Chapter 5

Choosing a Form
of Business Ownership

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 Sole Proprietorships

“…a business that is owned (and usually

operated) by one person.”

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 Forming a Sole Proprietorship

Simplest form of ownership

Easiest to start
Owner decides to start
business and begins
operations
Common in:
Retailing
Service
Agriculture

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 Advantages of
Sole Proprietorships
 Ease of Start-up & Closure
 Pride of Ownership
 Retention of All Profits
 Flexibility of Being Your Own Boss
 No Special Taxes

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 Disadvantages of
Sole Proprietorships
 Unlimited Liability
 Lack of Continuity
 Lack of Money
 Limited Management Skills
 Difficulty in Hiring Employees

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 Partnerships

 A voluntary association of 2 or more persons

to act as co-owners of a business for profit
 Much less common than sole proprietorship
or corporation
 No legal maximum on number of partners

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 Types of Partners

o General- person who assumes full or shared

responsibility for operating a business
o Active in day-to-day business operations
o Each partner can enter into contracts on behalf of
other partners
o Assumes unlimited liability
o Limited- person who contributes capital to a
business but no management responsibility or
losses beyond amount he/she invested

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 Articles of Partnership

“…an agreement listing and explaining

the terms of the partnership.”

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 Advantages of Partnerships

 Ease of Start-Up
 Availability of Capital and Credit
 Personal Interest
 Combined Business Skills and Knowledge
 Retention of Profits
 No Special Taxes

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 Disadvantages of Partnerships

 Unlimited Liability
 Management Disagreements
 Lack of Continuity
 Frozen Investment

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 Corporation

“…an artificial person created by law with

most of the legal rights of a real person,
including the rights to start and operate a
business, to buy or sell property, to borrow
money, to sue or be sued, and to enter into
binding contracts.”

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 Corporate Ownership

 Stock- shares of ownership of a corporation

 Stockholder- person who owns a corporation’s
stock
 Closed corporation- a corporation whose stock
is owned by relatively few people and is not
sold to the general public
 Open corporation- a corporation whose stock
can be bought and sold by any individual

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 Forming A Corporation

 Consult a lawyer
 Where to incorporate
 Cost of incorporating
 Advantages/disadvantages of each state’s corporate laws & tax
structure
 Corporate Location
 Domestic corporation- a corporation in state in which it is
incorporated
 Foreign corporation- a corporation in any state in which is does
business except the one in which it is incorporated
 Alien corporation- a corporation chartered by a foreign gov’t and
conducting business in the U.S.
 Organizational Meeting

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 Corporate Charter

“…a contract between a corporation and

the state in which the state recognizes
the formation of the artificial person that
is the corporation.”

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 Stockholders’ Rights

Common Stock- owned by individuals who vote

on corporate matters, whose claims on
profit/assets are subordinate to others
Preferred Stock- owned by individuals/firms
who do not have voting rights, whose claims on
dividends paid before those of common-stock
Dividend- a distribution of earnings to
stockholders
Proxy- legal form listing issues to be decided at
stockholders’ meeting and enabling
stockholders to transfer voting rights to other
individual(s)
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