Master 2 Finance d’Entreprise & KONE

Ingénierie Financière KOLOWI

ANGLAIS DES AFFAIRES

Homework N° 2

FORMS OF BUSINESS OWNERSHIP

Learning objectives:
1. Define the three most common forms of business ownership:
sole proprietorship, partnership, and corporation
2. Be aware of the advantages and disadvantages

Read the following text and do the exercises given after it

The three most common forms of business ownership in the United States are the sole
proprietorship, partnership, and corporation. In terms of ownership, corporations are
generally the most complex, and sole proprietorships are the simplest. In terms of
organization, however, all three usually start small and simple. Some, like IBM, grow and
grow.
3.1. Sole Proprietorships
A sole proprietorship is a business that is owned (and usually operated) by one person.
Sole proprietorship is the oldest and simplest form of business ownership, and it is the easiest
to start. In most instances, the owner (the sole proprietor) simply decides that he or she is in
business and begins operations. Some of the largest of today's corporations, including Ford
Motor Company, H.J. Heinz Company, and J.C. Penney Company, started out as tiny sole
proprietorships.
There are more than twelve million sole proprietorships in the United States. They
account for more than two-thirds of the country’s business firms. Sole proprietorships are
most common in the retailing, agriculture, and service industries. Thus the specialty clothing
shop, corner grocery, and television repair shop down the street are likely to be sole
proprietorships. Most of the advantages and disadvantages of sole proprietorships arise from
the two main characteristics of this form of ownership: simplicity and individual control.

Advantages of Sole Proprietorships

Ease and Low Cost of Formation and Dissolution: No contracts, agreements, or other
legal documents are required to start a sole proprietorship. Most are established without even
an attorney. A state or city license may be required for certain types of businesses, such as
restaurants or catering services that are regulated in the interest of public safety. But beyond
that, a sole proprietor does not pay any special start-up fees or taxes. Nor are there any
minimum capital requirements.
If the enterprise does not succeed, or the owner decides to enter another line of business,
the firm can be closed as easily as it was opened. Creditors must be paid, of course. But the
owner does not have to go through any legal procedure before hanging up an "Out of
Business" sign.
Retention of All Profits: All profits earned by a sole proprietorship become the
personal earnings of its owner. This provides the owner with a strong incentive to succeed—

1
perhaps the strongest incentive—and a great deal of satisfaction when the business does
succeed. It is this direct financial reward that attracts many entrepreneurs to the sole
proprietorship form of business.
Flexibility: The sole owner of a business is completely free to make decisions about the
firm's operations. Without asking or waiting for anyone's approval, a sole proprietor can
switch from retailing to wholesaling, move a shop's location, or open a new store and close
an old one. A sole owner can also respond to changes in market conditions much more
quickly than the operators of other forms of business. Suppose the sole owner of an appliance
store finds that many customers now prefer to shop on Sunday afternoons. He or she can
make an immediate change in business hours to take advantage of that information (provided
that state laws allow such stores to open on Sunday). The manager of one store in a large
corporate chain may have to seek the approval of numerous managers before making such a
change.
Furthermore, a sole proprietor can quickly switch suppliers to take advantage of a lower
price, whereas such a switch could take weeks in a more complex business.
Possible Tax Advantages: The sole proprietorship's profits are taxed as personal income
of the owner. Thus a sole proprietorship does not pay the special state and federal income
taxes that corporations pay. (As you will see later, the result of these special taxes is that a
corporation's profits are taxed twice. A sole proprietorship's profits are taxed only once.)
Also, recent changes in federal tax laws have resulted in higher tax rates for corporations than
for individuals at certain income levels.
Secrecy: Sole proprietors are not required by federal or state governments to publicly
reveal their business plans, profits, or other vital facts. Therefore, competitors cannot get their
hands on this information. Of course, sole proprietorships must report certain financial
information on their personal tax forms, but that information is kept secret by taxing
authorities.
Disadvantages of Sole Proprietorships
Unlimited Liability Unlimited liability is a legal concept that holds a sole proprietor
personally responsible for all the debts of his or her business. This means there is no legal
difference between the debts of the business and the debts of the proprietor. If the business
fails, the owner's personal property—including house, savings, and other assets—can be
seized (and sold if necessary) to pay creditors.
Unlimited liability is thus the other side of the owner-keeps-the-profits coin. It is
perhaps the major factor that tends to discourage would-be entrepreneurs from using this
form of business organization.
Lack of Continuity: Legally, the sole proprietor is the business. If the owner dies or is
declared legally incompetent, the business essentially ceases to exist. In many cases,
however, the owner's heirs take over the business and continue to operate it, especially if it is
a profitable enterprise.
Limited Ability to Borrow: Banks and other lenders are usually unwilling to lend large
sums to sole proprietorships. Only one person—the sole proprietor—can be held responsible
for repaying such loans, and the assets of most sole proprietors are fairly limited. Moreover,
these assets may already have been used as the basis for personal borrowing (a mortgage loan
or car loan) or for short-term credit from suppliers. Lenders also worry about the lack of
continuity of sole proprietorships: Who will repay a loan if the sole proprietor is
incapacitated?
The limited ability to borrow can keep a sole proprietorship from growing. It is the main
reason why many business owners change from the sole proprietorship to some other
ownership form when they need relatively large amounts of capital.

