Forms of Business

Ownership
 Sole Proprietorship
 A business that is
owned (and usually
operated) by one
person

 The simplest form

of business
ownership and the
easiest to start

 Many large
businesses began
as small, struggling
sole proprietorships

 The most popular

form of business
ownership
 Sole Proprietorship
Advantages
_________ Disadvantages
• Ease
___ __of _________
formation • Unlimited
Unlimited
________liability
liability
_________
• Greater
______ control
_______ and___ • Business
• Potential
________ owner isin
difficulty
__________
personally responsible for
___________
flexibility __ _________
borrowing money
the business _____
debts
• No_ ________
separate tax ___return
______ • Potential difficulty in
• Profit
Business
_______ is taxed
losses
______
ascan
___ borrowing money
______
offset
personalpersonal
________
incomeincome
to
______
owner
• Business losses can
offset personal income

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6-3
 Partnership
 A voluntary association of
two or more persons to act
as co-owners of a
business for profit
 Less common form of
ownership than sole
proprietorship or
corporation
 No legal limit on the
maximum number of
partners; most have only
two
 Large accounting, law, and
advertising partnerships
have multiple partners
 Partnerships are usually a
pooling of special talents
or the result of a sole
proprietor taking on a
partner
 Partnership
Advantages
• More owners to contribute
capital and effort
• Shared managerial and
financial responsibility
• Utilize complementary skills
• Easy to form
• Business losses can offset
personal income
• Profit taxed as personal
income of the partners
Disadvantages
• Must share control—and
profits
• Need the “right” partner
• Differences in opinion on
company’s direction
• Unlimited liability (general
partners only)

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 Partnership Agreement
• Capital contributions
• Responsibilities of each partner
• Decision-making process
• Shares of profits or losses
• Departure of partners
• Addition of partners

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6-6
 Corporations
• Most common
type of
corporation is a
“C” corporation
• A corporation is a
legal entity,
separate from its
owners
• Requirements vary
by state, many
states are
“corporation-
friendly”
• Corporations are
owned by
stockholders
• Articles of
incorporations
must be filed and
corporate bylaws
adopted

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6-7
 Special Elements of a
Corporation
 Corporate ownership
• Stock
– The shares of ownership of a corporation
– 2 Types: 1) Common Stock (voting privileges), 2) Preferred Stock (no voting
rights, dividends paid first)
• Stockholder (aka Shareholder)
– A person who owns a share or shares of a corporation’s stock
• Dividend
– A portion of the corporation’s profit (earnings) that is distributed to stockholders
• Board of Directors
– The governing body of the corporation, elected by stockholders and appoint
corporate officers
• Closed (private) corporation
– A corporation whose stock is owned by relatively few people and is not sold to the
general public
• Open (public) corporation
– A corporation whose stock is bought and sold on security exchanges and can be
purchased by any individual
Corporate Structure

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6-9
 Corporations
Advantages Disadvantages
• Limited liability – liability • Reporting requirements
is separate from owners; • Can be difficult and costly
stockholders only can to form
lose what they purchased • Corporations have their
in corporate stock own special taxes
• Extended life and • Double taxation
ownership transfer – Corporations pay a tax on their profit;
stockholders who receive a dividend
• Raising capital also have to pay a tax

• Tax benefits

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6-10
Limited Liability Company (LLC)
 Not-for-Profit Corporations
• An incorporated business that does not
seek a profit
• Utilizes revenue available after normal
operating expenses for the corporation’s
declared social or educational goals
• Tax-exempt status granted by federal and
state governments

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6-12
 Mergers and Acquisitions
• Merger
- Two companies join to
form one company
• Acquisition
- One company takes
over another company
Types of Mergers