Transcript Chapter 4 SELECT A TYPE OF OWNERSHIP

Chapter 2
SELECT A TYPE
OF OWNERSHIP
LESSONS
2.1 An Existing Business
2.2 A Franchise or a New Business
2.3 The Legal Form of Your
Business
ENTREPRENEURSHIP: Ideas in Action
© SOUTH-WESTERN PUBLISHING
Chapter 2
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Lesson 2.3
CHOOSE THE LEGAL FORM
OF YOUR BUSINESS
GOALS
Evaluate the different legal
forms for a business.
TYPES OF BUSINESS
ARRANGEMENTS
Sole proprietorship – one owner
Partnership – two or more owners
Corporation – many owners
S corporation
Limited Liability
Company (LLC)
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SOLE PROPRIETORSHIP
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 A business that is owned exclusively by one
person (or a husband and wife) is a sole
proprietorship.
 Sole proprietorship is the most common form
of ownership in the United States.
 Advantages
 Fewer government regulations than a corporation
 Easier to start
 Disadvantages
 Investment (funding is more difficult to obtain)
 Unlimited Liability / Risk – can lose personal
assets if business fails financially
PARTNERSHIP
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Advantages
 Shared responsibilities and capital
 Shared investment – easier to obtain financing
 Shared risk
 Fewer government regulations than a corporation
Disadvantages
 Unlimited liability
 Can be held legally liable for the errors of their partners.
 Sharing responsibilities and profits with others
(disagreements).
Chapter 7
PARTNERSHIP AGREEMENTS
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Outline the rights and responsibilities of the owners
business name
names of partners
investment by each partner
delegation of management duties
accounting method used
rights to audit accounting documents
profit distribution
salaries
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length of partnership
conditions under which partnership can be dissolved
asset distribution upon dissolution of partnership
CORPORATION Terms and
Concepts
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 A corporation is a separate being, like a person.
It is treated separately from its owners. Owners
cannot lose more than their investment.
 The individual or group that owns most shares
maintains control of the company.
 Share of stock – a unit of ownership in a corporation
 Shareholder – owner of stock (includes voting rights)
 Board of directors – group of people who meet several
times a year to make important decisions affecting the
company including dividend payments; not responsible for
day-to-day operations.
 Dividends – distributions of profits to shareholders by
corporations.
CORPORATION Advantages and
Disadvantages
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 Advantages
 Limited liability; personal assets are protected
 Financing options: businesses can raise money by selling
more stock.
 Lenders are also more willing to lend money to corporations
than to sole proprietorships or partnerships.
 Shareholders do not affect the management of a corporation
 Disadvantages
 Most complicated form of ownership to establish.
 Costly
 Subject to much more government regulations (paperwork)
 Double Taxation: Business pays taxes on its income, and
shareholders pay taxes on the dividends received (taxed as
corporate income and again as individual income).
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S CORPORATION
 An S corporation is a corporation organized
under subchapter S of the Internal Revenue
Code
 Income is taxed as a partnership.
 If the business looses money, owners can use the
losses to offset other sources of personal income.
 Individual shareholders are taxed on the profit
they earn – no double taxation.
Chapter 7
Not in text
LIMITED LIABILITY COMPANY
Limited Liability Company (LLC)
offers the limited liability protections of a
corporation to its owners
not subjected to the rules of an S
corporation
provides the benefits of partnership
taxation and limited personal liability
may be limited to a business life of 30
years
Chapter 2
CHARACTERISTICS OF
THE LEGAL FORMS OF
BUSINESS
FEATURE
Simple to start
Decisions made by one person
Low initial cost
Limited liability
Limited government regulation
Ability to raise capital
Double taxation of profits
Not in Text