OVERVIEW OF BUSINESS OWNERSHIP

Mr. SherpinskyMr. Sherpinsky

Council Rock School DistrictCouncil Rock School District

Forms of Business Ownership

THREE BASIC FORMS OF BUSINESS OWNERSHIP

•Sole proprietorship

•Partnership

•Corporation

SOLE PROPRIETORSHIP

•A business owned and operated by one person.

•Approximately 76 percent of all businesses in the U.S. are sole proprietorships.

ADVANTAGES OF SOLE PROPRIETORSHIPS

•Easy and inexpensive to create.

•Owner makes all business decisions.

•Owner receives all profits.

•Least regulated form of business ownership.

•Business itself pays no taxes.

DISADVANTAGES OF SOLE PROPRIETORSHIPS

•Owner has unlimited liability for all debts and actions of the business.

•Unlimited liability: The debts of the business may be paid from the personal assets of the owner.

•Difficult to raise capital.

•Limited by his/her skills and abilities.

•The death of the owner automatically dissolves the business.

COMMON TYPES OF SOLE PROPRIETORSHIPS• Repair shops

• Automotive• Lawn mower

• Small retail stores• Tailors• Bicycle

• Service organizations• Hair salons• Nail Salons• Food shops

FICTITIOUS NAMES

• A person who goes into business can choose to operate under his or her own name or can make up a name

• Sole proprietor uses anything but his or her own name, the law calls the made-up name a fictitious name.fictitious name.

• Must not be a name already in useMust not be a name already in use

CREATION AND OPERATION

• Usually a few formal requirements to establish a sole proprietorship• May require:

• Licenses to legally operate as business• Occupational licenses• Certain types of liability insurance

• Some states require formal filing to begin operations or to use fictitious names

Amira wants to start her own business. She really doesn’t like the idea of working for someone else—she wants work to suit her own schedule and she has very definite ideas about how a business should be run.

Her idea is to open a slushee and fruit juice stand near the city park. However, she estimates the stand will cost about $7,500 to open and she has only saved $4,000.

Given Amira’s circumstances, name one advantage Amira would find to having a sole proprietorship. Name one disadvantage.

ANSWERANSWER

Advantage—total control; disadvantage—limited capital.

Review What You’ve LearnedReview What You’ve Learned

What is a sole proprietorship?A form of business that is owned A form of business that is owned

and operated by one personand operated by one person

How does a sole proprietorship begin?

A person needs only to begin the A person needs only to begin the operation of the businessoperation of the business

Review What You’ve LearnedReview What You’ve Learned

Name the advantages of a sole proprietorship?• Ease of creationEase of creation• Total controlTotal control• Retention of profitsRetention of profits• Freedom from excessive governmental Freedom from excessive governmental

controlcontrol• One-time taxation of profitsOne-time taxation of profits

Review What You’ve LearnedReview What You’ve Learned

Name the disadvantages of a sole proprietorship?

• Limited capitalLimited capital• Unlimited liabilityUnlimited liability• Limited human resourcesLimited human resources• Limited lifetimeLimited lifetime

PARTNERSHIP

A form of business ownership in which two or more people share the assets, liabilities, and profits.

PARTNERSHIP LAW

Largely found in the Uniform Partnership Act (UPA)

The UPA defines partnership as “an association of two or more persons to carry on a business for profit.”

TYPES OF PARTNERSHIPS•General partnership:General partnership: A partnership in which all partners have unlimited personal liability and take full responsibility for the management of the business.

•Limited partnership:Limited partnership: A partnership in which the partners’ liability is limited to their investment.

•Secret:Secret: Active, Unknown relationship, unlimited liability

•Silent:Silent: Not Active, Known relationship, unlimited liability

•Dormant:Dormant: Not Active, unknown relationship, unlimited liability

•Joint venture:Joint venture: A partnership in which two companies join to complete a specific project. The partnership ends after a specified period of time.

•Strategic alliance:Strategic alliance: A partnership in which two businesses work together for mutual benefit.

ADVANTAGES OF PARTNERSHIPS

•Shared decision making and management responsibilities.

•Easier to raise capital and greater credit

•Few government regulations.

•Business losses are shared by all partners.

DISADVANTAGES OF PARTNERSHIPS

•Partnerships may lead to disagreements.

•Some entrepreneurs are not willing to share responsibilities and profits.

•Some entrepreneurs fear being held legally liable for the error of their partners.

•Each owner has unlimited liability.

•Death dissolves partnership

FORMING A GENERAL PARTNERSHIP

•Need two or more parties

•Combine their money, labor, and skills

•Purpose of carrying on a lawful business

FORMING A GENERAL PARTNERSHIP

Can be formed in one of three ways:Can be formed in one of three ways:

1. By agreementa) Express agreement drawn up by partners

b) (Articles of Partnership: Describe important points)

2. By proof of existencea) Method of doing business

b) (prima facie evidence: Forms regardless of the label)

3. By estoppela) Third party led to believe partnership exists

b) No true partnership created (Not real)

FORMING A GENERAL PARTNERSHIP

Statute of Frauds: Requirements

a) Under the Statue of Frauds, if a partnership is to last more than a year or if the partnership is formed to sell, buy, or lease real property, it must be evidenced in writing.

