Chapter 3:

Type of Business and

Business Ownership
Type of Business

OBJECTIVES
⦁ Identify the four main types of business
⦁ Examine trends in business startups in recent
decades
⦁ Explore growth expectations for business
Group 3

Shinamae Emerlson Etulle Anne Shellie Haide Molde

Villanueva Antoque
Types of Manufacturing Business
Business
Wholesaling Business

Retailing Business

Service Business
 Manufacturing
Business
Manufacturing businesses transform raw materials into
goods, categorized as industrial or consumer products.
Industrial goods, such as metal parts and machinery, are
sold to other manufacturing businesses. Consumer
goods, like baked goods or jewelry, are intended for
public consumption. Small manufacturers often sell
directly to consumers, while larger ones typically sell to
wholesalers, rather than directly to the public..
 Wholesaling
Business
Wholesalers buy goods in bulk from
manufacturers and sell smaller quantities to
retailers, acting as intermediaries in the supply
chain. They do not sell directly to the public but
facilitate the distribution of products from
manufacturers to retailers.
 Retailing Business
Retailers buy goods from wholesalers and sell
directly to consumers, operating in various forms
such as physical stores, online shops, and
catalogs. They may need a reseller's permit to
purchase tax-free from wholesalers and collect
sales tax from end buyers. The broader term for
both wholesale and retail businesses is a trade
business.
 Service Business
Service businesses offer a diverse range of
professional, technical, and everyday services for
a fee, including engineering, legal, medical, and
household services. Licensing requirements vary
by state, encompassing professionals and other
service providers. Some states also mandate
permits for service businesses collecting sales tax
on taxable services.
Special Type of Business

Farming combines aspects of manufacturing and retailing,

especially when directly selling produce to consumers.
Mining, also known as an "extraction business," involves
obtaining and converting resources like copper, oil, or sea
salt for sale to manufacturers.
What is the four main
types of business?
Trends in Business Startups
Over the past fifty years, the business landscape of the United States has undergone
significant changes.
In the 1950s, manufacturing dominated the economy, followed by wholesale and retail
sectors, with services playing a minor role.
The 1950s and 1960s saw a surge in franchising, notably in the service and retail industries,
exemplified by franchises like McDonald's.
However, by 1970, manufacturing's importance diminished, giving way to the rise of
service, wholesale, and retail businesses, which became the primary contributors to the
U.S. economy.
In the 2000s, the majority of new businesses were in the service and trade sectors,
accounting for nearly two-thirds of America's economic production in 2006, according to
the U.S. State Department.
Businesses of the
Future
The North American Industry Classification System (NAICS)
assigns numerical codes to North American industries, aiding in
business classification. The U.S. Department of Labor forecasts
substantial employee growth in service industries, with the top ten
companies in this prediction all sharing a commonality – they offer
services. This trend indicates an expected dominance of service
businesses in the U.S. economy through 2020.
Type of Business
Ownership

OBJECTIVES
⦁ Define liability ⦁ Examine corporations
⦁ Examine sole proprietorships ⦁ Understand cooperatives
⦁ Learn about partnerships
Liability of Business
Owner

The level of liability is a crucial factor in determining types of business

ownership. Unlimited liability obligates the owner to use personal assets to
settle business debts, including loans and legal judgments. Limited liability,
on the other hand, protects personal assets from being used to pay business
debts, limiting the owner's financial risk to the amount invested in the
business. The choice of ownership structure determines the extent of liability
for a business owner.
Sole Proprietorships

A sole proprietorship is a business owned by one individual, who takes all

profits but has unlimited liability for its debts. It is a common structure for
small businesses in the United States.
 Advantages Disadvantages
A sole proprietorship is the simplest In a sole proprietorship, one
and least expensive business person is solely responsible for
ownership option. The owner and the business, facing challenges in
business are considered one entity,
obtaining external funding and
simplifying income reporting on
expanding due to unlimited
personal tax returns. This structure
personal liability for business
involves less paperwork, easier tax
accounting, and grants the sole
debts.
proprietor complete control over
business management decisions.
How to
Set Up Naming the
Business
a Sole
Proprietorship

Tax I.D. Number

 Partnership

A partnership is a business organization where at least two individuals share

management, profit, and liability. In a general partnership, all partners have
unlimited liability, meaning they're personally responsible for business debts.
In a limited partnership, there's at least one general partner with limited
liability, while others are only investors with no say in daily operations.
 Advantages
A general partnership, like a sole
proprietorship, is straightforward to
establish and has minimal paperwork
compared to a corporation. It benefits
from the skills and financial support of
multiple individuals, making it easier
to borrow money or attract investors.
Additionally, it can offer employees
the opportunity to become partners,
serving as a motivational incentive.
Disadvantages
General partners risk personal
assets to settle business debts.
Partnerships have three main
drawbacks: profits are divided
among partners, each partner is
liable for others' actions, and
disagreements on business
operations are common.
Writing a Partnership Agreement

Entrepreneurs should draft a partnership agreement before starting a

business together. This legal document outlines how work, responsibilities,
rewards, and liabilities are shared among partners. It also addresses
outcomes if a partner dies or leaves, preventing conflicts and allowing
focus on business management and growth.
 Corporations

A corporation is a legal business entity with limited liability for owners

(shareholders). Shareholders, or stockholders, own units of the corporation
called shares, which may earn dividends from profits. Corporations often have
a board of directors making operational decisions. Most are C corporations,
taxed as a separate entity by the federal government.
 Advantages
Corporation shareholders have limited
liability, risking only their investment.
Ownership can be ended by selling
shares, and a corporation's lifespan is
independent of owners. Management
is handled by a board of directors,
enabling easier fundraising compared
to sole proprietorships or partnerships.
Disadvantages
Corporations are challenging and
expensive to establish and
maintain due to state regulations.
They face specific procedures for
record-keeping and double
taxation: first on corporate profits
and then on dividends for
shareholders.
Subchapter
S Corporations

A Subchapter S corporation differs from a C corporation in taxation. It's not

taxed as an entity; instead, income or loss is applied to each shareholder's tax
return. While it avoids double taxation, it has more restrictions and is costlier
to set up than a sole proprietorship or partnership.
Limited Liability
Companies

A Limited Liability Company (LLC) is a simplified business ownership

structure offering liability protection to members. It has simpler operations
and tax procedures, appealing to professionals seeking the benefits of both a
corporation and a sole proprietorship or partnership.
Nonprofit
Corporations

A nonprofit corporation operates for the benefit of society, using any profit to
further its mission. It relies on donations, not share sales, for funding, and
owners have limited liability for company debts. Nonprofit corporations often
receive special tax treatment from the IRS.
Cooperatives

A cooperative is a business owned and operated for the mutual

benefit of its members. Examples include farmers forming
cooperatives for selling crops and buying equipment.