Chapter 5-2 Forms of Business Ownership

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Chapter 5-2 Forms of Business Ownership Powered By Docstoc
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   Why might a person want to own their own
   A chance to be in control

   A chance to make decisions

   A chance to invest and make $$ -- profit

   Read more….
   Thousands of people are business owners;

    the amount of control they have, how
    decisions are made, the sources of money for
    the business, and control over profits –

   depends on the form of ownership.
   How many major forms of business
         ownerships are there?
Three (3)
   What are those three (3) forms of business
    The (3) forms of business ownership are…

   Proprietorship; aka sole proprietorship   (click to define)

   Partnership   (click to define)

   Corporation    (click to define)
                                                Return to Major Forms

                 A proprietorship is…

   A business owned and operated by just one

   7 Characteristics?
                                             Return to Major Forms

                  A partnership is…

   A business owned and controlled by two or more
    (> = 2) people who entered into an agreement

   4 Characteristics?
                                            Return to Partnership

          What is that agreement called?


Consists of?
                                               Return to Partnership

What does a partnership agreement consist of?
    Details the rules of procedures that guide
    ownership and operation.
    Identifies the business name and
    investment/contribution of each partner
   Shows how profit/losses will be divided
   Defines authority, duties, and responsibilities
   Details how the partnership can be dissolved
                                                  Return to Major Forms

                   A corporation is…
   A separate legal entity (body) formed by
    documents filed with a state; treated as an
    “individual” by governments
   7 Characteristics?
                                                Return to Major Forms

     Characteristics of a Proprietorship (7)
   Easiest to start and end
   Few legal requirements
   Capital needs are minimal
   Sole control over all business activities
   Owner receives all profits
   Owner responsible for all business debts
   Personal/business assets can be claimed to pay off
    business debts
                                                 Return to Major Forms

     Characteristics of a Partnership (4)
 Quite easy to start
 All owners share responsibilities for key business
  decisions and functions
 Capital investments and profits are shared based
  on agreement
 Each partner is liable for the debts of the business,
  if it fails
         Characteristics of a Corporation (7)
 Owned by one or more shareholders (persons who
    buy shares of stock)
   Managed by a board of directors (BoD)
   More difficult to form
   Must meet more legal requirements
   All owners do not have direct involvement in
   Owners will not have access to profits unless BoD
    approves dividends (profits shared)
   Liability (risk) of stockholders is limited to only
    amount invested
    What are the advantages of choosing to
    operate your business as a proprietorship?
   Freedom of working for yourself (NO BOSS)
   Total control of the business
   Easy startup; minimal capital needed
   No business name needed; minimal gov’t
   Business expenses can be used to reduce
    taxable income
                                                    Resume Review

          What is taxable income?
For example, if a proprietor earned $40,000 a year and
generate a profit of $5,000 from the business,

the government will expect a % of that $45,000 to be
paid in taxes; 25% of $45K = $11,250 income taxes, but

the business expenses = $2,000, then only $43,000 of
earned income would be taxable; taxes only $10,750.

                 $500 savings in taxes
    What are the disadvantages of choosing to
     operate your business as a proprietorship?
   The need to obtain required licenses and permits
   Limited capital and business skills
   Taxes will have to be paid on profits
   All risk is placed on the owner
   In the eyes of the law, the business and owner are the
     What are the advantages of choosing to
      operate your business as a partnership?
   Two or more people can contribute to the
    investment needed to start the business

   Added expertise to the business

   Good for people who share an idea for a
    business and work well together
  What are the disadvantages of choosing to
     operate your business as a partnership?
 No protection for personal assets in case of
 Each partner is responsible for decisions
  made by all other partners
 Each partner can lose much more than the
  original amount invested
 If partner chooses to leave the partnership or
  dies, the partnership normally is dissolved.
     What are the advantages of choosing to
      operate your business as a corporation?
   Liability of any owner is limited to amount

   Amount of the business debt doesn’t matter

   Can invest, make a profit, and NOT take part in
    the day-to-day management and operation
    What are the disadvantages of choosing to
     operate your business as a corporation?
   Decision making is shared by managers, the
    BoD, and shareholders

   More records are required and more laws that
    regulate operation

   Investors pay taxes on individual earnings from
    stocks; company must pay corporate taxes on
    profit because it is treated as an “individual.”
What other specialized forms of business
            ownership exists?
Specialized Partnerships and Corporations

    Limited liability partnership (Click to define)
    Joint venture (Click to define)
    S-corporation (Click to define)
    Limited liability company (LLC) (Click to define)
    Non-profit corporation (Click to define)

Cooperatives and Franchises               (Click to define)
                                                 Return to Special Forms

          A limited liability partnership is …

a partnership that identifies some investors who
cannot lose more than the amount of their
investment, but they are not allowed to participate in
the day-to-day management of the business.

is difficult and costly to setup
                                       Return to Special Forms

           A joint venture is …

a unique business organized by two or more
other businesses to operate for a limited
time and for a specific project.
                                             Return to Special Forms

             An S-corporation is …

offers the limited liability of a corporation; all
income is pass through to the owners based on
their investment and is taxed on their individual
tax returns.
                                           Return to Special Forms

  An limited liability company (LLC) is …

a combination of a partnership and
corporation; provides liability protection for

simpler requirements than corporation;
document like partnership agreement must
be developed
                                            Return to Special Forms

         A non-profit corporation is …
a group of people who join to do some activity
that benefits the public.
works in areas such as education, health care,
charity, or the arts
capital is generated by grants and donations

must be organized as a corporation
                                               Return to Special Forms

                 A cooperative is …
   a company owned by members, serves their
    needs, and is managed in their interest.

                  A franchise is…
   a written contract granting permission to
    operate a business to sell g/s in a set way.

   Read more…
                                       Return to Corporation

     What is a Board of Directors?

The people who will make major policy and
financial decisions for the business
       Cooperatives and Franchises
 Consumers form co-ops to purchases g/s
cheaper as a group
Businesses form co-ops to market the g/s
needed by its members
Larger numbers = greater bargaining power

Read more…
        Cooperatives and Franchises
  The company that owns the g/s and grants the
rights to another business is known as the franchiser
(i.e.,employer); examples – McDonald’s, Jiffy Lube,
Merry Maids, etc.
 The company purchasing the rights to run the
business is the franchisee (i.e., employee).
 Franchisee pays a fee and % of profit to franchiser.

                                                     END of REVIEW
                                               Return to Corporation

     What are the legal requirements?

•   Must file articles of incorporation with
    the state in which it will operate

•   Must create corporate bylaws
                                         Return to Legal Reqs

  What is an article of incorporation?

A written legal document that defines
ownership and operating procedures and
       conditions for the business
                                          Return to Corporation

        What are corporate bylaws?

Details that are the operating procedures for
                the corporation
     THE END

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