Types of Business Ownership

Intro to Accounting

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.

The Main Idea

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

The owner of a sole proprietorship:

receives the profits,

incurs any losses, and

is liable for the debts of the business.

Sole Proprietorship

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

Sole Proprietorship

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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 thepersonal rate of the owner.

Sole Proprietorship

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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.

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

Partnerships

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

General versus Limited Partners

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

General versus Limited Partners

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

Partnerships

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Advantages

Partnerships are inexpensive to create.

General partners have complete control.

Partners can share ideas.

Partners can secure investment capital more easily and in greater amounts.

Partnerships

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DisadvantagesIt 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.

In a corporation, the owners of the business are protected from liability for the actions of the company.

The Main Idea

What Is a Corporation?

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

C-Corporation

A C-corporation is the most common corporate form.

C-corporation

an entity that pays taxes on earnings; its shareholders pay taxes as well

C-Corporation

In smaller corporations, the founders generally are the major shareholders.

shareholders

the owners of a corporation

C-Corporation

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Advantagesstatus

limited liability

ability to raise investment money

perpetual existence

employee benefits

tax advantages

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

C-Corporation

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Disadvantagesexpensive to set up

income more heavily taxed

subject to double taxation on income

pays taxes on profits

stockholders taxed on dividends

Nonprofit Corporation

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

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

Before deciding on a legal form, ask yourself key questions about:

your skills

access to capital

expenses

willingness to assume liability

level of control wanted

length of time you expect to own the business

Making the Decision