Types of Business Ownership

Objectives

Summarize the advantages and

disadvantages of the most
common types of business
ownership.
 Three basic forms of business
ownership
Your choice depends on your needs &
goals
•Sole proprietorship

•Partnership

•Corporation
Sole proprietorship

•A business owned
and operated by
one person.
 Advantages of sole proprietorships
•Easy and inexpensive to create.
• Unless you need certification or
local permits, government
intervention is minimal
•Owner makes all business decisions &
has control over all aspects of the
business.
•Flexibility in scheduling to meet
owner’s needs
Advantages of sole proprietorships
cont.
•Owner receives all profits.
•Privacy – owner is the only one
who knows details of the business
• Secret ideas, formulas, or
recipes
•Ability to act quickly in making
decisions – no checking with others
 Advantages of sole proprietorships
cont.
•Tax advantages
• Business itself pays no taxes
• Taxes are paid as personal income of owner
which is usually lower than corporate taxes
• Many business expenses are deductible

•Easy to close/dissolve
• Pay employees and creditors
• Sell your equipment
• Notify customers if possible
 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.
• If you cannot pay business debt with business income, bill
collectors can take your personal assets (home, car)
•Difficult to raise capital.
• Banks/lenders consider sole proprietorships to be a high-
risk investment
•
Disadvantages of sole proprietorships

•Sole proprietorship is limited by

his/her skills and abilities.
•Uncertain life
• You are “it” – illness or injury that prevents you
from working may cause you to close
• Bankruptcy or incarceration will dissolve your
business
• The death of the owner automatically dissolves
the business.
Partnership

A form of business
ownership in which
two or more people
share the assets,
liabilities, and profits.
Advantages of partnerships
•Fairly easy & inexpensive to start
• May pay attorney if you develop a partnership agreement
•Combined resources
• Team with partners with different skills, experience, contacts, &
capital
• Sharing responsibilities makes business run more efficiently &
smoothly
• Increase the amount of capital to run the business. Lenders may
be more willing to lend or extend credit
•Decreased Competition
• Combining like businesses will decrease or eliminate
competition
Advantages of partnerships cont.
•Reduced expenses
• When two or more businesses combine expenses are no longer
being duplicated
• Ex. promotion, office space, supplies, utilities
•Business losses are shared by all partners.
•The partnership does not pay income tax on profits.
• Each partner pays income tax on her/his individual share of the
profit
Disadvantages of partnerships
•Unlimited liability
• Each owner in a general partnership has unlimited liability.
• Each partner can lose personal assets to pay business debt
• In a limited partnership, the liability is limited to the amount
invested in the business
•Limited Capital
• Although partners may bring more capital to the business than sole
proprietors, it is still limited to what each can contribute
• Some lenders may still be reluctant to lend large amounts
•Difficulty in ending
• Withdrawing can be complicated if there is no written partnership
agreement
• By law profits must be divided equally if no agreement
Disadvantages of partnerships cont.
•Partnerships may lead to disagreements.
• May disagree on business goals, finances, responsibilities, &
division of profits
• Can affect the efficiency of the business, morale of employees, &
success or failure of the venture
•Developing a detailed partnership agreement often
helps resolve the conflict because it addresses many
issues that cause potential disagreements
• In 1916, the U.S. government developed the Uniform Partnership
Act (updated in 1997) which serves as a guide for legally
formulating a general partnership agreement
• A limited partnership is more formal & specific in nature & is
governed by the Uniform Limited Partnership Act (ULPA)
Disadvantages of partnerships cont.

•Uncertain life/Transferability
• Unless specified in a detailed
partnership agreement,
bankruptcy, death & the
withdrawal or admittance of a new
partner dissolves the partnership
• Remaining partners may start a
new partnership if they have the
money to buy the former partner’s
share
 Corporation
 A business that is chartered by a
state and legally operates apart
from its owners.
 Owned by stockholders who
have purchased units or shares
of the company
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 corporation
•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.
Advantages of corporations
•Financial Power
• Can raise money quickly by issuing shares of stock.
• Because it is closely regulated by the government,
financial institutions are more willing to lend larger
amounts of capital
•Limited Liability
• Owners are liable only up to the amount of their
investments. Personal assets cannot be used to pay
business debt

•Unlimited life
• May exist indefinitely
• The death or withdrawal of an owner/stockholder does not
Advantages of corporations cont.

•Easy-to-transfer ownership
• Ownership simply transferred by selling stock to someone
else
• New stock certificate is issued in the name of new
stockholder. No permission is required by others
•The business can hire experts to

professionally manage
each aspect of the
Disadvantages of corporations
•Difficulty in forming & operating
• Legal assistance is needed to start a corporation
• Lawyer fees can be very expensive
• Must request approval from the State & register the Articles of
Incorporation
• Decisions about value & class of stock & shareholder voting rights

•Corporations are subject to more government

regulations than partnerships or sole proprietorships.
• Reporting & taxation requirements vary from state to state
Disadvantages of corporations
•Dual taxation
• Corporation is taxed on
profits from the company
• Shareholders are taxed on
the dividends they earn on
their investments
•Separate owners & managers
• Stockholders are not generally involved in the day-to-day operation
of the corporation
• Stockholders form a board of directors to make decisions about
the business & managers carry out these decisions
• Separation of ownership & management provides more opportunity
for irregularities or misunderstandings
Hybrid forms of Business Ownership

•Limited Liability Company (LLC)

•Limited Liability Partnership (LLP)
•Both combine various elements of sole
proprietorships, partnerships, &
corporations into one package
Advantages of Hybrid Businesses
•Cost to start & operate
• Generally less expensive than corporations
• No dual taxation - requires less paperwork & regulation
• LLPs are designed for business professionals such as
lawyers & doctors
• Partners might need to carry a required amount of liability insurance

•Limited Liability
• Personal assets cannot be used to pay business debt
• Owners (members) lose only what they have invested in
the business if it fails
Advantages of Hybrid Businesses cont.
•Taxation
• LLCs & LLPs pay taxes on personal income-tax returns
• Since they are not considered separate entities (like
corporations) they are not subject to dual taxation
•Combined resources
• Often have more owners & tend to have a wider pool of
financial resources, skills, talents, & contacts
•Life span
• Hybrids are required to dissolve after a specific time
period
• Depending on the state registered in, usually between 30 & 40 years
• Owners can decide if they want to reorganize or let it
dissolve
Advantages of Hybrid Businesses cont.
•Flexibility
• Number of members permitted in LLCs are
unlimited
• Sub S corporations must have 100 or fewer
shareholders
• Most states require only one member to
establish a business as a hybrid
• Members are permitted to run the company or to
allow others to manage it
• Membership changes do not automatically
dissolve the company
 Disadvantages of hybrids
•Requirements & laws to establish &
operate hybrids vary from state to
state
• Problematic for businesses that operate in
more than one state
• No universal guidelines from state to state

•Verification of each state’s

statutes can be costly