Major forms of business ownership.

Sole Proprietorship
Partnership
Corporation
Franchising
Explain how business owners can measure
their business performance.

Insert Chart from page 159

Sole Proprietorship

Owned by a single owner.

Partnership
Co-owned by two or more people.
Co-owners must register with the state and
may need an occupational license.

Corporation

State chartered entity that pays taxes and is

legally distinct from its owners.

Legal Forms of
Business

Sole Proprietorships

Partnerships

Corporations

General Partnership

Regular Corporation

Limited Partnership

Subchapter S
Corporation
(S-Corporation)

Master Limited
Partnership

Business owned (and usually operated) by

one person
Simplest form of business ownership
Bears all responsibility
Most popular form of business organization
more than 70% of all
Generate less than 10 % of all business
revenue.
Most common in:
Retailing
Service
Agriculture

Ease of Startup
Little legal documentation
No co-owners to consult

Least expensive to start

Pride of Ownership
Retention of profits
Flexibility
No Business Income Tax

Unlimited Liability
Limited Life Business ends when owner
leaves the business
Limited Access to Start-up Capital
Limited Access to Credit
Limited Management Expertise
Difficulty in Hiring Employees
Proprietor not considered an employee

Two or more owners

Least numerous form less than 10% of
all businesses
Partnership Agreement
Specifies rights and obligations of partners
If written, called the Articles of Partnership
(Articles of Co-partnership)

General Partnerships

All partners have unlimited liability.

Limited Partnerships
Some partners have personal liability that is
limited to the cash or property they invested
in the firm.
One or more general partners who actively
manage the business, receive a salary, share
in profits and losses, have unlimited liability.
Personal earnings received from the
partnership are subject to personal income
taxes.

Greater Access to Capital

Greater Access to Credit
Retention of Profits
More Management Expertise
No Business Income Tax

Shared Profits
Unlimited Liability for General Partners
Each partner has Agency power
Limited Life

Business ends when any partner withdraws

Management Disagreements
Frozen Investment

General Partner
Unlimited Liability
Assumes Management Role

Limited Partner
Liability limited to Investment
May not take active managerial role

Every partnership must have at least one

general partner

General Partnership

Limited Partnership

All partners are general partners

One or more limited partners

Limited Liability Partnership

Owned & managed like a corporation
Taxed like a partnership
Shares may be sold

Generally larger than other forms (Except

for S-Corporation)
Considered a separate legal entity

Owners called Stockholders or Shareholders

Ownership evidenced by Stock

Certificate
Governed by Board of Directors

Limited Liability
Ease of Ownership Transfer
Unlimited Life
Greater Access to Capital
Specialized Management Expertise

More difficult & costly to form

Requires a Corporate Charter

Subject to greater governmental scrutiny

Diluted earnings
Double taxation

SP
Corp
Income $1,000,000
$1,000,000
Expenses
500,000
500,000
EBT
$500,000
$500,000
(Assume Business Tax Rate = 50%)
Business Tax
0
250,000
Net Profit
$500,000
$250,000
(Assume a 30% Personal Tax Rate)
Personal Tax 150,000
75,000
$ to Owners $350,000
$175,000

Individual or group must adopt corporate

charter and file it with the state
Describes name of the firm, stock issued,
firms operations
Must also establish bylaws
Shareholders have limited liability
Shareholders elect members of board of
directors

http://www.dos.state.ny.us/corp/corpwww.html

Legal Permission to Operate as a

Corporation
Issued by state
May not conduct business as a
corporation without a charter

Company Name & Address

Names & addresses of Incorporators
Purpose of the Corporation
Maximum amount of stock & Classes of
Stock to be issued
Rights & Privileges of stockholders
Length of time the corporation is to exist

Elect members of board of directors who

are responsible for establishing general
policies of the firm

Elect president and other key officers who

run the business

Earn return on investment in two ways

May receive dividends
Stock may increase in value

Common Stock
Votes in corporate matters
One vote per share owned

Preferred Stock
No voting rights
Dividend claims are paid 1st

Dividend

Distribution of earnings to the stockholders of

a corporation

Owners/
Stockholders/
Shareholders
Chief Executive
Officer (CEO)

Board of Directors

President

Senior
Vice President

Vice President
Finance

Vice President
Production

Vice President
Marketing

Vice President
Human Resources

Privately Held
Ownership is restricted to small group of
investors.
Stock is not traded publicly.
Examples: L. L. Bean, Polo, Ralph
Lauren.
Publicly Held
Larger corporations.
Stock is traded publicly.
Act of initially issuing stock: going
public.

Government-Owned Corporation
Public Corporation
Owned & operated by government
Post office, NASA

Quasi-Government Corporation
Quasi-Public Corporation
Privately owned, government controlled
monopoly
Public utilities

Private Corporation

Owned by individuals or other companies

Not-For-Profit Corporation
Organized to provide a social, educational,
religious, or other service
Habitat for Humanity, Red Cross

For-Profit Corporation
Closed Corporation

Stock owned by relatively few people

Stock not sold to general public

Open Corporation
Stock is bought and sold on security
exchanges
Can be purchased by any individual

S-Corporation (Subchapter-S Corporation)

Corporate structure designed for small
business
Taxed as a partnership if there are 75 or fewer
stockholders
No non-resident alien stockholders
Only one class of stock

Limited-Liability Company (LLC)

Combines the benefits of a corporation &
partnership
Not limited to 75 stockholders

State-chartered entity that pays taxes and is distinct from its owners.

Advantages
Advantages
Limited
Limited liability.
liability.
Access
Access to
to funds.
funds.
OwnershipTransfer
OwnershipTransfer

Disadvantages
Disadvantages
May be
be costly
costly to
to
May
establish.
establish.
Financial disclosure.
disclosure.
Financial
Agency problems.
problems.
Agency
Tax disadvantage.
disadvantage.
Tax

Special type of corporation with 75 or fewer owners.

Advantages
Advantages
Lower
Lower taxes.
taxes.
Limited
Limited liability.
liability.
Ownership
Ownership Transfer
Transfer

Disadvantages
Disadvantages
Regulations may
may
Regulations
vary from
from state
state to
to
vary
state which
which impact
impact
state
taxation and
and liability.
liability.
taxation

Hostile takeover
Types of mergers
Horizontal: Similar products / services
Vertical: Different but related firms
Conglomerate: Completely different
industries

Franchise
License to operate an individually owned
business as though it were part of a chain of
outlets or stores
The business itself

Franchising

Actual granting of a franchise

Business owner (franchisor) allows

another (the franchisee) to use its
trademark, trade name, or copyright,
under specified conditions.
Each franchise operates as an
independent business.
Typically owned by a sole proprietor.

Franchisor
Supplies
Supplies
Supplies
Supplies

a known & advertised business name

management skills
training & materials
method of doing business

Franchisee:
Supplies labor & capital
Operates the franchised business
Agrees to abide by the franchise agreement

Franchisor
Fast, Selective Distribution
Motivated Franchisee

Franchisee
Opportunity to start a business
Business Experience of others
Nationally recognized name
National promotional campaigns

Mainly from Franchisees Viewpoint:

Franchisors contract can dictate every aspect
of the business
Pay for security
Long hours
Competition from same company