Transcript PROPRIETORSHIPS AND PARTNERSHIPS

PROPRIETORSHIPS
AND PARTNERSHIPS
CHAPTER
5
OBJECTIVES
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Describe characteristics of successful entrepreneurs.
Outline responsibilities of owning your own business.
List advantages and disadvantages of proprietorships.
List advantages and disadvantages of partnerships.
Describe legal points to consider when selecting a name for
a business.
CHARACTERISTICS OF
ENTREPRENEURS
 Could be years before a profit is made
 About half of all new businesses end within the first
5-6 years
 Often close due to financial reasons
 Many are closed because the owner is not well
suited to be an entrepreneur
 Obtain work experience in the type of business they
plan to open
 Well informed about financial, marketing, and legal
matters.
 About 90% of all businesses are owned by families.
CHARACTERISTICS OF
ENTREPRENEURS
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Self-starters
Energetic
Independent (enjoy working on their own)
Take charge of people
Creative thinkers (new ideas and ways to
solve problems)
 Personable
 Experienced
 Well informed
Deciding on a form of ownership
 Depends on several factors:
 Nature and size of the business
 Capital needed
 Tax laws
 Financial responsibility the owner is
willing to assume
What we will be discussing…
 Two legal forms of ownership (in this
chapter):
 Proprietorship
 Partnership
 Selection of a legal name
GETTING A
BUSINESS STARTED
 Prepare a business plan
 A written document that describes the nature of
the business, the company’s goals and
objectives, and how they will be achieved.
 Helps you see more clearly the risks and
responsibilities involved and will help you
decide whether you really want to do it
 Assume the responsibilities of business
ownership
 Banker will ask to see your plan if you wish
to borrow startup funds.
Businesses fail for 3 reasons:
1. They did not prepare a business plan
2. Their plan was unrealistic
3. They wrote the plan only because the
moneylender, such as a bank,
required it
ELEMENTS OF
A BUSINESS PLAN
Nature of the Business
 Detailed description of products and/or services
Goals and Objectives
 Estimation of risk based on analysis of industry
 Basic results expected in the short and long run
Plan
 Marketing
Size of business
 Results expressed as sales volume or profits
Customers
and demand for the product or service
 Financial
Location
of business
Plan
Prices for the
product or service
 Background
of entrepreneur(s)
 Investment needed to start and maintain business
Plan
 Organizational
Comparison of product
or service with competitors
 Projected income, expenses, and profit
 Legal form of ownership
 Cash start-up and cash flow needs
 Legal factors: licenses, leases, contracts
 Organization chart
 Job descriptions and employee skills needed
 Physical facilities: building, equipment, tools
Legal forms of business
 Sole Proprietorship
 Partnership
 Corporation
 S-Corporation
 3 Key issues
 Legal liability
 Tax ramifications
 Cost of creation
Proprietorship
 Most common form of ownership
 Over 16 million on this country
 Sole Proprietorship
 A business owned and managed by one person
 Proprietor
 The owner-manager of a business
 Performs the day-to-day tasks
 Owner furnishes expertise, money, and
management
 Entitled to all the profits for assuming these responsibilities
Sole Proprietorship
 One person
 Solely responsible for ALL aspects of
business
 Little control from the government
 Easiest form to create
 Enjoy profits and suffer losses
 DBA – “Certificate of Doing Business Under
an Assumed Name” (selection & registration
of a name)
 76-95%
Advantage of a SP
 Easy and inexpensive to create
 Owner has complete authority/control
 Only taxed once at personal income tax rate
 Receive all profit
 Start immediately
Disadvantages of SP
 Unlimited liability
 Risk his/her home, bank accounts, other assets
 Difficult to raise capital
 Owner’s FS may not qualify
 Relies on his/her skills alone
 Business dies when owner dies
PROPRIETORSHIP
Advantages
Disadvantages
 Owner is boss
 Owner receives all profits
 Owner personally knows
employees and customers
 Owner can act quickly in
decision making
 Owner is free from red tape
 Owner usually pays less
income tax than a
corporation
 Owner may lack necessary
skills and abilities
 Owner may lack funds
 Owner bears all losses
 Illness or death may close
the business
Hobby Rule
IRS – Hobby Rule
If a co. does not make a profit in 3 out of
5 years it can be judged as a hobby
Can not deduct losses from gross
income to reduce taxable income
Why would the IRS implement such a
regulation?
Why are sole proprietorships the
most common form of business?
Little control from the government
Proprietorship
 If there are no debts, the proprietor has
full claim to the assets
 Property owned by the business
 If there are debts, creditors have first
claim against the assets
 Those to whom money is owed
Proprietorship
 Statement of financial position (balance
sheet)
 Shows the assets, liabilities, and capital
(net worth, equity) of a business
 Assets – what you own
 Liabilities – what you owe
 Capital, net worth, equity – assets less
liabilities (profits)
Claims Against
Assets
Assets
Cash
$17,760
Merchandise 31,680
Accounts Payable
(Liabilities)
Equipment
J. York, Capital
24,960
$14,400
$204,000
??????
