forms of business ownership chapter 7 · 2013-02-22 · chapter 7 1) limited partnership – (a...

Forms of Business OwnershipChapter 7

Studies indicate that 25-30% of all new businesses fail within their first year and over 50

percent fail within three years.


Let's take a look at the 3 different forms of business ownership:



1. Sole Proprietorship – owned by one person



1. Sole Proprietorship – owned by one person2. Partnership – owned by two or more people.



1. Sole Proprietorship – owned by one person2. Partnership – owned by two or more people.3. Corporation – considered by the government to

be an entity separate from its owners or stockholders.


A. Sole Proprietorship


A. Sole Proprietorship – business with one owner.



Advantages:



Advantages:1. The most popular business model in the US today.



Advantages:1. The most popular business model in the US today.2. Gives owners the most freedom



Advantages:1. The most popular business model in the US today.2. Gives owners the most freedom3. Can keep his business information private.

(trade secrets or strategies from competition)





Disadvantages:





Disadvantages:1. Unlimited financial liability (greatest risk)





Disadvantages:1. Unlimited financial liability (greatest risk)2. Limited availability of Money – must tap into personal finances or seek a loan

from a creditor. (now owe a debt to)


B. Partnership - (also known as a general partnership) a business with two or more persons as the owners.



Note: Most states do not require that partners have a written contract but many attorneys recommend it.



Note: Most states do not require that partners have a written contract but many attorneys recommend it. The agreement answers the following questions:




1. Who are the partner?




1. Who are the partner?2. What is each partner responsible to do?3. How are profits to be divided?




1. Who are the partner?2. What is each partner responsible to do?3. How are profits to be divided?4. How may a partner withdraw from the

partnership?5. How can the partnership be dissolved?



Advantages:1. Greater retention of employees (over sole

proprietorship.) There are opportunities to promote or become partners.




proprietorship.) There are opportunities to promote or become partners. Many law and accounting firms use this model.




proprietorship.) There are opportunities to promote or become partners. Many law and accounting firms use this model.

2. Greater Financial Resources (more people, more money) greatest advantage




proprietorship.) There are opportunities to promote or become partners. Many law and

accounting firms use this model. 2. Greater Financial Resources (more

people, more money) greatest advantageDisadvantages:

1. All partners are fully responsible for the financial decisions of the other.

2. Conflict between partners (leads to short lifespan) Sinful nature rears its ugly head again.


1) Limited Partnership – (a type of partnership) At least one partner has an unlimited personal financial liability.


1) Limited Partnership – (a type of partnership) At least one partner has an unlimited personal financial liability. And one limited partner invests money with the right to inspect the books and share in the profits, but he has no management responsibilities and makes no business decisions.



Surety = becoming security for another's debt.



Surety = becoming security for another's debt. In a partnership each partner is liable for the financial decisions and mistakes of the other. Cosigner = Pledging to undertake another's debt if they default.



Surety = becoming security for another's debt. In a partnership each partner is liable for the financial decisions and mistakes of the other. Cosigner = Pledging to undertake another's debt if they default.Scripture warns against this. (Proverbs)


C. Corporation = business owners legally declaring that the business is its own organization, independent of and separate from the owners or stockholders.


C. Corporation = business owners legally declaring that the business is its own organization, independent of and separate from the owners or stockholders. (called being incorporated)



Two Types of Corporations1. Private Corporations - owned by private

citizens



Two Types of Corporations1. Private Corporations - owned by private

citizens2. Public Corporations - owned by the general

public but is managed by the government.


1. In the eyes of the law, a corporation possesses two important qualities:



a. liability



a. liabilityb. taxability




2. Chief Advantage of incorporating a company is Limited Personal Liability.




2. Chief Advantage of incorporating a company is Limited Personal Liability.

3. Ownership – a person becomes an owner of part of a corporation by buying shares of its stock.


Determining Percentage of Ownership

Number of shares owned divided by the total number of outstanding shares determines the degree of

ownership.




ownership.

