CHAPTER 2

Forms of Business Ownership

Source: Introduction to Business by Skinner & Ivancevich

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 Quote

‘The greatest disability of life is bad ATTITUDE.’

-Scott Hamilton
 LEARNING OUTCOMES
Upon completion of the session you will be able to:

 Describe Sole Proprietorship;

 Elucidate Partnership;
 Discuss about Corporation as a form of ownership.

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What type of Business is right for you?

Before owing a business one should consider:

1. Capital requirements
2. Risk
3. Control
4. Managerial abilities
5. Time requirements
6. Tax liability

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 Forms of ownership

1. 2. 3.
Sole Partnership Corporation
Proprietorship
 Sole Proprietorship
Definition
A business that is owned and usually managed
by one person/individual. The person may
receive help from others in operating the
business, but is the only boss. Examples:
￭ Small Independent Retail Shops
￭ Hardware store
￭ Bakery
￭ Restaurant
￭ Tea-stall
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 Sole Proprietorship (cont’d)
Definition
The Sole Proprietor often aided by one or two
employees, operates a shop that frequently
caters to a group of regular customers.

The Capital (money) needed to start and

operate the business is normally provided by the
owner through personal wealth or borrowed
money.

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 FEATURES OF SOLE
Capital comes from personal
PROPRIETORSHIP
wealth or borrowed money 01

Owner Controls Proprietor is an

the operation
03 02 active manager

Ta k e s t h e Supervise the
decisions 05 04 employees

Good managerial
06 ability required
 Sole Proprietorship (cont’d)
Advantages
Easy of Starting and Ending the Business
All one has to do to start a sole proprietorship is buy or lease the
needed equipments and put up some announcements saying s/he is
in business. It is just as easy to get out of business; s/he simply stops.

Being Your Own Boss

Working for others simply does not have the same excitement as
working for own-self—at least, that’s the way sole proprietorship feel.

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 Sole Proprietorship (cont’d)
Advantages
Control
The owner has the freedom to make the final decisions on any sector.
Secrecy
As the owner is one there is no change or limited changes to be
shared of the business secret information.
Pride of Ownership
People who own and manage their own businesses are rightfully
proud of their work. They deserve all the credit for taking then risks
and providing needed goods or services.

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 Sole Proprietorship (cont’d)
Advantages
Sole Participation in Profits and Losses
All profits earned or losses incurred by operating the business are to
be shared by the Individual.

Retention of Company Profit

Other than the joy of being boss, there is nothing like the pleasure of
knowing that one can earn as much as possible and not have to share
that money with anyone.

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 Sole Proprietorship (cont’d)
Advantages
Tax Breaks
A major advantage of the proprietorship is that the businesses pays
no income tax. A Corporation pays taxes on profits; its owners, the
shareholders pay taxes on dividends. Whereas, a sole proprietor pays
no tax on business profits, instead the person is taxed as an individual
on all his/her income earned from the business.

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 Sole Proprietorship (cont’d)
Disadvantages
Unlimited Liabilities—The Risk of Personal Losses
The responsibility of business owner for all the debts of the business.
Obligations of investors to use personal assets, when necessary to pay
off the debts to business creditors.

Limited Financial Resources

Funds available to the business are limited to the funds that the one
(sole) owner can gather. Therefore funds are limited to personal
wealth

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 Sole Proprietorship (cont’d)
Disadvantages
Limitations in managerial ability
All businesses need management; that is someone must keep
inventory records, accounting records, tax records and so forth. Many
people who are skilled at selling things or providing a service are not
skilled in keeping records. Sole proprietors may have no one to help.

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 Sole Proprietorship (cont’d)
Disadvantages
Few Fringe Benefits
As the owner is the boss, s/he loses the fringe benefits that often
come from working for others. (Health insurance, disabilities
insurance, sick leave and vacation pay)
Limited Growth
Expansion is often show since a sole proprietorship relies on its owner
for most of its creativity, business know-how and funding.
Limited Life Span
Death, Illness, bankruptcy or retirement of the owner terminates the
proprietorship.

