Choosing a Form
of Ownership
Learning Objectives
Discuss the issues that entrepreneurs
should consider when evaluating
different forms of ownership.
Describe the advantages and
disadvantages of the sole
proprietorship.
Describe the advantages and
disadvantages of the partnership.
Describe the advantages and
disadvantages of the corporation.
Issues Entrepreneurs Should Consider
When Evaluating Different Forms Of
Ownership.
Tax considerations
Liability exposure
Start-up and future capital requirements
Control
Managerial ability
Business goals
Management succession plans
Cost of formation
Traditionally, business owners have been able to
choose from three major forms of ownership: the sole
proprietorship, the partnership, and the corporation.
The Sole Proprietorship
Simplest and most popular form of
ownership
Owned and managed by one
individual
Owner and ultimate decision maker
for the business
Simple to form
Advantages of Sole Proprietorship
Simple to create: simply obtain the necessary
business licenses from state, county, and/or local
governments and begin operation.
Least costly form of ownership to establish: there
is no need to create and file legal documents,
such as those recommended for partnerships and
required for corporations. For example, one may
simply contact the secretary of states office,
select a business name, identify the location,
describe the nature of the business, and pay the
appropriate fees and license costs.
Total decision-making authority
No special legal restrictions
Easy to discontinue
Disadvantages of Sole Proprietorship
Unlimited personal liability
Limited access to capital
Limited skills and abilities
Feelings of isolation
Lack of continuity of the business
Landscaper
A landscaper may work alone or hire a small team of employees.
Landscapers maintain lawns, plants and trees of homeowners and
businesses. Most landscaping companies working with commercial
customers hire employees to work on projects.
Computer Repair Services
Computer repair companies are often operated as sole proprietorships.
Some business owners operate commercial shops, while others work from
home. Small computer repair businesses typically cater to individuals.
Catering Company
Catering companies offer their services for parties, weddings, church
functions and business events. In most cases, a sole proprietor operating a
catering company needs to hire employees.
Housecleaning Service
The start-up costs for a housecleaning business are generally low. Business
owners can offer a variety of additional services, such as laundry, window
washing and carpet cleaning.
Tutoring
Tutoring businesses provide learning assistance to students in a
variety of subjects. Tutors may work with students in person or
through online video chats. Many tutors have teaching experience or
extensive knowledge in the subject they are teaching.
Virtual Assistant
Virtual assistants help entrepreneurs with administrative functions
through the Internet. The tasks completed by virtual assistants
depend upon the needs of clients. Common tasks may include
checking emails, creating excel spreadsheets and typing documents.
Freelance Writer
Some freelance writers operate as independent contractors, while
others start small publishing companies. A freelance writer provides
content to businesses owners or writes content to sell to consumers.
Press releases, sales copy, website content and blog posts are
commonly provided by freelance writers.
The Partnership
A partnership is an association of two or more people
who co-own a business for the purpose of making a
profit.
In a partnership, the co-owners (partners) legally share a
businesss assets, liabilities, and profits according to the
terms of an established partnership agreement.
The law does not require a written partnership
agreement, also known as the articles of partnership, but
it is wise to work with an attorney to develop an
agreement that documents the exact status and
responsibility of each partner.
The partnership agreement is a document that
states the terms of operating the partnership
for the protection of each partner involved.
Every partnership should be based on a
comprehensive written agreement.
When problems arise between partners, the
written document becomes invaluable.
Banks often want to review the partnership
agreement before lending the business money.
A partnership agreement can include any terms
the partners want (unless they are illegal).
A standard partnership agreement includes the following
information:
1.
2.
3.
4.
5.
6.
Name of the partnership.
Purpose of the business.
Domicile of the business.
Duration of the partnership.
Names of the partners and their legal addresses.
Contributions of each partner to the business, at the
creation of the partnership and later.
7. Agreement on how the profits or losses will be
distributed.
8. Agreement on salaries or drawing rights against
profits for each partner.
9. Procedure for expansion through the addition of new
partners.
[Link] of the partnerships assets if
the partners voluntarily dissolve the
partnership
[Link] of the partnership interest
[Link] or disability of one of the
partners
[Link] rights
[Link]-making authority
[Link] authority
[Link] tax matters
[Link] or modifications of the
partnership agreement
Advantages of Partnership
Easy to establish
Complementary skills
For years, Norm Brodsky, founder of CitiStorage, a document
storage company in New York City, resisted taking on a partner
because he knew that many partnerships fall apart. Finally,
Brodsky brought his trusted friend Sam Kaplan in as a partner
because he saw that Kaplans values and philosophies were
similar to his own and that Kaplans strengths were skills that
he lacked. With his strong background in finance, Kaplan had
an immediate impact on the company. He took over the
management of Ministorage's finances and introduced
systems and practices that were rare in a small company.
While I still think its a bad idea to start a business with one,
Ive come to realize that ending with a partner is another
matterespecially if the other person is someone like Sam,
says Brodsky
Division of profits
Larger pool of capital
Ability to attract limited partners
Little governmental regulation
Flexibility
Taxation
Disadvantages of the Partnership
Unlimited liability of at least one
partner
Capital accumulation
Difficulty in disposing of partnership
interest
Potential for personality and
authority conflicts
Partners are bound by the law of
agency
Brothers John and Jim Martin started a retail clothing shop as
equal partners. The business proved successful, and over the
years the brothers opened two additional shops. Five of their
children are now active in the business, three from Johns
family and two from Jims. Plans to open another store had
been vetoed by Jims family, which brought to the surface a
range of underlying issues involving work practices and
compensation that had gone unresolved for years. The
brothers attempted to resolve the dispute through direct
negotiation over several months but were unsuccessful. Their
accountant realized the impact the dispute was having on the
business and suggested mediation. Both families agreed, and
with the mediators help the families began communicating
for the first time in years. In addition to saving the family
business, a key outcome of the mediation process was the
restoration of the relationships among family members, who
finally realized that unresolved problems do not disappear
and that it is better to address problems when they occur.
