Lecture 2

Forms of Business
Objectives
Identify general characteristics, advantages, and
disadvantages of each of these organizational
types for small businesses
What do we Know!
 Why we need to know about types of
businesses ?
Important Factors
Taxation – Taxes on profits are paid through
personal tax returns except forcorporations
Liability and Risk – Responsibility for harm to
another person or property, or contractdisputes
Management – Decision-makingauthority
Continuity and Transferability – How abusiness
persists and how it is sold
Expense and Formality – Costs,legal
responsibility, degree ofcomplexity
Discussion Point #1: Organizational Factors

 Which organizational factors have themost

impact on yourbusiness?
Sole proprietorship
 A business owned and operated by one
person
 Business is one and the same asthe owner
 When the owner is responsible for the
company’s debts
Advantages of Sole Proprietorship
• 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 Proprietorship

Advantages of Sole Proprietorships

Proprietors are
Easy to start
in-charge

Proprietors keep Taxes are lower

all the profits than a corporation’s
 Advantages of Sole Proprietorship
• 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
 Disadvantages of Sole Proprietorship
• 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
• Needs include paying employees, purchasing equipment &
inventory, & running the business
• Expansions can be delayed or halted causing you to lose
business to your competition
Disadvantages of Sole Proprietorship

disadvantages of Sole Proprietorships

Unlimited liability Investment generation

Limited KSA
(knowledge, Skills, Uncertain life
Abilities)

Illness, death,
bankruptcy
Discussion Point #2: Your selection of Business

 Advantages vs Disadvantages of your

choice?
Partnership
 Business association of two or more people
A form of business ownership in which
two or more people share the assets,
liabilities, and profits.
 To start a partnership, you need a
partnership agreement.
Advantages of Partnership

Advantages of Partnerships

Easy to Easier to Easier to

start obtain capital obtain credit

Not dependent
Only taxed
on a sole Skills, Abilities
once
person
 Advantages of Partnership
• 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 Partnership
• 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 Partnership
• 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 Partnership
• 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
Disadvantages of Partnership
Disadvantages of Partnerships
Business risk is
shared Uncertain/Transferability

Unlimited legal
and financial Disagreements/Conflicts
liability is shared

Difficult to end
If one partner businesses
makes a mistake,
all partners are
responsible Taxation
Discussion Point #3: Your selection of Business

 Advantages vs Disadvantages of your

choice of partnership?
Dissolution of Partnership
Dissolution of Partnership
 List the methods the partners may use
to dissolve a partnership.
 Discuss the reasons why a court may
order dissolution of a partnership.
 Identify those events that result in
dissolution of a partnership by operation
of the law.
 Explain who should be notified of a
partnership dissolution.
Dissolution of Partnership
If no date for dissolution is fixed, the
partners dissolve the agreement at
any time.
If one partner voluntarily withdraws,
the business can continue, but the
legal partnership itself is dissolved
A partner be expelled by any activity
the partners agree upon in the
partnership agreement.
Dissolution of Partnership
 Insanity of a partner
 Insanity must be by court decree.
 Incapacity
 If partner develops an incapacity that makes it
impossible for the partner to perform in the
partnership.
 Misconduct
 If one partner acts to the detriment of the
company.
 Futility
 All partnerships must operate for a profit. If this
clearly is not being met, the partnership must be
dissolved.
Distribution of Assets

Partners who have advanced money

are entitled to reimbursement

Each partner is entitled to the

return of contributed capital

Remaining assets are distributed equally

Discussion Point #4: Your selection of Business

 List down following business essentials

 Resources required (Human, financial, physical resources)
 Operational activities (Manufacturing or Services)
 Raw material supplies and suppliers
 Customers
 Competitors
 Suitable form of business