Sole Proprietorships

Sole Proprietorships Sole Proprietorship is a business that is owned(and usually operated) by one person. • Simplest form of ownership and easiest to start. • Allows the owner to pick and choose what assignments to work on. • Possible to make more money than when working for a salary for another business.

Advantages of Proprietorships • Ease of Start-Up • Requires no contracts, agreements or other legal agreements • Register the name and purchase a license or permit to operate • No minimum capital requirements • Firm may be closed as easily as opened • Creditors must be paid, but no legal procedure to close business

Advantages of Proprietorships(continued) • Pride of Ownership • Owner can take pride in spending a great deal of time and hard work ‘growing’ his business. • Deserves credit for assuming the risks and solving the daily problems of the business. • However, owner will also be blamed if the business fails.

Advantages of Proprietorships(continued) • Retention of All Profits • All profits become the personal earnings (salary) of the owner. • Great incentive to succeed.

Advantages of Proprietorships(continued) • Flexibility • Owner is free to make decisions about how the business will operate. • Owner is free to decide when to open or close shops or move to other locations. • Owner is free to make changes in business hours of operation.

Disadvantages of Proprietorships • Unlimited Liability • A legal term which holds the business owner personally responsible for all debts of the business. • Debts of the business are considered personal debts of the owner. • If the owner is sued or the business fails, the owner’s personal assets can be sold to pay the expenses owed.

Disadvantages of Proprietorships(continued) • Lack of Continuity • Since the owner is the business, if he/she dies or retires, the business goes with him/her. • However, if the business is successful, the heirs can sell or continue it.

Disadvantages of Proprietorships(continued) • Lack of Money • Owner may have a limited ability to borrow money from banks. • Banks worry that a single owner will not be able to pay back the loan because personal money may have been used for other loans as well. • Banks worry about continuity of the business if something happens to the owner – who will pay back the money? • Banks are concerned about the large number of sole proprietorships that fail.

Disadvantages of Proprietorships(continued) • Limited Management Skills • The most experienced manager is unlikely to have expertise in all areas of management. • May have to assume the role of buyer, salesperson, accountant, IT specialist, etc. • So the owner’s ability to hire individuals who have the expertise he/she lacks is critical.

Disadvantages of Proprietorships(continued) • Difficulty in Hiring Employees • Potential employees may feel that there is little room for advancement in a small business. • Employees may move after 1 or 2 years to larger companies after getting experience in a small company which affects continuity of management and service. They want to assume more responsibility and will be paid higher salaries and benefits in a larger company.

Advantages Easy to Start Pride of Ownership No Profit Sharing Flexibility in Decision Making Disadvantages Unlimited Liability Lack of Continuity Lack of Money Limited Management Skills Difficulty in Hiring and Keeping Employees Pros and Cons of Sole Proprietorships

Partnerships A Partnership is a voluntary association of two or more persons to act as co-owners of a business for profit. Usually represents a collection of people with special managerial skills and talents.

Types of Partnerships General Partner– a person who assumes full or shared responsibility for operating a business. • May enter into contracts on behalf of other partners. • Has unlimited liability for business debts made by him/her and also by other general partners, even if he/she is unaware or did not give approval for these debts. • If he/she leaves the partnership, notice must be given to all creditors, customers and suppliers to avoid future liabilities created by other general partners. General Partnership - a business co-owned by two or more general partners who are liable for everything the business does.

Types of Partnerships(continued) Limited Partner– a person who contributes capital to a business but who has no management responsibility or liability for losses beyond his/her investment in the partnership. Limited Partnership– a business co-owned by one or more general partners who manage the business and limited partners who invest in it. • Special legal rules apply concerning details of the partnership and liability to be reported to agency providing the operating license. • At least one general partner must be responsible for the debts of the limited partnership.

Types of Partnerships(continued) Master Limited Partnership (MLP) – a business partnership owned and managed like a corporation but taxed like a partnership. • Units of the partnership can be sold to investors to raise capital. • Investors are free to sell their units of ownership at any time.

