B. OVERVIEW OF SMALL
3.00 Explain the legal
environment of small business.
3.01 Compare forms of business
(The logos used in this PowerPoint were copied directly from corporate websites.
They have not been altered in any way.)
Three basic forms of business
•A business owned and
operated by one
percent of all
businesses in the U.S.
Advantages of sole proprietorships
•Easy and inexpensive to create.
•Owner makes all business decisions.
•Owner receives all profits.
•Least regulated form of business
•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.
•Sole proprietorship is limited by his/her skills
•The death of the owner automatically
dissolves the business.
A form of business
ownership in which
two or more people
share the assets,
liabilities, and profits.
Types of Partnerships
•General partnership: A partnership in which all
partners have unlimited personal liability and take
full responsibility for the management of the
•Limited partnership: A partnership in which the
partners’ liability is limited to their investment.
•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: A partnership in which two
businesses work together for mutual benefit.
Advantages of partnerships
•Shared decision making and management
•Easier to raise capital than in a sole
•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.
A business that is chartered by a
state and legally operates apart
from its owners.
Types of corporations
•C-corporation: The most common form of
corporation. It protects the entrepreneur from being
personally sued for the actions and debts of the
•Subchapter S corporation: A corporation that is
taxed like a sole proprietorship or partnership.
•Nonprofit corporation: Legal entities that make
money for reasons other than the owner’s profit.
•Limited Liability Company (LLC): A new form of
business ownership that provides limited liability
and tax advantages.
Advantages of corporations
•Can raise money by issuing shares of stock.
•Offers owners limited liability. Limited
Owners are liable only up to the amount of
•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
Disadvantages of corporations
•Legal assistance is needed to start a
•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
•Income is taxed twice.
Alternate approaches to starting a
•Buy an existing business.
•Enter a family business.
•Own a franchise business.
Advantages of buying an existing
•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 existing
•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
Advantages to entering a family
•There is a certain sense of pride and
accomplishment that comes from being part of a
•A business can remain in the family for
•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 family 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
•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 business
Franchise: A legal agreement that
gives an individual the right to market a
company’s products or services in a
Franchisee: A person who purchases a
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
Advantages of purchasing a franchise
An established product or service is being
Franchisors often offer management, technical,
and other assistance.
Equipment and supplies may be less
A guarantee of consistency attracts customers.
Disadvantages of purchasing a franchise
The cost of franchises may be high, which can
Franchise owners are limited in the decisions they
can make regarding the business.
The performance of other franchises impact on the
The franchise agreement may be terminated by the