LECTURE 4

Types of Business Ownership

 SOLE PROPRIETORSHIP

• The easiest and most popular form of business

ownership is the sole proprietorship.

sole proprietorship
a business that is owned and
operated by one person
 SOLE PROPRIETORSHIP

• The owner of a sole proprietorship:

receives the profits,

incurs any losses, and
is liable for the debts of the business.
 SOLE PROPRIETORSHIP

• In a sole proprietorship the owner must decide how

much liability protection he or she needs.

liability protection
insurance against the debts
and actions of a business
 ADVANTAGES

• Sole proprietorship is easy and inexpensive to create.

The owner has complete authority over all business activities.

It is the least regulated form of business ownership.

The business pays no taxes; income is taxed at the personal rate

of the owner.
 DISADVANTAGES

The owner has unlimited liability.

Raising capital is more difficult.

The business is totally reliant on the skills and abilities of the

owner.

The death of owner dissolves the business unless

there is a will to the contrary.
 DISADVANTAGES

• The biggest disadvantage of a sole proprietorship is financial.

• In this form of business ownership, the owner has unlimited
liability.

unlimited liability
full responsibility for all debts
and actions of a business
 PARTNERSHIP

• A partnership draws on the skills, knowledge, and financial

resources of more than one person.

partnership
an unincorporated business
with two or more owners who
share the decisions, assets,
liabilities, and profits
 PARTNERSHIP

General vs Limited

The law requires that all general partner

partnerships have at least a participant in a partnership
one general partner. who has unlimited personal
A partnership may be set liability and takes full
up so that all of the responsibility for managing the
partners are general business
partners.
 PARTNERSHIP

• Some partnerships include a limited partner.

limited partner
a partner in a business whose
liability is limited to his or her
investment; a limited partner
cannot be actively involved in
managing the business
 PARTNERSHIP

Partnerships are inexpensive to create.

General partners have complete control.

Partners can share ideas.

Partners can share ideas.

 PARTNERSHIP

It is difficult to dissolve one partner’s interest without

dissolving the partnership.

There may be personality conflicts.

Partners can be held liable for each others’ actions.

 CORPORATIONS

In a corporation, the owners of the business are

protected from liability for the actions of the
company.
There are three types of corporations:
•C-Corporation
•Subchapter S Corporation
•Nonprofit Corporation corporation
a business that is registered by
a state and operates apart
from its owners; it issues shares
of stock and lives on after the
owners have sold their interest
or passed away
 C- CORPORATIONS

• A C-corporation is the most common corporate

form. C-corporation
an entity that pays taxes on
earnings; its shareholders pay
taxes as well

• C-Corporations: In smaller corporations, the

founders generally are the major shareholders.

shareholders
the owners of a corporation
C-CORPORATIONS

ADVANTAGES
status

limited liability

ability to raise investment money

perpetual existence

employee benefits

tax advantages
 C-CORPORATIONS

ADVANTAGES

Corporate shareholders have limited liability, but some banks

require officers to personally guarantee the debts of the
company.

limited liability
partial responsibility of a
corporate shareholder; he or
she is responsible only up to
the amount of his or her
individual investment
C-CORPORATIONS

DISADVANTAGES
expensive to set up

income more heavily taxed

subject to double taxation on income

pays taxes on profits

stockholders taxed on dividends

 S- CORPORATIONS

• Avoid double taxation with a

S-corporation
A corporation taxed like a
partnership
 S- CORPORATIONS

• Advantages
• Profits are only taxed once at the shareholder’s personal tax
rate.
• The S-Corporation in not a taxpaying entity
• Disadvantages
• Can have no more than 75 stockholders who must be U.S.
citizens
• Can have only one class of stock
• Often restaurants are S-Corporations. If the business
produces enough cash, this form works
• If the business shoes a large taxable profit but has not
generated enough cash to cover the taxes, the owners
must pay the taxes out of their personal earnings
 NON-PROFIT CORPORATIONS

• A nonprofit corporation must fall within one of four categories:

• religion
• charity nonprofit corporation
• public benefit a legal entity that makes
• mutual benefit money for reasons other than
the owner’s profit; it can make
a profit, but the profit must
remain within the company
 LIMITED LIABILITY COMPANY

• There are many benefits to forming a limited liability company

(LLC).

limited liability company (LLC)

a company whose owners
and managers have limited
liability and some tax benefits,
but which avoids some
restrictions associated with
Subchapter S corporations
 LIMITED LIABILITY COMPANY

• LLC is simpler to set up than a corporation

• LLC allows for the flexibility of a partnership structure
• LLC protects its owners with the limited liability of a
corporation, its members are not liable for the
company’s debts.
• LLX is not subject to double taxation. Provides the
pass-through tax advantages of partnership. Profits
are taxed personally, and shareholders are taxed
only once.
 CORPORATIONS

• Before deciding on a legal form, ask yourself key

questions about:
Making the Decision

your skills willingness to assume liability

access to capital level of control wanted
expenses length of time you expect to
own the business
THANK YOU!
NBMANASAN.SVCC2022