Transcript CHAPTER 16: TYPES OF BUSINESS OWNERSHIP

Ms. Baumgartner Inc. presents…

Identify advantages and disadvantages of a
sole proprietorship

Explain difference between general partners
and limited partners

Identify advantages and disadvantages of a
partnership

3 legal forms:
 Sole Proprietorship
 Partnership
 Corporation




Owned by 1 person
Oldest and most common form of ownership
75% of businesses in the U.S. are these
Starter of the business is an ENTREPRENEUR
 EX: auto repair, house cleaning, plumbing, etc.



Operate out of homes or small offices/stores
Many go out of business
Example of successful SP: Debbie Fields
 Mrs. Fields Cookies






Freedom to make all decisions (total control)
Receive all profits
Pay tax 1 time per year (as individual, not company)
Easy set-up (little paperwork, low costs)
Simple Licensing (easy to get business license)
Must apply for Business Name
 Apply for a Certificate of Doing Business under an
assumed Name—DBA

You need an Employer Identification Number
 Assigned by IRS for tax purposes
 You need this if you plan on hiring 1 or more employees


Limited capital (you have to either use your own
money or get a loan yourself)
Unlimited liability (responsibility)
 Owner is responsible to pay debts out of their
personal assets (out of what they own)
 EX: if business does bad, you may lose your car


Limited Human Resources (you must be good at
all parts of business—pricing, advertising,
selling, transporting, etc.)
Limited Life (situation where a business’s life
span is determined by owner’s life span or
decision to close the business



Owned by 2 or more people
Agree to operate business for profit
Sign a partnership agreement
 Written document that says how partnership will work

Agreement includes








Names of partners
Name and type of business
Amount that each partner invested in the beginning
Duties, rights and responsibilities of each partner
Procedures for sharing profits and losses
How assets will be split up if partnership is ended
5% of all businesses in the U.S. are partnerships
EX: Campbell Soup Company

2 basic types of partnerships
 General Partners
▪ Business partner who has authority to make decisions, is
active in the business operations and has unlimited
liability for all losses or debts of business
▪ EVERY partnerships has at least 1 general partner
▪ All general partners have mutual agency power (right to
sign contracts that are legally binding)
 Limited Partners
▪ Does not take an active role in decision making or
running of the business
▪ Liability is limited to the amount they invested only
Easy set-up (like sole proprietorships)
More skills and knowledge (since people have
different areas of strengths, the more the
people, the more strengths are being used)
 Available Capital (several people can invest
money; easier to get a loan with 2 people
 Total control by partners (both people to blame
for good OR bad that happens)
 Profits taxed only once (taxed once a year and
not taxed as a business; each partner pays
personal income taxes based on what they made)



Unlimited liability for each General Partner
 Each partner is responsible for all debts and losses of
business. Both people must pay debts out of their
own pocket if business cannot afford

Disagreement among Partners
 If you don’t get along, business could suffer

Shared Profits
 Profits must be shared—even if you do more work

Limited Life (can end for several reasons)
 If a partner dies or decides to remove from business
because of illness; may be a disagreement; may want
to add new partners

Describe 2 types of corporations

Summarize the process of forming a
corporation

List advantages/disadvantages of corporation





A business organization that operates
individually that is separate from its owners
and is treated by law as if it were an individual
person
Can do everything the other 2 can do
It can sue or be sued
20% of businesses in the U.S. are
corporations
They produce 90% of total business revenue



File an application with state for permission
to operate (called ARTICLES OF INCORPORATION)
You must write a set of corporate bylaws
(rules that a corporation must operate to)
Then state issues a corporate charter
 A license to operate a corporation; states the
purpose of the business and lists the laws and
guidelines




Ownership divided into small units (shares)
Bought by people called stockholders
Stockholders are legal owners of the company
Each receives a stock certificate—which is
proof of ownership
 Closely held corporations: private corporation who
has a small amount of stockholders; not traded in
open markets
 Public Corporations: sells stocks openly in market
 Going Public: when a corporation decides to sells
stocks in the open market

Ability to raise money easily
 By selling stocks

Limited Liability
 If the corporation has $ problems, the owners only lose
the amount of their investment—their stock price

Continued Life
 If a stockholder changes, the business does not end (unlike
sole proprietorships)

Separate Ownership and Management
 Owners do not run the business
 Instead, they elect a board of directors who are
responsible for overseeing general operations.

Complex, Expensive Set-Up
 Must complete many forms, file reports and obey
many laws, pay legal fees, licensing costs, and
stock certificate fees

Slow Decision-Making process
 People discuss issues and debate them before
making any decisions—takes time!

Taxes
 It must pay state and federal taxes on its profits
and dividends

Also called an LLC
A business that operates and pays taxes like a
partnership but has limited liability for owners
 Combines some of partnership and corporation
 The owner’s liability is only what they invested
 This form of business can only be used if the
business is small


An agreement to sell a company’s products or
services in a designated geographic area
 EX: McDonald’s, Subway, Burger King, Wendy’s,
Taco Bell



When you open a franchise, you decide if
your business is going to be a S.P,
Partnership, Corporation or LLC.
Then purchase a franchise license from the
parent corporation (EX: Burger King)
McDonald’s costs about $350,000 to start


Reviewing Key Concepts: 1-6 (pg 544)
Your Financial portfolio (pg 547)
 Worksheet to organize partnership (pg 188-89)