Partnership Agreement Articles of Partnership– a written or oral agreement listing and explaining the terms of the partnership.

Partnership Agreement (continued) Partnership Agreement should include: • Name of all partners • Type of business, name of business, address of business • Length of partnership • Investment of all partners • Duties of all partners • Salaries, withdrawals, profit sharing terms • Termination of partnership • Signatures of all partners Recommend that legal assistance be used to draft the agreement.

Advantages of Partnerships • Ease of Start-Up • No legal requirements • Register the company name and securing the necessary licenses or permits • Written articles of partnership are not required legally

Advantages of Partnerships(continued) • Availability of Capital and Credit • Partners can pool their capital and secure a better credit rating. • Partners have a better chance of getting approval for loans because banks see that more than one person is responsible for the debt created by the partnership.

Advantages of Partnerships(continued) • Retention of Profit • Partners share directly in the profits and are therefore highly motivated to do their best to make the business a success. • Partnership agreement should state how much profit each partner receives or the amount of loss for which each is responsible.

Advantages of Partnerships(continued) • Personal Interest • General partners are very concerned about the operation of the business because each is responsible for the actions of the other general partners.

Advantages of Partnerships(continued) • Combined Business Skills and Knowledge • The weaknesses of one partner will be picked up by the other partner(s). • More opportunity to discuss important decisions with others concerned leads to better, more effective decision making.

Disadvantages of Partnerships(continued) • Unlimited Liability • Each general partner is liable for all debts of the business. • Each partner is legally and personally responsible for the debts and actions of any other general partner. • Limited partners risk only their original investment. • Limited-liability partnership (LLP) is usually only allowed for doctors, dentists, accountants and attorneys. In an LLP, all partners may have limited liability for the malpractice of other partners.

Disadvantages of Partnerships(continued) • Effects of Management Disagreements • Trust is critical in a partnership. • When partners disagree about decisions, ethics, or overall policies, distrust happens and it may become impossible to operate the business.

Disadvantages of Partnerships(continued) • Lack of Continuity • Terminated if any one of the general partners dies, withdraws or is declared legally incompetent. • If partner who dies or leaves has specialized management or technical skills which cannot be replaced easily, the partnership is not likely to survive. • However, Partnership Agreement may allow remaining partners to ‘buy out’ the share of the deceased or leaving partner and continue the business.

Disadvantages of Partnerships(continued) • Frozen Investment • Easier to invest capital in a business than to get it out. • Other partners may not be willing to ‘buy out’ a partner who wishes to leave. • Other partners may not be willing to accept a new partner from outside who is willing to ‘buy out’ the partner wishing to leave.

Advantages Easy to Start Up More Capital and Credit Available Profit Sharing Personal Interest Increased Business Skills and Knowledge Disadvantages Unlimited Liability Lack of Continuity Management Disagreement Effects Frozen Investment Pros and Cons of Partnerships

Corporations A Corporation is an artificial person created by law with most of the legal rights of a real person, including the rights to: • start and operate a business • buy or sell property • borrow money • sue or be sued • enter into binding contracts A corporation exists only on paper.

Corporate Ownership Corporations are owned by Stockholders– people (sometimes called shareholders) who own a piece of the corporation in the form of Stock – which is a share in the company in the form of a certificate. Stock is sold to individuals or companies that want to invest in the newly formed corporation.

Corporate Ownership(continued) Closed Corporation is one whose stock is owned by relatively few people and is not sold to the general public. If a stockholder wishes to sell his stock, a private sale will be arranged with another stockholder or a very close acquaintance.

Corporate Ownership(continued) Open Corporation is one whose stock is bought and sold on a Stock Exchange and can be purchased by individuals. Stockholders may number in the hundreds of thousands or even millions.

Forming A Corporation Incorporation is the process of forming a corporation.