2
 Limited Business Skills and Knowledge: Managers perform a variety of functions
(including planning, organizing, and controlling) in such areas as finance, marketing, human
resources management, and operations. Often the sole proprietor is also the sole manager—in
addition to being a salesperson, buyer, accountant, and, on occasion, janitor.
Even the most experienced business owner is unlikely to have expertise in all these
areas. Consequently, the business can suffer in the areas in which the owner is less
knowledgeable, unless he or she obtains the necessary expertise by hiring assistants or
consultants.
Lack of Opportunity for Employees: The sole proprietor may find it hard to attract and
keep competent help. Potential employees may feel that there is no room for advancement in
a firm whose owner assumes all managerial responsibilities. And when those who are hired
are ready to take on added responsibility, they may find that the only way to do so is to quit
the sole proprietorship and either work for a larger firm or start up their own business.

A) Match the words on the left with their definitions on the right

1. contract a) the ability to change very quickly in order to suit new conditions 1-e

2. license b) money that is lent to sb by a bank or another financial organization 2-h

3. tax on sth c) a person who helps or supports sb in their work 3-k

4. start-up fee d) money that you have saved, especially in a bank 4-f

5. flexibility e) an official written agreement between two parties 5-a

6. business f) money that you pay in order to set up a new business 6-j
hours
7. dissolution g) the profit that a company makes 7-i

8. heir h) an official 8-l

document that shows
that permission has
been given to do,
own or use sth
9. assistant i) the act of officially ending a business 9-c

10. savings j) the hours in a day that a shop or company is open 10-d

11. loan k) money that you have to pay to the government 11-b

12. earnings l) a person who has the legal right to receive sb’s property and continue the work after 12-g
their death

II.COMPREHENSION
A) Choose the item that best completes each sentence
1. Most United States businesses are : c
a) corporations
b) partnerships
c) sole proprietorships
2. Unlimited liability means that the owner: b

3
 a) has unlimited ability to borrow
b) must be liable for his/her company debts
c) cannot be held responsible for his/her company debts
3. If a sum of money was lent to a sole proprietorship, the responsibility to repay the
loan is assumed: a
a) by the owner himself/herself
b) by the owner’s family members
c) by the owner’s staff

