business Essentials

1. C H A P T E R 3
TYPES OF BUSINESS
OWNERSHIP

2. • Entrepreneurs need to understand the advantages and
disadvantages of various types of businesses so that
they can choose the one that best suits their needs.

3. SOLE PROPRIETORSHIP
• The easiest and most popular form of business
ownership is the sole proprietorship.
sole proprietorship
a business that is owned and
operated by one person

4. SOLE PROPRIETORSHIP
• The owner of a sole proprietorship:
receives the profits,
incurs any losses, and
is liable for the debts of the business.

5. SOLE PROPRIETORSHIP
• In a sole proprietorship the owner must decide how
much liability protection he or she needs.
liability protection
insurance against the debts and
actions of a business

6. ADVANTAGES
• Sole proprietorship is easy and inexpensive to create.
The owner has complete authority over all business activities.
It is the least regulated form of business ownership.
The business pays no taxes; income is taxed at the personal rate of
the owner.

7. DISADVANTAGES
The owner has unlimited liability.
Raising capital is more difficult.
The business is totally reliant on the skills and abilities of the
owner.
The death of owner dissolves the business unless
there is a will to the contrary.

8. DISADVANTAGES
• The biggest disadvantage of a sole proprietorship is financial.
• In this form of business ownership, the owner has unlimited
liability.
unlimited liability
full responsibility for all debts and
actions of a business

9. PARTNERSHIP
• A partnership draws on the skills, knowledge, and financial
resources of more than one person.
partnership
an unincorporated business with
two or more owners who share
the decisions, assets, liabilities,
and profits

10. PARTNERSHIP
General vs Limited
The law requires that all
partnerships have at least
one general partner.
A partnership may be set up
so that all of the partners
are general partners.
general partner
a participant in a partnership who
has unlimited personal liability
and takes full responsibility for
managing the business

11. PARTNERSHIP
• Some partnerships include a limited partner.
limited partner
a partner in a business whose
liability is limited to his or her
investment; a limited partner
cannot be actively involved in
managing the business

12. PARTNERSHIP
Partnerships are inexpensive to create.
General partners have complete control.
Partners can share ideas.
Partners can share ideas.

13. PARTNERSHIP
It is difficult to dissolve one partner’s interest without
dissolving the partnership.
There may be personality conflicts.
Partners can be held liable for each others’ actions.

14. CORPORATIONS
In a corporation, the owners of the business are protected
from liability for the actions of the company.
There are three types of corporations:
•C-Corporation
•Subchapter S Corporation
•Nonprofit Corporation corporation
a business that is registered by a
state and operates apart from its
owners; it issues shares of stock
and lives on after the owners
have sold their interest or passed
away

15. C- CORPORATIONS
• A C-corporation is the most common corporate form.
• C-Corporations: In smaller corporations, the founders
generally are the major shareholders.
C-corporation
an entity that pays taxes on
earnings; its shareholders pay
taxes as well
shareholders
the owners of a corporation

16. C-CORPORATIONS
ADVANTAGES
status
limited liability
ability to raise investment money
perpetual existence
employee benefits
tax advantages

17. C-CORPORATIONS
ADVANTAGES
Corporate shareholders have limited liability, but some banks require
officers to personally guarantee the debts of the company.
limited liability
partial responsibility of a
corporate shareholder; he or she
is responsible only up to the
amount of his or her individual
investment

18. C-CORPORATIONS
DISADVANTAGES
expensive to set up
income more heavily taxed
subject to double taxation on income
pays taxes on profits
stockholders taxed on dividends

19. S- CORPORATIONS
• Avoid double taxation with a
S-corporation
A corporation taxed like a
partnership

20. S- CORPORATIONS
• Advantages
• Profits are only taxed once at the shareholder’s personal tax rate.
• The S-Corporation in not a taxpaying entity
• Disadvantages
• Can have no more than 75 stockholders who must be U.S.
citizens
• Can have only one class of stock
• Often restaurants are S-Corporations. If the business produces
enough cash, this form works
• If the business shoes a large taxable profit but has not generated
enough cash to cover the taxes, the owners must pay the taxes
out of their personal earnings

21. NON-PROFIT CORPORATIONS
• A nonprofit corporation must fall within one of four categories:
• religion
• charity
• public benefit
• mutual benefit nonprofit corporation
a legal entity that makes money
for reasons other than the
owner’s profit; it can make a
profit, but the profit must remain
within the company

22. LIMITED LIABILITY COMPANY
• There are many benefits to forming a limited liability company
(LLC).
limited liability company (LLC)
a company whose owners and
managers have limited liability
and some tax benefits, but which
avoids some restrictions
associated with Subchapter S
corporations

23. LIMITED LIABILITY COMPANY
• LLC is simpler to set up than a corporation
• LLC allows for the flexibility of a partnership structure
• LLC protects its owners with the limited liability of a
corporation, its members are not liable for the company’s
debts.
• LLX is not subject to double taxation. Provides the pass-
through tax advantages of partnership. Profits are taxed
personally, and shareholders are taxed only once.

24. CORPORATIONS
• Before deciding on a legal form, ask yourself key
questions about:
Making the Decision
willingness to assume liability
level of control wanted
length of time you expect to own
the business
your skills
access to capital
expenses