The Corporate Charter • Corporate Charter is a contract between the corporation and the state, in which the state recognizes the formation of the ‘artificial’ person that is the corporation. • Before the corporate charter can be approved, the Articles of Incorporationmust be submitted to the state officials.

The Corporate Charter(continued) • The following information is required: • Name and address of the business • Names and addresses of the incorporators • Purpose of the corporation • Maximum amount and type of stock to be issued • Rights and privileges of stockholders • Length of time the corporation is to exist

Stockholders’ Rights Common Stock Holders – individuals or firms who may vote on corporate matters but whose claims on profit and assets are second to claims of others. Preferred Stock Holders – individuals or firms who usually do not have voting rights but whose claims on dividends are paid before those of common-stock owners.

Stockholders’ Rights(continued) Dividend is a distribution of earnings to the stockholders of a corporation. Other rights include: receiving information about the company, voting on changes to the corporate charter, and attending the Annual Stockholders’ meeting where they may vote on issues. Proxy is a legal form listing issues to be voted on which allows stockholders to transfer their voting rights to someone else.

Organizational Meeting At this meeting, the incorporators and the original stockholders meet to elect the Board of Directors. This Board is directly responsible to the stockholders for the way they operate the business.

Corporate Structure

The Board of Directors is the top governing body (including the President and Executive Vice Presidents) of a corporation elected by the stockholders. Responsibilities include: setting company goals and developing plans (or strategies) to meet those goals. Responsible for the overall operation of the company and for appointing the Corporate Officers. Board of Directors

Corporate Officers • Corporate Officers include the Chairman of the Board, President, Executive Vice Presidents, Corporate Secretary, Treasurer and any other top executive appointed by the Board of Directors. • They are responsible for the day-to-day operation of the business by carrying out the strategies of the Board, hiring employees, reporting to the Board of Directors monthly, and reporting to the stockholders at the annual meeting.

Advantages of Corporations • Limited Liability • Each owner’s liability is limited to the amount of money he/she has paid for the corporation’s stock. • If the corporation fails, creditors have a claim only on the corporation’s assets, not on the owners’ personal assets.

Advantages of Corporations(continued) • Ease of Raising Capital • Banks are more eager to lend money to large corporations because the assets are greater. • Corporations may also raise capital by selling shares to individuals and other businesses. • Individuals may sell their shares easily if they choose to do so.

Advantages of Corporations(continued) • Ease of Transfer of Ownership • It is very easy to sell stock on the Stock Exchange through a stockbroker. • Can sell anytime and take advantage of the price of the stock going up on any given day. • No restrictions apply to the buying and selling of stock.

Advantages of Corporations(continued) • Perpetual Life • A corporation exists independently of its owners since it is considered an ‘artificial’ person. • The withdrawal or death of a key person does not mean the corporation will end.

Advantages of Corporations(continued) • Specialized Management • Corporations are able to recruit specialized and talented managers because they are able to offer larger salaries and more benefits. • They are able to offer more opportunity for individuals to advance in rank.

Disadvantages of Corporations • Difficulty and Expense of Formation • Fees for forming a corporation might include: charter fees, registration fees, attorney’s fees, costs associated with selling stocks, etc. • A great deal of time and money can be involved in setting up the Corporate Charter.

Disadvantages of Corporations(continued) • Government Regulation • Government has many regulations to be satisfied before stock can be offered for sell. • Business reports must be filed periodically with various levels of government. • Government requires that various reports be made to the stockholders.

Disadvantages of Corporations(continued) • Lack of Secrecy • Because government agencies require corporations to file reports to their agencies and to the stockholders, it is difficult to keep some operations secret.

Advantages Limited Liability Easy to Raise Capital Transfer of Ownership Easy Perpetual Life Specialized Management Disadvantages Difficulty and Expense of Formation Government Regulation Lack of Secrecy Pros and Cons of Corporations

Sole Proprietorships