Partnerships
Learning objectives :
1. Define the word Partnership
2. Know different types of partners within a partnership and distinguish
between a general and a limited partner
3. Comprehend the importance of the articles of partnership
4. Be aware of the advantages and disadvantages of a partnership
Study and Learn the Words:
English English equivalents French
To translate To change sth into a different form A traduire
Receipt To earn money Recette
To pool Mettre en relation
Real estate Immobilier
Personal estate Biens personnels
To incur debts Contracter des dettes
Prospective partner Would-be partner Partenaires potentiels
To file
To draw up
Pecretary of state
the terms of the
partnership
To list
To spell out to explain sth in a clear way Expliquer clairement
To maintain accounts
To extend credit to lend money Prêter de l’argent

Read the following text and do the exercises given after it

The major disadvantages of a sole proprietorship stem from its one-person control—and
the limited amount that one person can do in a workday. One way to reduce the effect of
these disadvantages is to have more than one owner. Multiple ownership translates into more
time devoted to managing, more management expertise, and more capital and borrowing
ability.
Partnership is an association of two or more persons to act as co-owners of a
business for profit.
There are approximately 2 million partnerships in the United States. They account for
about $370 billion in receipts. However, this form of ownership is much less common than
4
the sole proprietorship or the corporation. In fact, partnerships represent only about 10
percent of all American businesses.
Although there is no legal maximum, most partnerships have only two partners.
(However, most of the largest partnerships in accounting, law, and advertising have many
more than two partners.) Often a partnership represents a pooling of special talents,
particularly in such fields as law, accounting, advertising, real estate, and retailing. Also, a
partnership may result from a sole proprietor taking on a partner for the purpose of obtaining
more capital.
Types of Partners
All partners need not be equal. Some may be fully active in running the business,
whereas others may have a much more limited role.
General Partners: A general partner is one who assumes full or shared operational
responsibility of a business. Like sole proprietors, general partners are responsible for
operating the business. They also assume unlimited liability for its debts, including debts that
have been incurred by any other general partner without their knowledge or consent. The law
requires that every partnership have at least one general partner. This is to ensure that the
liabilities of the business are legally assumed by at least one person. General partners are
active in day-to-day business operations, and each partner can enter into contracts on behalf
of all the others. Each partner is taxed on his or her share of the profit—in the same way a
sole proprietor is taxed. (The partnership itself pays no income tax.) If one general partner
withdraws from the partnership, he or she must give notice to creditors, customers, and
suppliers to avoid future liability.
Limited Partners: A limited partner is a person who contributes capital to a business
but is not active in managing it; his or her liability is limited to the amount that he or she has
invested. In return for their investment, limited partners share in the profits of the firm. Not
all states in the USA allow limited partnerships. In those that do, the prospective partners
must file formal articles of partnership. They must publish a notice regarding the limitation in
at least one newspaper. And they must ensure that at least one partner is a general partner.
The goal of these requirements is to protect the customers and creditors of the limited
partnership.
The Partnership Agreement
Some states require that partners draw up articles of partnership and file them with the
secretary of state. Articles of partnership are a written agreement listing and explaining the
terms of the partnership. The articles generally describe each partner's contribution to, share
of, and duties in the business. They may outline each partner's responsibility—who will
maintain the accounts, who will manage sales, and so forth. They may also spell out how
disputes will be settled and how one partner can buy the interests of another.

Advantages of Partnerships
Ease and Low Cost of Formation: Like sole proprietorships, partnerships are relatively
easy to form. The legal requirements are often limited to registering the name of the business
and purchasing whatever licenses are needed. It may not even be necessary to consult an
attorney, except in states that require written articles of partnership. However, it is generally a
good idea to get the advice and assistance of an attorney when forming a partnership.
Availability of Capital and Credit: Partners can pool their funds so that their business
has more capital than would be available to a sole proprietorship. This additional capital,
coupled with the general partners' unlimited liability, can form the basis for a good credit

