Types of

Business
Ownership

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Types of Business Ownership

Chapter 7

Types of Business
Ownership

7.1

Sole Proprietorships and

Partnerships

7.2

Corporations

Types of Business Ownership

7.1

Discuss the sole proprietorship legal form.

Explain the partnership legal form.

Section 7.1 Sole Proprietorships and Partnerships

Types of Business Ownership

7.1

Entrepreneurs need to understand the advantages

and disadvantages of various forms of business
ownership so they can choose the most appropriate
form for their business.

Section 7.1 Sole Proprietorships and Partnerships

Types of Business Ownership

7.1

sole proprietorship
liability protection
unlimited liability

Section 7.1 Sole Proprietorships and Partnerships

partnership
general partner
limited partner

Types of Business Ownership

Sole Proprietorship
The easiest and most
popular form of business
ownership is the sole
proprietorship.

Section 7.1 Sole Proprietorships and Partnerships

sole proprietorship
a business that is owned
and operated by one
person

Types of Business Ownership

Sole Proprietorship
The owner of a sole proprietorship:
receives the profits
incurs any losses
is liable for the debts of the business

Section 7.1 Sole Proprietorships and Partnerships

Types of Business Ownership

Sole Proprietorship
In a sole proprietorship the
owner must decide how
much liability protection
he or she needs.

Section 7.1 Sole Proprietorships and Partnerships

liability protection
insurance against the
debts and actions of a
business

Sole Proprietorship
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
personal rate of owner.
Section 7.1 Sole Proprietorships and Partnerships

Sole Proprietorship
Disadvantages
The owner has unlimited liability.

Raising capital is more difficult.

The business is totally reliant on skills and abilities of owner.

The death of owner dissolves the business unless
there is a will to the contrary.
Section 7.1 Sole Proprietorships and Partnerships

10

Types of Business Ownership

Disadvantages
The biggest disadvantage
of a sole proprietorship is
financial.

unlimited liability
full responsibility for all
debts and actions of a
business

In this form of business

ownership, the owner has
unlimited liability.

Section 7.1 Sole Proprietorships and Partnerships

11

Types of Business Ownership

Partnerships
A partnership draws on
skills, knowledge, and
financial resources or more
than one person.

Section 7.1 Sole Proprietorships and Partnerships

partnership an
unincorporated business
with two or more owners
who share the decisions,
assets, liabilities, and
profits

12

Types of Business Ownership

General Versus
Limited Partners
The law requires that all
partnerships have at least
one general partner.

general partner a
participant in a partnership
who has unlimited
personal liability and takes
full responsibility for
managing the business

A partnership may be set up

so that all of the partners are
general partners.

Section 7.1 Sole Proprietorships and Partnerships

13

Types of Business Ownership

General Versus
Limited Partners
Some partnerships include
a limited partner.

Section 7.1 Sole Proprietorships and Partnerships

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

14

Partnerships
Advantages
Partnerships are inexpensive to create.

General partners have complete control.

Partners can share ideas.

Partners can share ideas and secure investment capital more
easily and in greater amounts.
Section 7.1 Sole Proprietorships and Partnerships

15

Partnerships
Disadvantages
It is difficult to dissolve one partners interest without
dissolving the partnership.

There may be personality conflicts.

Partners can be held liable for each others actions.

Section 7.1 Sole Proprietorships and Partnerships

16

Types of Business Ownership

7.1

1. Discuss the sole proprietorship legal form.

Sole proprietorship is the easiest and most

popular form of business to create. The owner
receives the profits, incurs any losses, and is
liable for the debts of the business.

Section 7.1 Sole Proprietorships and Partnerships

17

Types of Business Ownership

7.1

2. Explain the partnership legal form.

A partnership is an unincorporated business with two or

more owners. The partners share the decisions, assets,
liabilities, and profits. The partnership can draw on the
skills, knowledge, and financial resources of more than
one person, which is an advantage when seeking loans.

Section 7.1 Sole Proprietorships and Partnerships

18

Types of Business Ownership

7.2

Explain how the corporate form gives owners more

protection from liability.
Discuss the advantages and disadvantages of a
C-corporation
Describe a Subchapter S corporation.
Compare nonprofit corporations to C-corporations.
Explain the limited liability company.
Discuss how to decide which legal form to use.
Section 7.2 Corporations

19

Types of Business Ownership

7.2

In a corporation, the owners of the business

are protected from liability for the actions of
the company.

Section 7.2 Corporations

20

Types of Business Ownership

7.2

corporation
C-corporation
shareholders
limited liability

Section 7.2 Corporations

Subchapter S corporation
limited liability company (LLC)
nonprofit corporation

21

Types of Business Ownership

What Is a Corporation?
There are three types of
corporations:
C-corporation
Subchapter S
corporation
nonprofit corporation

Section 7.2 Corporations

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

22

Types of Business Ownership

C-Corporation
A C-corporation is the
most common corporate
form.