Land & Bldg 144,000
Total
$218,400
Total
What is the value of the assets?
What is the value of the liabilities?
What is the capital?
218,400
$218,400
$14,400
$204,000 (218,400-14,400)
Assets = Liabilities + Capital
Statement of Financial Position
for Betty Caskey
Assets
Cash
Claims against Assets
$50,000
Accts. Payable
Merch.
75,000
Other Debts
Equipment
63,000
Total Owed
Land & Bldg
78,000
$125,000
182,000
B. Caskey, Capital
Total
$47,000
$370,000
Total
245,000
$370,000
Business suited to being
proprietorships
 Businesses primarily concerned with providing
personal services
 Examples:
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Dentist
Accountants
Landscape gardeners
Carpenters
Painters
Barbers
Beauty Salons
Web site developers/computer consultants
Business suited to being
proprietorships
 Businesses that sell merchandise or services
on a small scale
 Examples
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Newspapers/Magazine stands
Roadside markets
Fast food/family restaurants
Flower shops
Small grocery stores
Web-based businesses
Business suited to being
proprietorships
 Types of businesses that can be
operated suitable as a proprietorship:
1. Is small enough to be managed by the
proprietor or a few people hired by the
proprietor
2. Does not require a large amount of
capital
What is the proper word to
describe the following:
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Someone to whom an entrepreneur owes money
 Creditor
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Things that businesses own
 Assets
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The debts of a business
 Liabilities
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A document that shows what a business owns and owes after
subtracting what the owner’s share of the business is worth
 Balance sheet or statement of financial position
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An owner’s value in the business
 Capital, net worth, or equity
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Another word for an entrepreneur
 Sole proprietor or proprietor
Partnership
Two or more people
Average 2 – 3 partners (no limit)
1.6 million in the US
Skill, knowledge, and financial
resources of more than one person
Partnership
 DBA (if not using the names of the
partners)
 Each partner is liable for the actions of
the other partners
 A key factor in the success of a
partnership is for the partners to clearly
agree upon each person’s
responsibilities
Different types of partners
1. Silent
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May be known to the public but takes no active
part in management
2. Secret
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Not known to the public but participates in
management
3. Dormant
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Neither known to the public as a partner nor
active in management
Partnership Agreement
Law does not require an agreement
Should obtain a WRITTEN copy
Helps problems that may arise due to
different personalities and/or goals
Agreements should constantly be
updated
Partnership Agreement
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Name of the business
Names of partners
Contributions of the partners
Managerial responsibilities
Accounting method
Right to review and/or audit accounting documents
Division of profit/losses among partners
Salaries to be withdrawn
Duration of the partnership
Dissolution of the partnership
Distribution of assets upon dissolution
Death of a partner
Signatures of ALL partners
PARTNERSHIP
Advantages
Disadvantages
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 Unlimited financial liability
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Skills and abilities pooled
Sources of capital increased
Credit position improved
Contribution of goodwill
Increased concern in
business management
Less tax burden that
corporations
Reduction in competition
Retirement from
management
Operating economies
 Indicates that partners are
responsible for their share
of the business debts
 Disagreement among
partners
 Each partner bound by
contracts of others
 Uncertain life
 Limited sources of capital
 Unsatisfactory division of
profits
 Difficulty in withdrawing from
partnership
Unlimited Financial Liability
Partners: York, Burton, Chan
Owe creditors $18,000
York
Burton
$6,000
Chan
Unlimited Financial Liability
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A partnership has the following three partners with capital as
listed
 Abbott $80,000
 Baker $40,000
 Calabro $40,000
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$160,000
The business fails. The partners convert all assets to cash.
However, they do not collect enough to pay a $60,000 balance
owed to creditors. The creditors jointly sue Abbott for the
$60,000
Can the creditors sue only 1 partner?
 Yes
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If they sue only Abbott, what recourse does Abbott have?
 Abbott has a claim against the other two partners for their share
of the loss
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How much can Abbott ask Baker and Calabro to pay?
 $40,000 / 160,000 = .25
 .25 x 60,000 = $15,000
each
 Abbott’s share would be $30,000 (80,000 / 160,000 = .5
.5 x 60,000 = 30,000)
Limited Partnership
 Limited Partnership
 Restricts the liability of a partner to the amount of the
partner’s investment
 Not all partners have unlimited liability
 One partner must be a general partner and have
unlimited liability
 Useful when one person wishes to invest in a
business but does not have the time or interest to
participate actively
 Any business formed as a SP can usually be formed
as a limited partnership
Businesses suited to be
partnerships
 Offer more than one product or service
(car dealerships)
 Open more than 8 hours a day (retail,
food)
What are some advantages and
disadvantages of a partnership?
Advantage – little government regulation
and shared decision making
Disadvantage – disagreements, share
profits, and liable for partner’s errors
Business Name
 A SP or partnership may be conducted under
the name(s) of the owner(s)
 In many states the law prohibits the use of
and Company or & Co., unless such
identification indicates additional partners
 Jones, Smith & Co.
 Proper registration is required so that
creditors may know everyone who is
responsible for the business