Example: If you own 2,500 shares of a company that has 10,000 shares outstanding, how much of the

company do you own?




ownership.


company do you own?

2,500 shares divided by 10,000 shares =




ownership.


company do you own?

2,500 shares divided by 10,000 shares = one-fourth


Advantages1. Limited Personal Financial Liability of

Stockholders.



Stockholders. The limit is on how much they invest. Creditors cannot touch their personal property.

2. Experienced Management 1. Run by a board of directors




2. Experienced Management a. Run by a board of directors appointed by the

stockholders.





stockholders.b.The board appoints a chief executive officer

(CEO)





stockholders.b. The board appoints a chief executive officer

(CEO), he usually serves as president of the corporation.







3. Ease in Raising Financial Capital

Forms of Business OwnershipChapter 7Advantages

1. Limited Personal Financial Liability of Stockholders. The limit is on how much they invest. Creditors cannot touch their personal property.




3. Ease in Raising Financial Capitala. Can sell more stock to raise money


Advantages1. Limited Personal Financial Liability of Stockholders. The limit is on how much they invest. Creditors cannot touch their personal property.2. Experienced Management

a. Run by a board of directors appointed by the stockholders.b. The board appoints a chief executive officer


3. Ease in Raising Financial Capitala. Can sell more stock to raise moneyb. Get better deals on loans because they are

more likely to pay them back.


Disadvantages1. Higher Taxes (higher scale than personal)


Disadvantages1. Higher Taxes (higher scale than personal)2. Double Taxes on Earnings


Disadvantages1. Higher Taxes (higher scale than personal)2. Double Taxes on Earnings – After firms pay out

profits to the stockholders, they must pay personal income taxes on the dividends.



profits to the stockholders, they must pay personal income taxes on the dividends. (Like having payroll taxes removed from your check and then when you get your pay check you pay additional income taxes on what tis left over.



profits to the stockholders, they must pay personal income taxes on the dividends. (Like having payroll taxes removed from your check and then when you get your pay check you pay additional income taxes on what tis left over.

Subchapter S Corporation (or S Corporation) is an exception to this rule. If a business has fewer than 35 shareholders and abides by certain restrictions they can incorporate as an S Corporation and only pay taxes at the personal income tax level.


Disadvantages3. Greater Government Regulation4. Lack of Secrecy – required reporting


Disadvantages3. Greater Government Regulation4. Lack of Secrecy – required reporting 5. Impersonality – Many large corporations suffer

because employees become depersonalized by the sheer size of the firm.


Disadvantages3. Greater Government Regulation4. Lack of Secrecy – required reporting 5. Impersonality – Many large corporations suffer

because employees become depersonalized by the sheer size of the firm.

6. Rigidity – Corporations generally move at a muchslower pace in reaction to market changes than owners of proprietorships and partnerships.


LLC =


LLC = Limited Liability Company


LLC = Limited Liability Company 1. Governed by an operating agreement


LLC = Limited Liability Company 1. Governed by an operating agreement2. Foreign Partners are allowed


LLC = Limited Liability Company 1. Governed by an operating agreement2. Foreign Partners are allowed3. No regular shareholder meetings are required


LLC = Limited Liability Company 1. Governed by an operating agreement2. Foreign Partners are allowed3. No regular shareholder meetings are required4. Less burdensome financial reporting requirements



An LLC is a Company and not a Corporation



An LLC is a Company and not a Corporation – It can have only one individual owner and operator, unlike a corporation that requires 3 or more.


James Cash Penney


James Cash Penney = JC Penney

Great business man that rose from poverty more than once to build his business.




The statement that best summarizes his business philosophy:





“Do unto others as you would have them do unto you.”





“Do unto others as you would have them do unto you.”(the golden rule)

forms of business ownership chapter 7 · 2013-02-22 · chapter 7 1) limited partnership – (a...

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