Dissolving a Partnership

a) Legal detachment: change in the relationship when partner stops being associated with business

b) Doesn’t necessarily bring end to business

DISSOLVING A PARTNERSHIP

Effects of Dissolution

a) Other partners may wish to continue

b) If so, new agreement needed

c) Public notice given to relieve retiring partners from liability for any new debts

Distribution of Assets

a) Paid in this order:i. Money owed to creditors

ii. Money lent to partners to the firm

iii. Original money paid by partners

iv. Surplus owed to partner

PARTNERSHIP PROPERTY

Limitations

a) Important to distinguish between property of partnership and individual partners.

b) Property contributed to partnership becomes partnership property

Property Rights of the Partners

a) Certain rights exist:

I. Right to use/control the property

II. Right to manage the firm

III. Right to share in profits

PARTNERSHIP DUITES

Partners must trust one another

a) Each partner is an agent of the other partner and has duties comparable to those of an agent

b) These duties:

i. Always act in good faith and in the best interest of the firm

ii. Always use their best skill and judgment in looking after the firm’s affairs

iii. To be loyal to the firm and put the firm’s interests first

QUIZQUIZ

BLOGBLOG

CORPORATIONCORPORATION

A business that is chartered by a state and legally operates apart from its owners.

Is an entity of its own with all rights of a person.

TYPES OF CORPORATIONSTYPES OF CORPORATIONS•C-corporation:C-corporation: The most common form of corporation. It protects the entrepreneur from being personally sued for the actions and debts of the corporation.

•Subchapter S corporation:Subchapter S corporation: A corporation that is taxed like a sole proprietorship or partnership.

•Nonprofit corporation:Nonprofit corporation: Legal entities that make money for reasons other than the owner’s profit.

•Limited Liability Company (LLC):Limited Liability Company (LLC): A new form of business ownership that provides limited liability and tax advantages.

ADVANTAGES OF CORPORATIONSADVANTAGES OF CORPORATIONS

•Can raise money by issuing shares of stock.

•Offers owners limited liability. Limited liability: Owners are liable only up to the amount of their investments.

•People can easily enter or leave the business by buying or selling their shares of stock.

•The business can hire experts to professionally manage each aspect of the business.

DISADVANTAGES OF CORPORATIONSDISADVANTAGES OF CORPORATIONS•Legal assistance is needed to start a corporation.

•Start-up is costly.

•Corporations are subject to more government regulations than partnerships or sole proprietorships.

•A lot of paperwork is involved in running a corporation.

•Income is taxed twice.

Alternate approaches to starting a Alternate approaches to starting a businessbusiness

•Buy an existing business.

•Enter a family business.

•Own a franchise business.

ADVANTAGES OF BUYING AN ADVANTAGES OF BUYING AN EXISTING BUSINESSEXISTING BUSINESS

•Existing businesses already have customers, suppliers, and procedures.

•Seller of the business may be willing to train the new owner.

•There are existing financial records.

•Financial arrangements may be easier.

DISADVANTAGES OF BUYING AN DISADVANTAGES OF BUYING AN EXISTING BUSINESSEXISTING BUSINESS

•Business may be for sale because it is not making a profit.

•Problems may be inherited with the purchase of an existing business.

•Many entrepreneurs may not have the capital needed to purchase an existing business.

ADVANTAGES TO ENTERING A FAMILY ADVANTAGES TO ENTERING A FAMILY BUSINESSBUSINESS

•There is a certain sense of pride and accomplishment that comes from being part of a family endeavor.

•A business can remain in the family for generations.

•Some people enjoy working with relatives.

•The efforts of running a family business give one the benefit of knowing that their efforts are helping those whom they care about.

DISADVANTAGES TO ENTERING A DISADVANTAGES TO ENTERING A FAMILY BUSINESSFAMILY BUSINESS

•Senior management positions are often held by family members who may not be the best qualified.

•It may be difficult to retain qualified employees who are not members of the family.

•Family politics may affect decisions regarding the business.

•It is often difficult to separate business life and private life in family-run businesses.

•It is often difficult to set policies and procedures and to make decisions.

OWN A FRANCHISE BUSINESSOWN A FRANCHISE BUSINESS

Franchise: A legal agreement that gives an individual the right to market a company’s products or services in a particular area.

Franchisee: A person who purchases a franchise agreement.

Franchisor: The person or company who sells a franchise.

Initial franchise fee: The fee the franchise owner pays in return for the right to run the business.

ADVANTAGES OF PURCHASING A ADVANTAGES OF PURCHASING A FRANCHISE BUSINESSFRANCHISE BUSINESS

An established product or service is being provided.

Franchisors often offer management, technical, and other assistance.

Equipment and supplies may be less expensive.

A guarantee of consistency attracts customers.

DISADVANTAGES OF PURCHASING A DISADVANTAGES OF PURCHASING A FRANCHISE BUSINESSFRANCHISE BUSINESS

The cost of franchises may be high, which can reduce profits.

Franchise owners are limited in the decisions they can make regarding the business.

The performance of other franchises impact on the franchisee.

The franchise agreement may be terminated by the franchisor.

CORPORATION QUICK FACTS TO KNOW CORPORATION QUICK FACTS TO KNOW

Paying the filing fee for the application is the last thing to do to complete the process to form a corporation.

Individuals who own the corporation are called shareowners or stockholders.

Developing and filing the articles for incorporation are a required document for forming corporations and completing an application for incorporation.

CORPORATION QUICK FACTS TO KNOW CORPORATION QUICK FACTS TO KNOW

Promoters are the people charged with carrying out the incorporation process.

Corporations formed in Texas and operating in Pennsylvania would be considered foreign.foreign.

Corporation formed in Mexico and operating in the United States would be considered alien corporations.

Articles of incorporation are submitted to the Secretary of State for each state.