TYPES OF BUSINESS

OWNERSHIP
CHAPTER 7
• 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.
 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
 SOLE PROPRIETORSHIP

• The owner of a sole proprietorship:

receives the profits,

incurs any losses, and
is liable for the debts of the business.
 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
 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 the personal rate of the
owner.
 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
 PARTNERSHIP

• 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
 PARTNERSHIP

General vs Limited

The law requires that all general partner

partnerships have at least one
general partner.
A partnership may be set up so
that all of the partners are
general partners.
a participant in a partnership who has
unlimited personal liability and takes
full responsibility for managing the
business
 PARTNERSHIP

• 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
 PARTNERSHIP

Partnerships are inexpensive to create.

General partners have complete control.

Partners can share ideas.

Partners can share ideas.

 PARTNERSHIP

It 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.

 CORPORATIONS

In a corporation, the owners of the business are protected from

liability for the actions of the company.

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- CORPORATIONS

• 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-Corporations: In smaller corporations, the founders

generally are the major shareholders.

shareholders
the owners of a corporation
C-CORPORATIONS

ADVANTAGES
status

limited liability

ability to raise investment money

perpetual existence

employee benefits

tax advantages
 C-CORPORATIONS

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-CORPORATIONS

DISADVANTAGES
expensive to set up

income more heavily taxed

subject to double taxation on income

pays taxes on profits

stockholders taxed on dividends

 S- CORPORATIONS

• Avoid double taxation with a

S-corporation
A corporation taxed like a partnership
 S- CORPORATIONS

• Advantages
• Profits are only taxed once at the shareholder’s personal tax rate.
• The S-Corporation in not a taxpaying entity
• Disadvantages
• Can have no more than 75 stockholders who must be U.S. citizens
• Can have only one class of stock
• Often restaurants are S-Corporations. If the business produces enough
cash, this form works
• If the business shoes a large taxable profit but has not generated enough
cash to cover the taxes, the owners must pay the taxes out of their
personal earnings
 NON-PROFIT CORPORATIONS

• 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
 LIMITED LIABILITY COMPANY

• LLC is simpler to set up than a corporation

• LLC allows for the flexibility of a partnership structure
• LLC protects its owners with the limited liability of a
corporation, its members are not liable for the company’s
debts.
• LLX is not subject to double taxation. Provides the pass-
through tax advantages of partnership. Profits are taxed
personally, and shareholders are taxed only once.
 CORPORATIONS

• Before deciding on a legal form, ask yourself key questions

about:
Making the Decision

your skills willingness to assume liability

access to capital level of control wanted
expenses length of time you expect to own the
business