Business Ownership

Introduction to Business
 Choosing an Organizational Type
Four Business Organizational Options:
1. Sole proprietorship
2. Partnership
3. Corporation
4. Hybrid (limited liability company (LLC), limited
liability partnership (LLP)
Each type of business has its own set of risks and rewards,
costs and benefits.

Picking the best type depends on the nature of the

business opportunity and the level of personal exposure to
risk the owner is willing to accept.
 Considerations in Choosing an
Organizational Type
• Cost of start up
• Control vs. responsibility
• Do you want to share the
profits?
• Taxation
• Entrepreneurial ability
• Risk tolerance
• Financing
• Continuity and transferability
 Sole Proprietorships

Sole proprietorships are

• Owned and run by one person
• The simplest and most common legal structure for a
business
 Advantages of Sole Proprietorship

1. Easy and inexpensive to form

2. Single owner has complete control over all decisions
3. Easy tax preparation
Disadvantages of Sole Proprietorship

• Unlimited personal liability for the sole proprietor

• Can be difficult to raise money
• Single owner takes on all responsibility for business
operations and finances
 Partnerships

Partnerships are businesses in which two or more people

share ownership and responsibility.

There are two types of partnerships:

1. General Partnerships
2. Limited Partnerships (also known as Limited Liability
Partnerships)
 Advantages of Partnership

• Easy and inexpensive to form

• Shared financial commitment among partners
• Utilize the expertise of each partner
• Partnership incentives for employees
 Disadvantages of Partnership

• Partners retain full liability for the business

• Disagreements among partners can occur
• Profits shared among partners
 Corporations

• Account for the majority of the revenue from business in

the U.S.
• Are the most complex type of organization to start and
maintain
• Are NOT the most common form of business ownership

Three types of corporations:

1. C corporations
2. S corporations
3. B corporations
 C Corporations

• Are independent legal entities owned by shareholders

• Pay income tax on their profits
• Dividends appear on the shareholder’s personal tax
returns and are subject to taxation
• Income distributed as salary or other compensation is a
deduction for the corporation
 Advantages of C Corps

• Provide shareholders limited liability for debts and

actions
• Able to generate capital through sale of stocks
• Profits outside of salary, bonuses and dividends are
often taxed at a lower rate than personal taxes
• Attractive to potential employees due to ability to
provide employee benefits and stock options
 Disadvantages of C Corps

• Time consuming and costly to start

• Taxed twice (in some cases) - when the company makes
a profit and again when dividends are paid to
shareholders
• Additional paperwork and recordkeeping required by the
state and federal governments
 S Corporations

• Special type of corporation created through an IRS tax

election
• Profits and losses can pass through to your personal tax
return
• The business is not taxed; instead, only the shareholders
are taxed
 Advantages of S Corps

• Tax savings
• Business expense tax credits
• Clear lines drawn between the shareholders and the
business that improve the protection of the shareholders
 Disadvantages of S Corps

• Stricter operational processes

• Shareholder compensation requirements
 Benefit (B) Corporations

Type of for-profit corporate entity, authorized by thirty

U.S. states and the District of Columbia, that includes
positive impact on society, workers, the community, and
the environment
• Differ from traditional C corporations in purpose,
accountability, and transparency, but not in taxation
 Advantages of B Corps

• Gives companies more options and protections if they

decide to sell the business to someone else or take it
public
• Allows companies to stand out as businesses with a
standard they consider higher than maximizing profit for
shareholders
• May create value via employee engagement and
customer loyalty
 Disadvantages of B Corps

• Transparency and reporting requirements

• Annual fees to retain certified B Corp status
• Compliance and governance obligations
 Practice Question

1. How is a B Corp different from a non-profit?

2. How are B Corps different from S Corps or C Corps?

 Hybrid Forms of Ownership

Hybrid forms of ownership allow the business owner to

take advantage of limited personal liability and the
benefits of partnership or corporate organization.

Examples include LLC and LLP.

The type of ownership an owner selects will largely be

determined by the size, objectives, and vision for the
business.
 LLC (Limited Liability Company)

• Hybrid business structure allowed by state statute

• Provides the limited liability features of a corporation
• Unlike shareholders in a corporation, are not taxed as a
separate business entity
• Profits and losses are “passed through” the business to
each member of the LLC
 Advantages of an LLC

• Members are protected from personal liability for

business decisions
• Less recordkeeping compared to an S Corporation
• Sharing of profits
• Up to the members to decide who has earned what
percentage of the profits or losses
 Disadvantages of an LLC

• Possible limited life

• Self-employment taxes
• Entire net income of the LLC is subject to taxes
 LLP (Limited Liability Partnership)

• A partnership in which some or all partners have limited

liabilities
• One partner is not responsible or liable for another
partner’s misconduct or negligence
• Partners may manage the company directly without
electing a board of directors
• Profits are allocated among the partners for tax
purposes, avoiding the problem of “double taxation”
often found in corporations
 Advantages of an LLP

• Single taxation
• Limited liability
• Flexibility
 Disadvantages of an LLP

• Can prevent dissolution if a partner dies or withdraws

• Limitation of formation
• Partner control
 Franchising

A franchise is a business model that involves one business

owner (the franchisor) licensing trademarks and methods
to an independent entrepreneur (the franchisee) for a
prescribed period of time
 Advantages and Disadvantages
for the Franchisor
Advantages
• Access to capital for Disadvantages
growth and expansion • Lack of control
• Cash flow for operations • Trade secrets
• Economies of scale • Overexposure
 Advantages and Disadvantages
for the Franchisee
Advantages
• Less risk Disadvantages
• Name/brand recognition • Cost
• Access to expertise, • Unequal partnership
ongoing support • Rules and enforcement.
• Relative autonomy • Purchasing a franchise
doesn’t guarantee success
Forms of Business Ownership Comparison
 Mergers

A merger is the consolidation of two companies that,

prior to the merger, were operating as independent
entities.
A merger usually creates one larger company, and one of
the original companies ceases to exist.
 Two Types of Mergers

• Horizontal merger occurs between companies in the

same industry.
• Vertical merger is characterized by the merger of two
organizations that have a buyer-seller relationship or two
or more firms that are operating at different levels within
an industry’s supply chain.
 Acquisitions

An acquisition occurs when a company purchases the

assets of another business (such as stock, property,
plants, equipment) and usually permits the acquired
company to continue operating as it did prior to the
acquisition.
 Quick Review
• What are the important factors in choosing an
organizational type?
• What are the advantages and disadvantages of sole
proprietorships and partnerships?
• What are the advantages and disadvantages
of corporations?
• What are the advantages and disadvantages of hybrid
forms of business ownership?
• What are the advantages and disadvantages of
franchises?
• What are the two types of mergers and acquisitions?