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

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

Corporations




Limited Liability Company

There are many benefits to forming a limited liability company (LLC).

limited liability company (LLC)

a company whose owners and managers have limited liability and some tax benefits, but which avoids some restrictions associated with Subchapter S corporations

limited liability company (LLC)

a company whose owners and managers have limited liability and some tax benefits, but which avoids some restrictions associated with Subchapter S corporations

Corporations




Before deciding on a legal form, ask yourself key questions about:

your skills

access to capital

expenses

willingness to assume liability

level of control wanted

length of time you expect to own the business

Making the Decision

Documents

The Main Idea