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Chapter Three

Choosing a Form of Business Ownership

SPL 1302 Basic Commerce Dr. M. Khata Jabor Department of Technical and Engineering Education Faculty of Education

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Learning Objectives

1. Describe the advantages and disadvantages

of sole proprietorships. 2. Explain the different types of partners and the importance of partnership agreements. 3. Describe the advantages and disadvantages of partnerships. 4. Describe the advantages and disadvantages of a corporation.

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Sole Proprietorships

A business that is owned (and usually

operated) by one person The simplest form of business ownership and the easiest to start Many large businesses began as a small struggling sole proprietorships The most widespread form of business ownership

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Relative Percentages of Sole Proprietorships, Partnerships, and Corporations in the U.S.

proprietorships are most common in retailing, agriculture, and the service industries

Source: U.S. Bureau of the Census, Statistical Abstract of the United States, Washington, D.C., 2008, p. 487 (

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Advantages and Disadvantages of Sole Proprietorships

Ease of start-up and closure Pride of ownership Retention of all profits Flexibility of being your own boss No special taxes

Unlimited liability
A legal concept that holds a business owner personally responsible for all the debts of the business

Lack of continuity Lack of money Limited management skills Difficulty in hiring employees

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A voluntary association of two or more persons to act as coowners of business for profit Less common form of ownership than sole proprietorship or corporation No legal limit on the maximum number of partners; most have only 2 Large accounting, law, and advertising partnerships have multiple partners Partnerships are usually a pooling of special talents or the result of a sole proprietor taking on a partner

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Types of Partners
General partner
A person who assumes full or shared responsibility for operating a business General partnership: a business co-owned by two or more general partners who are liable for everything the business does Limited partner A person who contribute capital to a business but has no management responsibility or liability for losses beyond the amount he or she invested in the partnership Limited partnership: a business co-owned by one or more general partners who manage the business and limited partners who invest money in it Master limited partnership (MLP): a business partnership that is owned and managed like a corporation but taxed like a partnership

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The Partnership Agreement

Articles of partnership
An agreement listing and explaining the terms of the partnership Agreement should state
Who will make final decisions What each partners duties will be How much each partner will invest How much profit or loss each partner receives or is responsible for How the partnership can be dissolved

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Advantages and Disadvantages of Partnerships

Ease of start-up Availability of capital and credit Personal interest Combined business skills and knowledge Retention of profits No special taxes

Unlimited liability Management disagreements Lack of continuity Frozen investment

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An artificial person created by law with most of the legal
rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts There are 5.6 million corporations in the U.S. They comprise only 20% of all businesses, but they account for 83.8 % of sales revenues

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Corporate Ownership

Corporate ownership
The shares of ownership of a corporation

A person who owns a corporations stock

Closed corporation
A corporation whose stock is owned by relatively few people and is not sold to the general public

Open corporation
A corporation whose stock is bought and sold on security exchanges and can be purchased by any individual
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Advantages and Disadvantages of Corporations

Limited liability
Each owners financial liability is limited to the amount of money that he or she has paid for the corporations stock

Difficulty and expense of formation Government regulation and increased paperwork Conflict within the corporation Double taxation Lack of secrecy

Ease of raising capital Ease of transfer of ownership Perpetual life Specialized management

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Advantages and Disadvantages

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Special Types of Business Ownership (contd)

Government-owned corporations
A corporation owned and operated by a local, state, or federal government Purpose
To ensure that a public service is available

Petronas MAS Tabung Haji

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Special Types of Business Ownership (contd)

Not-for-profit corporations
Corporations organized to provide social, educational, religious, or other services, rather than to earn a profit Charities, museums, private schools, and colleges are organized as not-for-profits primarily to ensure limited liability

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Cooperatives, Joint Ventures, Syndicates

Associations of individuals or firms whose purpose is to perform some business function for its members Members benefit from the efficiencies of the cooperatives activities, such as reducing unit costs by making bulk purchases and coordinating services such as transportation, processing, and marketing products

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