Section 7.2 Corporations

C-corporation an entity
that pays taxes on
earnings; its shareholders
pay taxes as well

23

Types of Business Ownership

C-Corporation
In smaller corporations, the
founders generally are the
major shareholders.

Section 7.2 Corporations

shareholders an owner
of shares of stock in a
corporation

24

C-Corporation
Advantages
status
limited liability
ability to raise investment money
perpetual existence
employee benefits
tax advantages
Section 7.2 Corporations

25

Types of Business Ownership

Advantages
Corporate shareholders
have limited liability, but
some banks require officers
to personally guarantee the
debts of the company.

Section 7.2 Corporations

limited liability partial

responsibility of a
corporate shareholder; he
or she is responsible only
up to the amount of the
individual investment

26

C-Corporation
Disadvantages
expensive to set up
income is more heavily taxed
subject to double taxation on income
pays taxes on profits
stockholders pay taxes on dividends
Section 7.2 Corporations

27

Types of Business Ownership

Subchapter S Corporation
An entrepreneur can avoid
the double taxation of a
C-corporation by setting up a
Subchapter S corporation.

Section 7.2 Corporations

subchapter S
corporation a
corporation that is taxed
like a partnership; profits
are taxed only once at
the shareholders
personal tax rate

28

Types of Business Ownership

Nonprofit Corporation
A nonprofit corporation
must fall within one of four
categories:
religion
charity
public benefit
mutual benefit

Section 7.2 Corporations

nonprofit corporation
a legal entity that makes
money for reasons other
than the owners profit; it
can make a profit, but
the profit must remain
within the company

29

Types of Business Ownership

Limited Liability Company

There are many benefits to
forming a limited liability
company (LLC)

Section 7.2 Corporations

limited liability
company (LLC)
a company whose
owners and managers
have limited liability and
some tax benefits, but
avoids some restrictions
associated with
Subchapter S
corporations

30

Types of Business Ownership

Making the Decision

Before deciding on a legal form, ask yourself key
questions about:
your skills
capital
expenses

Section 7.2 Corporations

willingness to assume liability

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

31

Types of Business Ownership

7.2

1. Explain how the corporate form gives owners

more protection from liability.

A corporation offers limited liability. In other

words, shareholders are liable only up to the
amount of their individual investments.

Section 7.2 Corporations

32

Types of Business Ownership

7.2

2. Discuss the advantages and disadvantages

of a C-corporation.
Advantages: A corporation has a more professional appearance,
its shareholders are liable only up to the amount of their individual
investment, it can raise money by issuing shares of stock, it has
perpetual existence, it is structured to accommodate employee
benefits, and it has tax advantages.
Disadvantages: A corporation is expensive to set up and its
income is more heavily taxed.

Section 7.2 Corporations

33

Types of Business Ownership

7.2

3. Describe a Subchapter S corporation.

The Subchapter S corporation is taxed like a partnership;

profits are taxed only once at the shareholders personal
tax rate. Therefore, the Subchapter S corporation is not a
tax-paying entity. Generally, it can have no more than 75
stockholders who must be U.S. citizens. It can have only
one class of stock.

Section 7.2 Corporations

34

Types of Business Ownership

7.2

4. Compare nonprofit corporations to Ccorporations.

Nonprofit corporations can make a profit, but the profit
must remain within the companies and not be distributed to
shareholders. Any type of business can be a corporation,
but a nonprofit must be formed for religious or for
charitable purposes, public benefit, or religious purposes.
C-corporations are created to make a profit for its owners,
or shareholders.
Section 7.2 Corporations

35

Types of Business Ownership

7.2

5. Explain the limited liability company.

The limited liability company protects owners with the

limited liability of a corporation. That is, the companys
owners are not liable for its debts. It also provides passthrough tax advantages; shareholders are taxed only once.
There are no limitations on the number of members or on
their status.

Section 7.2 Corporations

36

Types of Business Ownership

7.2

6. Discuss how to decide which legal

form to use.
You should consider your skills, capital, living expenses,
willingness to assume personal liability for any claims
against the business, control desired. Also, ask yourself:
do you expect to have initial losses, or will the business
be profitable from the beginning? Do you expect to sell
the business some day?
Section 7.2 Corporations

37

Types of Business Ownership

Entry Level
E-Commerce
Big companies can afford to spend millions of
dollars developing their e-commerce sites.
However, there are ways that allow small
businesses to ease into e-commerce at a slower,
less-expensive pace.

Section 7.2 Corporations

38

Types of Business Ownership

Tech Terms
hosted shopping cart
a business that offers e-commerce services for a monthly fee; users
can upload product information and have their business launched
instantly
online auction
an auction that takes place on a Web site such as eBay

Section 7.2 Corporations

39

Types of Business Ownership

Tech Terms
open-source software
software applications that are distributed free of charge; a number of
e-commerce shopping cart programs are available as open-source
software
virtual store
an online storefront that allows entrepreneurs to sell products they do
not own.

Section 7.2 Corporations

40

End of

Types of
Business
Ownership

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