Types of Business Ownership

1. Types of Business Ownership Chapter 7

2. Sole Proprietorship • Owned by a single owner • Easiest form of business ownership • Owner is the only one responsible for the business’s activities • Owner is obligated to cover any payments resulting from loans but does not need to share the profits • Examples: • Local restaurants, construction firms, barber shop/beauty salon • Over 75% of all businesses in the U.S. are sole proprietorships

3. Sole Proprietorship • Characteristics of Success • Must be willing to accept full responsibility for the firm’s performance • Must be willing to work flexible hours • Must exhibit strong leadership skills • Must be well organized • Must have good communication skills • Many have previous experience in the market in which they are competing • As an employee in a competitor’s firm • As a manager

4. Sole Proprietorship • Advantages • All earnings go to the sole proprietor • Easy organization • Complete control • Lower taxes • Disadvantages • Sole proprietor incurs all losses • Unlimited liability • Limited funds • Limited skills

5. Partnership • A business that is co-owned by two or more people • Must register with the state and may need to apply for an occupational license • About 10% of all firms are partnerships • Types of partnerships: • general—all partners have unlimited liability • General partners manage the business, receive a salary, share the profits or losses of the business • Limited—partner’s liability is limited to the cash or property they contributed to the partnership • Limited partners are only investors in the partnership and do not participate in its management

6. partnerships • Advantages • Additional funding • Losses are shared • More specialization • Disadvantages • Control is shared • Unlimited liability • Profits are shared

7. S-corporations • Firms that have 100 or fewer owners • Have limited liability • Taxed as if the firm were a partnership • Earnings are distributed to the owners and taxed at the respective personal income tax rate of each owner • Some state governments impose a corporate tax on S-Corporations • Many accounting firms and small businesses select the S-Corporation as a form of ownership

8. Limited Liability company (llc) • LLCs have all of the favorable features of a general partnership but also offer limited liability for the partners • Protects a partner’s personal assets from the negligence of other partners in the firm • Assets of the company are not protected • Examples: machinery, property • Must be created according to the laws of the state where the business is located

9. corporation • State chartered entity that pays taxes and is legally distinct from its owners • About 20% of firms • Generate about 90% of all business revenue • Forming a Corporation: • Adopt a corporate charter and file it with the state government • Name of firm • Stock issued • Firm’s operations • Establish bylaws • Guidelines for managing the firm

10. corporation • Shareholders are legally separated from the entity • Limited liability—not held personally responsible for the firm’s actions • Most money that can be lost is the initial investment • Stockholders elect a board of directors • Responsible for establishing general policies of the firm • Can get rid of key officers (CEO, CFO) • Can be voted out

11. CORPORATION • How stockholders earn a return • Receive dividends from the firm • Portion of the firm’s recent earnings over three months that are distributed to stockholders • Stock value may increase • When a firm becomes more profitable, the value of the stock tends to rise • Selling stock for a higher price than what they paid for it **risk losing money if stock value decreases**

12. corporations • Privately held • Ownership is restricted to a small group of investors • Usually small corporations • Publicly held • Shares can be easily purchased or sold by investors • Can obtain additional funds by issuing new common stock

13. corporations • Advantages • Limited liability • Access to funds • Transfer of ownership • Disadvantages • High organizational expense • Financial disclosure • Agency problems • High taxes