CHAPTER 6 BUSINESS

FORMATION: SECTION 1 & 2

Blue 10/16/23
Gold 10/13/23
 Learning Objectives
▣ 6-1: Describe the characteristics of the four
basic forms of business ownership

▣ 6-2: Discuss the advantages and disadvantages

of a sole proprietorship

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6-1 Business Ownership Options: The Big
Four
▣ Deciding which form of business ownership to
use is vitally important
▣ Choice affects nearly all aspects of business
◼ Starting and running
◼ Profit distribution
◼ Types of taxes paid
◼ Regulations business must follow
▣ Form of ownership determines other things too
◼ Degree to which owner is liable for debt
◼ Sources of funds for future expansion

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 Business Ownership Options: The Big
Four
▣ Choosing right form can help entrepreneur
battle steep odds of survival
◼ 20% fail within a year
◼ 1/3 within 2 years
◼ 51% within 5 years
◼ 2/3 within 10 years

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How Covid-19 Pandemic Affected New
Business
▣ New company registrations soared!!
◼ Raised 82% in United States
◼ 20% in France
◼ 14% in Japan
◼ 30% in the United Kingdom

▣ People were running out of options

◼ “necessity entrepreneurs”
◼ Forced creativity, new ideas, products, services

▣ Question: How many will succeed and for how

long?
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 4 Forms – 1) Sole Proprietorship
▣ Sole Proprietorship – business owned, and
usually managed, by a single individual

▣ As far as law is concerned,

a sole proprietorship is simply
an extension of the owner

▣ Company earnings treated as income

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 4 Forms – 1) Sole Proprietorship
▣ Debts incurred by company
are considered owner’s
personal debts

▣ Personal financial assets seized to pay for

unpaid company debts (unlimited liability)
◼ Cash
◼ Bank accounts
◼ Home
◼ Investments
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 4 Forms – 2) Partnership
▣ Partnership – voluntary agreement under which
two or more people act as co-owners of a
business for profit

▣ Several types of partnerships exist

▣ General Partnership is the most common

◼ Each partner has right to participate in company’s
management
◼ Each partner shares in profits
◼ Each partner has unlimited liability for company debts
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 4 Forms – 3) Corporation
▣ Corporation – a business entity by filing a form
(articles of incorporation) with the appropriate
state agency
▣ Separate legal entity
◼ Distinct from owners
▣ Like an artificial person – can do most any
business activity a natural person can
◼ Enter into binding contracts
◼ Borrow money
◼ Own property

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 4 Forms – 3) Corporation
▣ Corporation activities (continued)
◼ Pay taxes
◼ Initiate legal actions (lawsuits) in its own name
◼ Be a partner of another company
◼ Be an owner of another corporation

▣ Owners have limited liability

◼ Not personally responsible for debts
◼ Not responsible for obligations of company

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4 Forms – 4) Limited Liability Company
(LLC)
▣ Limited Liability Company (LLC) – hybrid
form of business ownership that is similar in
some respects to a corporation, while having
characteristics that are similar to a partnership

▣ Like a Corporation:
◼ LLC is separate legal entity to owners
◼ Limited liability to debts for owners

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4 Forms – 4) Limited Liability Company
(LLC)
▣ More flexibility than a corporation in terms of
tax treatment
◼ Owners taxed as corporation..or…
◼ Owners taxed as partnership

▣ Individuals forming a single-person LLC taxed

as part of owner’s personal tax return

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 4 Forms of Business Ownership
▣ Sole Proprietorship
◼ By far the most common type of business organization
◼ 27.2 million businesses
◼ 72.4% of businesses
◼ $1.59 trillion in revenue
◼ $349 billion in profit
▣ Corporations
◼ 6.33 million businesses
◼ 16.9% of businesses
▣ Partnership
◼ 4.01 million businesses
◼ 10.7% of businesses
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 Sole Proprietorships
▣ Internal Revenue Service (IRS) stats
◼ 70% reported annual revenue of less than $25k
◼ Less than 1% report excess of $1 million
◼ 59% break even or are profitable

◼ https://quizizz.com/join

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Exhibit 6.1

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Exhibit 6.2

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 Exhibit 6.2 Stats
▣ Corporation form rules for economic impact
◼ 16.9% of all business, but nearly 80% of revenue
◼ 67% of all business profits
◼ Companies making hundred of billions of dollars
🢭 Walmart Exxon Mobile
🢭 Amazon Apple
🢭 CVS AT&T
◼ Not all are multi-billion dollar enterprises
🢭 24.1% less than $25k

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 Exhibit 6.2 Stats
▣ Partnerships
◼ Larger and more profitable than sole proprietorships
🢭 2.2 times more than sole proprietorships
◼ Less common that Corporations or Sole

▣ Forms of business ownership don’t have to be

set in stone
◼ Convert from Sole to Corporation
◼ Corporation to LLC
◼ More common after significant changes to Fed Tax
laws
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6-2a Advantages of Sole Proprietorships
▣ Ease of Formation
◼ Paperwork and costs involved are minimal
◼ No special forms filed
◼ No special fees must be paid
◼ Entrepreneurs can get a business up and running quickly
▣ Retention of Control
◼ You are the ONLY owner, you are in control
◼ Ability to manage any way you want
◼ Could be a positive with only one person in charge
◼ “the more cooks you put into the kitchen, the more likely
there is to be disagreement about what ingredients you
should use and so forth” – Jason Greenburg (entre study)
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6-2a Advantages of Sole Proprietorships

▣ Pride of Ownership
◼ One of the main reasons people prefer
◼ Personal satisfaction from owning and running
▣ Retention of Profits
◼ Business is successful, you get all the profits
◼ Minus your personal taxes
▣ Possible Tax Advantage
◼ No taxes levied directly on earnings
◼ Earnings taxed as income of the proprietor

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6-2b Disadvantages of Proprietorships

▣ Unlimited Liability
◼ Law views proprietorship as extension of owner
◼ Debts of firm becomes owner’s personal debts
◼ Someone sues your business and wins
🢭 Court can seize personal assets
🢭 Assets having nothing to do with business
🢭 Sell these to pay damages
◼ Risky endeavor

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6-2b Disadvantages of Proprietorships

▣ Limited Ability to Attract and Maintain

Talented Employees
◼ Unable to pay high salary
◼ No substantial perks
◼ Experienced employees will choose other businesses
▣ Heavy workload and Responsibilities
◼ Long hours, lots of stress
◼ Ultimate authority
◼ Perform tasks and make decisions in areas that you
may lack expertise

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6-2b Disadvantages of Proprietorships

▣ Lack of Permanence
◼ Extension of owner
◼ Lacks permanence
◼ Could legally cease to exist
for many reasons
🢭 Owner dies
🢭 Retires
🢭 Withdraws from business
◼ Operates under new ownership, seen as different
business in the eyes of the law

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 Canvas Assignments
▣ Please complete the Guided Notes for Ch 6,
Sections 1 and 2. You may submit this as a
screenshot on Canvas (5 pts)

▣ Please complete the Section 6-1 and Section 6-2

multiple choice questions. 6-1 has 4 questions
for a total of 4 pts and 6-2 has 3 questions for a
total of 3 points.

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