CHAPTER 16: TYPES OF BUSINESS OWNERSHIP

1. Ms. Baumgartner Inc. presents… CHAPTER 16: TYPES OF BUSINESS OWNERSHIP

2. 16.1 Goals/Objectives • Identify advantages and disadvantages of a sole proprietorship • Explain difference between general partners and limited partners • Identify advantages and disadvantages of a partnership

3. Types of Business Ownership • 3 legal forms: • Sole Proprietorship • Partnership • Corporation

4. Sole Proprietorship • Owned by 1 person • Oldest and most common form of ownership • 75% of businesses in the U.S. are these • Starter of the business is an ENTREPRENEUR • EX: auto repair, house cleaning, plumbing, etc. • Operate out of homes or small offices/stores • Many go out of business • Example of successful SP: Debbie Fields • Mrs. Fields Cookies

5. Advantages of Sole Proprietorship • Freedom to make all decisions (total control) • Receive all profits • Pay tax 1 time per year (as individual, not company) • Easy set-up (little paperwork, low costs) • Simple Licensing (easy to get business license) • Must apply for Business Name • Apply for a Certificate of Doing Business under an assumed Name—DBA • You need an Employer Identification Number • Assigned by IRS for tax purposes • You need this if you plan on hiring 1 or more employees

6. Disadvantages of S.P. • Limited capital (you have to either use your own money or get a loan yourself) • Unlimited liability (responsibility) • Owner is responsible to pay debts out of their personal assets (out of what they own) • EX: if business does bad, you may lose your car • Limited Human Resources (you must be good at all parts of business—pricing, advertising, selling, transporting, etc.) • Limited Life (situation where a business’s life span is determined by owner’s life span or decision to close the business

7. Partnerships • Owned by 2 or more people • Agree to operate business for profit • Sign a partnership agreement • Written document that says how partnership will work • Agreement includes • Names of partners • Name and type of business • Amount that each partner invested in the beginning • Duties, rights and responsibilities of each partner • Procedures for sharing profits and losses • How assets will be split up if partnership is ended • 5% of all businesses in the U.S. are partnerships • EX: Campbell Soup Company

8. General Partners vs Limited Partners • 2 basic types of partnerships • General Partners • Business partner who has authority to make decisions, is active in the business operations and has unlimited liability for all losses or debts of business • EVERY partnerships has at least 1 general partner • All general partners have mutual agency power (right to sign contracts that are legally binding) • Limited Partners • Does not take an active role in decision making or running of the business • Liability is limited to the amount they invested only

9. Advantages of Partnership • Easy set-up (like sole proprietorships) • More skills and knowledge (since people have different areas of strengths, the more the people, the more strengths are being used) • Available Capital (several people can invest money; easier to get a loan with 2 people • Total control by partners (both people to blame for good OR bad that happens) • Profits taxed only once (taxed once a year and not taxed as a business; each partner pays personal income taxes based on what they made)

10. Disadvantages of Partnership • Unlimited liability for each General Partner • Each partner is responsible for all debts and losses of business. Both people must pay debts out of their own pocket if business cannot afford • Disagreement among Partners • If you don’t get along, business could suffer • Shared Profits • Profits must be shared—even if you do more work • Limited Life (can end for several reasons) • If a partner dies or decides to remove from business because of illness; may be a disagreement; may want to add new partners

11. 16.2 Goals/Objectives • Describe 2 types of corporations • Summarize the process of forming a corporation • List advantages/disadvantages of corporation

12. What is a Corporation? • A business organization that operates individually that is separate from its owners and is treated by law as if it were an individual person • Can do everything the other 2 can do • It can sue or be sued • 20% of businesses in the U.S. are corporations • They produce 90% of total business revenue

13. Starting a Corporation • File an application with state for permission to operate (called ARTICLES OF INCORPORATION) • You must write a set of corporate bylaws (rules that a corporation must operate to) • Then state issues a corporate charter • A license to operate a corporation; states the purpose of the business and lists the laws and guidelines

14. Issuing Stock • Ownership divided into small units (shares) • Bought by people called stockholders • Stockholders are legal owners of the company • Each receives a stock certificate—which is proof of ownership • Closely held corporations: private corporation who has a small amount of stockholders; not traded in open markets • Public Corporations: sells stocks openly in market • Going Public: when a corporation decides to sells stocks in the open market

15. Advantages of Corporations • Ability to raise money easily • By selling stocks • Limited Liability • If the corporation has $ problems, the owners only lose the amount of their investment—their stock price • Continued Life • If a stockholder changes, the business does not end (unlike sole proprietorships) • Separate Ownership and Management • Owners do not run the business • Instead, they elect a board of directors who are responsible for overseeing general operations.

16. Disadvantages of Corporations • Complex, Expensive Set-Up • Must complete many forms, file reports and obey many laws, pay legal fees, licensing costs, and stock certificate fees • Slow Decision-Making process • People discuss issues and debate them before making any decisions—takes time! • Taxes • It must pay state and federal taxes on its profits and dividends

17. Limited Liability Company • Also called an LLC • A business that operates and pays taxes like a partnership but has limited liability for owners • Combines some of partnership and corporation • The owner’s liability is only what they invested • This form of business can only be used if the business is small

18. Franchise • An agreement to sell a company’s products or services in a designated geographic area • EX: McDonald’s, Subway, Burger King, Wendy’s, Taco Bell • When you open a franchise, you decide if your business is going to be a S.P, Partnership, Corporation or LLC. • Then purchase a franchise license from the parent corporation (EX: Burger King) • McDonald’s costs about $350,000 to start

19. Chapter 16 Review Activities • Reviewing Key Concepts: 1-6 (pg 544) • Your Financial portfolio (pg 547) • Worksheet to organize partnership (pg 188-89)