Chapter 3 - Presentation 2


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Chapter 3 - Presentation 2

  1. 1.  All businesses have liability, but the type of ownership selected to run that business will determine how much liability to the owner of the business.
  2. 2.  Sole Proprietorship – a legally defined type of business ownership in which a single individual:  Owns the business  Collects all profits from the business  Has unlimited liability for its debt  Most small businesses operate as a sole proprietorship and the majority of all businesses in the United States are sole proprietorships.
  3. 3.  There are various advantages of sole proprietorships:  Simplest and least expensive to start  Business income and expenses are reported on the owner’s personal income tax statement  Sole decision maker of the business
  4. 4.  There are also many disadvantages of sole proprietorships:  Has unlimited liability for the business  Difficult to borrow money or attract investors  Difficult to expand the business with limited capital
  5. 5.  Most communities require a business license, at least in order for you to set up a sole proprietorship.  Naming the Business  A person may use their own name to describe the sole proprietorship  Any name other than the owner’s name is referred to as a trade name or DBA (Doing Business As)
  6. 6.  Tax ID Number  The federal government and some states require a business to have a Tax ID Number for tax purposes.  Business owners can use their Social Security Number if there is no other employees  If employees are hired, an entrepreneur must obtain a Employer Identification Number (EIN)
  7. 7.  Partnership  A legally defined type of business organization in which at least two individuals share: ▪ Management ▪ Profit ▪ liability
  8. 8.  General Partnerships  All partners have unlimited liability and are responsible for business debt  All partners assume personal financial risk  Limited Partnerships  Structured so that at least one partner (general partner) has limited liability for the business debts  Other partners have no say in company’s day to day operations
  9. 9.  Advantages of Partnerships  Generally the same as setting up a sole proprietorship in terms of taxes and paperwork  The general partner can rely on the entrepreneurial skills and financial backing of at least two individuals instead of just one  Can generate more funds from investors  Offer an incentive to employees that they can possibly be one day partners of the business
  10. 10.  Disadvantages of Partnerships  Profit is split between the partners  Each partner is responsible for the business related actions of all the others  Partners could have trouble agreeing on direction of the business
  11. 11.  Partnership Agreement  A legal document that clearly defines how the work, responsibilities, rewards, and liabilities of a partnership will be shared by the partners  It also specifies: ▪ What happens if a business owner dies ▪ How the business could dissolve ▪ How the profits and responsibilities will be split up