CHAPTER 8

FORMS OF SMALL
BUSINESS
OWNERSHIP
 Three basic forms of business
ownership
Your choice depends on your resources &
goals
•Sole proprietorship

•Partnership

•Corporation
Sole proprietorship

•A business owned
and operated by one
person.
 Advantages of sole proprietorships
•Easy and inexpensive to create.
• Unless you need certification or local permits,
government intervention is minimal
•Secrecy.
• This is possible because he does not have, and
he is not required by law, to share information
with anyone
•Owner receives all profits.
Advantages of sole proprietorships cont.

•Control of the Business

• The power to control the business
is vested solely to the single
proprietor.
 Advantages of sole proprietorships cont.

•Tax advantages
• Business itself pays no taxes
• Taxes are paid as personal income of owner which is
usually lower than corporate taxes

•Easy to close/dissolve
• It can be dissolved at will.
• Pay employees and creditors
• Sell your equipment
 Disadvantages of sole proprietorships
•Owner has unlimited liability for all debts and

actions of the business.

• Unlimited liability: The debts of the business may be paid from
the personal assets of the owner.
• If you cannot pay business debt with business income, bill
collectors can take your personal assets (home, car)

•Difficult to raise capital.

• Banks/lenders consider sole proprietorships to be a high-risk
investment
 Disadvantages of sole proprietorships

•Sole proprietorship is limited by his/her

skills and abilities.
•Uncertain life
• You are “it” – illness or injury that prevents you from
working may cause you to close
• Bankruptcy or incarceration will dissolve your
business
• The death of the owner automatically dissolves the
business.
Partnership

A form of business
ownership in which two
or more people share
the assets, liabilities,
and profits.
Types of Partnership

Partnership may be classified according to the

liability of the partners.
1. General Partnership – is an association of two
or more persons, each with unlimited liability
and who are actively involved in the business.
2. Limited Partnership – is an arrangement in
which the liability of one or more partners is
limited to the amount of assets they invested
in the business.
Partnership agreement

 It is a document designed to prevent or at

least minimize disagreements between
partners. It usually covers the following:
1. Purpose of the business
2. Terms of the partnership
3. Financial contribution made by each partner
at the beginning and during the lifetime of
the business.
4. Distribution of the profits
Partnership agreement

5. Withdrawal of contributed assets or capital

by a partner.
6. Management powers and work
responsibilities of each partners
7. Provisions for admitting new partners
8. Provisions for expelling a partner
9. Provision for continuing the business in the
business in the events of a partner’s death,
illness, disability or withdrawal
Advantages of partnerships

•Fairly easy & inexpensive to start

• The only requirement before the partnership starts to operate is for the
partners to agree on basic aspects of business like the nature of the
business, location, capitalization, and the like.
•Combined resources
• Team with partners with different skills, experience, contacts, & capital
• Sharing responsibilities makes business run more efficiently & smoothly
• Increase the amount of capital to run the business. Lenders may be
more willing to lend or extend credit
Advantages of partnerships cont.
•Decreased Competition
• Combining like businesses will decrease or eliminate competition
•Business losses are shared by all partners.
•The partnership does not pay income tax on profits.
• Each partner pays income tax on her/his individual share of the profit
Disadvantages of partnerships
•Unlimited liability
• Each owner in a general partnership has unlimited
liability.
• Each partner can lose personal assets to pay business
debt
• In a limited partnership, the liability is limited to the
amount invested in the business
•Difficulty in ending
• Withdrawing can be complicated if there is no written
partnership agreement
• By law profits must be divided equally if no
agreement
Disadvantages of partnerships cont.
•Partnerships may lead to disagreements.
• May disagree on business goals, finances, responsibilities, &
division of profits
• Can affect the efficiency of the business, morale of employees, &
success or failure of the venture
Disadvantages of partnerships cont.

•Uncertain life/Transferability
• Unless specified in a detailed
partnership agreement, bankruptcy,
death & the withdrawal or
admittance of a new partner
dissolves the partnership
• Remaining partners may start a new
partnership if they have the money
to buy the former partner’s share
 Corporation
  A corporation is a legal form of business
that is separate from its owners. A business
that is legally chartered enterprise with
most of the legal rights of a person
including the right to own and sell property,
to borrow money and to sue and be sued.
 Owned by stockholders who have
purchased units or shares of the company.
 They are issued certificated of ownership
called STOCKS.
Advantages of corporations
•Ease of Expansion
• The authority granted to a corporation to sell its own share of
stock provides a means to pool large amounts of funds.
•Limited Liability
• Owners are liable only up to the amount of their investments.
Personal assets cannot be used to pay business debt

•Unlimited life
• It is established to have a life of up to 50 years and is
extendible for longer periods.
• The death or withdrawal of an owner/stockholder does not
affect the life span of the corporation
Advantages of corporations cont.

•Easy-to-transfer ownership
• Ownership simply transferred by selling stock to someone else
• New stock certificate is issued in the name of new stockholder.
No permission is required by others
•The business can hire experts to

professionally manage each

aspect of the
Disadvantages of corporations
•Difficulty in forming & operating
• Legal assistance is needed to start a corporation
• Lawyer fees can be very expensive
• Must request approval from the State & register the Articles of Incorporation
under Securities and Exchange Commission (SEC)
•Corporations are subject to more government regulations
than partnerships or sole proprietorships.
• Reporting & taxation requirements vary from state to state
• Required to keep detailed reports for stockholders & to keep them informed
of certain corporate transactions, meetings, & voting rights
Disadvantages of corporations
•Dual taxation
• Corporation is taxed on profits from the
company
• Shareholders are taxed on the
dividends they earn on their
investments
•Separate owners & managers
• Stockholders are not generally involved in the day-to-day operation of
the corporation
• Stockholders form a board of directors to make decisions about the
business & managers carry out these decisions
• Separation of ownership & management provides more opportunity for
irregularities or misunderstandings