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Partnership

A business owned by two or more people.

An Association of two or more persons to carry on as co-owners

of a business for profit.

A partnership can be based on a written contract or

a voluntary and legal oral agreement.
 Partnership (cont’d)
Types
1. General Partnership
A Partnership in which at least one partner has unlimited liability;
a general partner has authority to act and make binding decision
as an owner. Partners generally share profits and losses according
to a plan specified by agreement between them.
The general partner may be liable for all the debts of the
business.

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 Partnership (cont’d)
Types
2. Limited Partnership
A Partnership with at least one general partner and one or more
limited partners who are liable for losses only up to the amount
of their investment.
The general partners arrange and run the business, while the
limited partners are investors only. Investors receive special tax
advantages and protection from liability.
Limited partners legally may have no say in managing the
business. If there is any violation, the limited partnership status is
dissolved.
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 Partnership (cont’d)
Types
3. Joint Partnership
Sometimes a number of individuals and businesses join together in order
to accomplish a specific purpose or objectives or to complete a single
transaction.
A joint venture (often abbreviated JV) is an entity formed between two
or more parties to undertake economic activity together. The parties
agree to create a new entity by both contributing equity (capital), and
they then share in the revenues, expenses, and control of the enterprise.
The venture can be for one specific project only, or a continuing business
relationship such as the Fuji Xerox joint venture.

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 Partnership (cont’d)
Types
Master Limited Partnerships (MLPs)
A new form of partnership, the master limited partnership (MLP), looks
much like a corporation in that it acts like a corporation and is traded on
the stock exchanges like a corporation, but it is taxed like a partnership
and thus avoids the corporate income tax. Two well-known MLPs are
Burger King and Perkins Family Restaurants.

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 Partnership Contract

Sound business practice dictates that a partnership

agreement be written and signed, although it is not a legal
requirement. Such a contractual agreement is called Articles
of Partnership.
Written articles of partnership can prevent or lessen
misunderstandings at a later date. Oral partnership
agreements, though quite legal, tend to be hard to recreate
and are open to misunderstandings. Written articles of
partnership provide a proof of an agreement.

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 Partnership Contract
Name of business partnership
 Type of business
 Location of the business
 Expected life of the partnership
 Names of the partners and amount of each one's investment
 Procedure for distributing profits and covering losses
 Amounts that partners will withdraw for services
 Procedure for withdrawal of funds
 Duties of each partner
 Procedures for dissolving the partnership
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 Partnership
Advantages
More Capital
In the sole proprietorship, the amount of capital is limited to personal
wealth and the credit of the owner. But in a partnership business,
when two or more people pool their money and credit, it is easier to
pay the rent, utilities, and other bills incurred by a business.

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 Partnership
Advantages
Combined Managerial Skills
In a partnership, people with different talents and skills may join
together to form a business. It is simply much easier to manage the
day-to-day activities of a business with carefully chosen partners.
Partners give each other free time from the business and provide
different skills and perspectives.
Ease of Starting
As it involves a private contract contractual agreement, a partnership
is fairly easy to start. It is nearly as free from government regulation
as a sole proprietorship.

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 Partnership
Advantages
Clear Legal Status
The legal outline for partnerships have been established through the court.
The questions of rights, responsibilities, liabilities and partner duties have
been covered. Therefore the legal status of a partnership is clearly visible.
Lawyers can provide legal advice about the partnership issues.

Tax Advantages
The partnership has some potential tax advantage over a corporation. In
partnership has some proprietorship, the owners pay taxes on their
business earnings. But the partnership as a business does not pay income
tax.
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 Partnership
Disadvantages
Unlimited Liability
Each general partner is liable for the debts of the firm, no matter who was
responsible for causing those debts. You are liable for your partners’
mistakes as well as your own. Like sole proprietors, general partners can
lose their homes, cars, and everything else they own if the business loses a
lawsuit or goes bankrupt.