5
rating. Banks and suppliers may be more willing to extend credit or grant sizable loans to
such a partnership than to an individual owner.
This does not mean that partnerships can easily borrow all the money they need. Many
partnerships have found it hard to get long-term financing simply because lenders worry
about enterprises that take years to earn a profit. But, in general, partnerships have greater
assets and so stand a better chance of obtaining the loans they need.
Retention of Profits: As in a sole proprietorship, all profits belong to the owners of the
partnership. The partners share directly in the financial rewards. Thus they are highly
motivated to do their best to make the firm succeed.
Personal Interest: General partners are very much concerned with the operation of the
firm—perhaps even more so than sole proprietors. After all, they are responsible for the
actions of all other general partners, as well as for their own.
Combined Business Skills and Knowledge: Partners often have complementary skills.
If one partner is weak in, say, finances, another may be stronger in that area. Moreover, the
ability to discuss important decisions with another concerned individual often takes some of
the pressure off everyone and leads to more effective decision making.
Possible Tax Advantages: Like sole proprietors, partners are taxed only on their
individual income from the business.
Disadvantages of Partnerships
Unlimited Liability: Each general partner is personally responsible for all debts of the
business, whether or not that particular partner incurred those debts. General partners thus run
the risk of having to use their personal assets to pay creditors. Limited partners, however, risk
only their original investment.
Lack of Continuity: Partnerships are terminated in the event of the death, withdrawal,
or legally declared incompetence of any one of the general partners. However, that partner's
ownership share can be purchased by the remaining partners. In other words, the law does not
automatically provide that the business shall continue, but the articles of partnership may do
so. For example, the partnership agreement may permit surviving partners to continue the
business after buying a deceased partner's interest from his or her estate. However, if the
partnership loses an owner whose specific skills cannot be replaced, it is not likely to survive.
Effects of Management Disagreements: The division of responsibilities among several
partners means the partners must work together as a team. They must have great trust in each
other. If partners begin to disagree about decisions, policies, or ethics, distrust may cloud the
horizon. Such a mood tends to get worse as time passes – often to the point where it is
impossible to operate the business successfully. To reduce disagreements, a number of issues
can be settled when forming the partnership.
Frozen Investment: It is easy to invest money in a partnership, but it is sometimes
quite difficult to get it out. This is the case, for example, when remaining partners are
unwilling to buy the share of the business that belongs to the partner who is leaving. To
prevent such difficulties, the procedure for buying out a partner should be included in the
articles of partnership.
In some cases, a partner must find someone outside the firm to buy his or her share.
How easy or difficult it is to find an outsider depends on how successful the business is.

I. VOCABULARY PRACTICE
A) Find in the text synonymous phrases to the following:
1. To conclude a contract
Partnership is an association of two or more persons to act as co-owners of a
business for profit.

6
 2. To give big loans
Banks and suppliers may be more willing to extend credit or grant sizable loans to
such a partnership than to an individual owner.
3. To be reluctant to purchase sth

4. To inform lenders

5. To leave a partnership
To prevent such difficulties, the procedure for buying out a partner should be
included in the articles of partnership.

B) FOCUS ON LANGUAGE The word ACCOUNT

Match the meaning of the words in bold with their definition in the right
1. The consulting company has won 2 new accounts in Singapore a) represents 1-e
2. On no account should these products be released before they are checked. b) on credit 2-h
3. Labour accounts for 45% of the manufacturing costs. c) because of 3-a
4. Mrs Baker is our regular customer and she may buy on account. d) for themselves 4-b
5. By all accounts, we will benefit greatly if we are going to expand next e) big customers 5-j
year.
6. Agents buy and sell on their own account. f) explain 6-d
7. I cannot account for this unexpected decrease in sales. g) consider 7-f
8. Our development project has to be adjusted on account of the shortage of h) under no circumstances 8-c
personnel.
9. Our solicitor has received a detailed account of all our new customers’ i) report 9-i
business deals.
10. A good manager should take the good performance of his employees into j) people say 10-g
account.