Chapter 4 Choosing a form of business ownership
sole proprietorship
➔ business owned and operated by one person
◆ most popular type of business ownership
◆ ranked last in sales revenues.
◆ 24.1 million sole proprietorship in U.S (72%)
◆ 4% of total annual sales
● Advantages:
○ ease of start-up & closure
■ limited legal requirements.
○ pride of ownership
○ retention of all profits
■ all profits become owner’s personal earnings
○ no special taxes
■ profits earned are taxed a the owner’s personal income
○ flexibility of being your own boss
■ free of making decisions on own
● Disadvantages:
➔ Unlimited liability- legal concept that holds a business owner personally
responsible for all business debts.
● lack on continuity
○ if the owner dies, retires, legally incapable, the firm ends.
● lack of money
○ banks, suppliers, other lenders r unwilling to lend large sums of money.
● limited management skills
○ must be an expert in many different areas (accounting, sales, buying,
etc)
● Difficulty in hiring employees
Partnerships
➔ a voluntary organisation of 2 or more persons to act as co-owners of a business for
profit.
◆ less common than sole proprietorship & corporation
◆ represents only 10% of U.S businesses
◆ no legal maximum number of partners
● 2 Types of partners
➔ General partner- a person who assumes full/shared responsibility for operating a
business.
➔ Limited Partner- a person who invests money in a business but has no management
responsibility/liability for losses beyond the amount they invested in the partnership.
, THE PARTNERSHIP AGREEMENT:
➔ Articles of partnership- an agreement listing & explaining the terms of the
partnership.
◆ the agreement should state:
● who will make final decisions
● each partner duties
● how much profit/loss e/ partner receives or responsible for
● what happens if partner wants to close the firm or dies
● Advantages:
○ Ease of startup
■ limited legal requirements
○ availability of capital & credit
■ bcs partners can pool their funds, partnership has more capital
available than S.P
○ Personal interest
■ help from another partner
○ combined business skills/knowledge
■ weakness of one partner may be offset by another partner’s strength.
○ retention of profits
■ all profits belong to the owners
○ no special taxes
■ e/ partner’s share of profit is taxed the same as a sole proprietorship
(S.P)
● DisAdvantages
○ unlimited liability
■ e/ general partner is legally+personally responsible for the debts, taxes,
& actions of any other partners conducting partnership business, even
if they didn’t do anything wrong.
■ limited partners only risk their og investment
○ management disagreements
○ lack of continuity
■ terminated if one partner dies, withdraws, wants to discontinue;
remaining partner can purchase that partner’s ownership share.
○ frozen investment
■ hard to take out invested money
Corporation
➔ an artificial person created by law w/ most of the legal rts of a real person, including rts
to start/operate a business, buy/sell property, borrow money, sue/be sued, & enter into
binding contracts.
◆ corp. exists only on paper
◆ makes up 18% of businesses
◆ accounts 82% of sales revenue
sole proprietorship
➔ business owned and operated by one person
◆ most popular type of business ownership
◆ ranked last in sales revenues.
◆ 24.1 million sole proprietorship in U.S (72%)
◆ 4% of total annual sales
● Advantages:
○ ease of start-up & closure
■ limited legal requirements.
○ pride of ownership
○ retention of all profits
■ all profits become owner’s personal earnings
○ no special taxes
■ profits earned are taxed a the owner’s personal income
○ flexibility of being your own boss
■ free of making decisions on own
● Disadvantages:
➔ Unlimited liability- legal concept that holds a business owner personally
responsible for all business debts.
● lack on continuity
○ if the owner dies, retires, legally incapable, the firm ends.
● lack of money
○ banks, suppliers, other lenders r unwilling to lend large sums of money.
● limited management skills
○ must be an expert in many different areas (accounting, sales, buying,
etc)
● Difficulty in hiring employees
Partnerships
➔ a voluntary organisation of 2 or more persons to act as co-owners of a business for
profit.
◆ less common than sole proprietorship & corporation
◆ represents only 10% of U.S businesses
◆ no legal maximum number of partners
● 2 Types of partners
➔ General partner- a person who assumes full/shared responsibility for operating a
business.
➔ Limited Partner- a person who invests money in a business but has no management
responsibility/liability for losses beyond the amount they invested in the partnership.
, THE PARTNERSHIP AGREEMENT:
➔ Articles of partnership- an agreement listing & explaining the terms of the
partnership.
◆ the agreement should state:
● who will make final decisions
● each partner duties
● how much profit/loss e/ partner receives or responsible for
● what happens if partner wants to close the firm or dies
● Advantages:
○ Ease of startup
■ limited legal requirements
○ availability of capital & credit
■ bcs partners can pool their funds, partnership has more capital
available than S.P
○ Personal interest
■ help from another partner
○ combined business skills/knowledge
■ weakness of one partner may be offset by another partner’s strength.
○ retention of profits
■ all profits belong to the owners
○ no special taxes
■ e/ partner’s share of profit is taxed the same as a sole proprietorship
(S.P)
● DisAdvantages
○ unlimited liability
■ e/ general partner is legally+personally responsible for the debts, taxes,
& actions of any other partners conducting partnership business, even
if they didn’t do anything wrong.
■ limited partners only risk their og investment
○ management disagreements
○ lack of continuity
■ terminated if one partner dies, withdraws, wants to discontinue;
remaining partner can purchase that partner’s ownership share.
○ frozen investment
■ hard to take out invested money
Corporation
➔ an artificial person created by law w/ most of the legal rts of a real person, including rts
to start/operate a business, buy/sell property, borrow money, sue/be sued, & enter into
binding contracts.
◆ corp. exists only on paper
◆ makes up 18% of businesses
◆ accounts 82% of sales revenue