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 Partnership
Disadvantages
Disagreements Among Partners
Disagreements over money are just one example of potential conflict in a
partnership. Who has final authority over employees? Who hires and fires
employees? Who works what hours? What if one partner wants to buy
expensive equipment for the firm and the other partner disagrees?
Potential conflicts are many. Because of such problems, all terms of
partnership should be spelled out in writing to protect all parties and to
minimize misunderstandings.

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 Partnership
Disadvantages
Investment withdrawal difficulty
A person who invests money in a partnership may have a hard time
withdrawing the investment. It is much easier to invest in a partnership
than to withdraw. Sure, you can end a partnership just by quitting.
However, questions about who gets what and what happens next are often
very difficult to solve when the partnership ends.

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 Partnership
Disadvantages
Limited Capital Availability
The partnership may have an advantage over the sole proprietorship in the
availability of capital, but it does not compare to a corporation in ability to
raise capital. Partners sometimes have limited capabilities and cannot
compete in businesses requiring large amount of capital. The amount of
capital a partnership can raise depends on the personal wealth of the
partners and their credit ratings.
Instability
If a partner dies or withdraws from the business, the partnership is
dissolved.

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 Corporation
Some industries such as automobile manufacturing, computer
manufacturing, oil refining and natural gas production require millions
of dollars to operate a business.

Typically such vast amount of money are put together by attracting

numerous investors.

The unincorporated forms of business – sole proprietorship and the

partnership do not attract investors who do not want to make decisions
or to be actually involved in managing the firm.
 Corporation

A legal entity with authority to act and have liability separate from
its owners.

In the eyes of law, the corporation is an artificial being, invisible

and intangible. It has the legal rights of an individual; it can own
property, purchase goods and services and sue other persons or
corporation.
 Corporation
Basically a vast amount of money put together to attract investors

The corporation owners spread over a wide geographical area can

hire professional managers to operate the business

It has legal right, purchase property, goods and services.

 Corporation

Run by
Owned by Professional
A Corporation
Managers
Shareholders

Owns
Property
Owes
Sells to
Creditors

Recruits
Customers People
Figure: The Range of a
Corporation’s Relationship
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 Corporation Types

Private Domestic

Public
1 6 Foreign

Closed
2 7 Alien

Open
3 8 Non profit

4 9 Single-
Municipal
Individual
5 10
 Corporation
Advantages
1. Limited Liability
2. Skilled Management Team
3. Transfer of ownership
4. Greater capital base
5. Stability
6. Legal entity status

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 Corporation
Disadvantages
1. Difficulty of starting
2. Lack of control
3. Multiple taxation
4. Governmental involvement
5. Lack of secrecy
6. Lack of personal interest
7. Credit limitations

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 Mergers

Combining two or more business

enterprises into a single entity.

 Joining together of two corporations.

 Types of Mergers
 Horizontal Merger
 Vertical Merger
 Conglomerate Merger
 Mergers

 Horizontal Merger
A merger involving competitive firms in the same
market.

Example: A Garment Manufacturer merging with

another Garment Manufacturer.
 Mergers
 Vertical Merger
A merger in which a firm joins with its suppliers.

Example: A Cement Manufacturer (Lafarge Surma

Cement) merging with the stone crushers of
Meghalaya, India.
 Mergers
 Conglomerate Merger
A merger involving firms selling goods in unrelated
markets.

Example: Automobile Manufacturer merging with a

Construction Firm.
 Cooperative (co-op)
Definition
An Organization in which people collectively own and
operate a business in order to compete with bigger
competitors.

 Take approval from Social Welfare Department.

 Group of people doing business for their own benefit or welfare.
 Only the members get the benefits.
 Profits are distributed among the members.

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Cooperatives

 Milk Vita
 Dairy Coperatives
 Kingshuk Co-operative Society Ltd.
 Dhaka Club
 Gulshan Club
ANY QUESTION
?

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THANK YOU

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