Types of

Business
Ownership

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Chapter 7 Types of Business Ownership
Types of Business
Ownership

7.1 Sole Proprietorships and

Partnerships

7.2 Corporations

2
 Types of Business Ownership

7.1

Discuss the sole proprietorship legal form.

Explain the partnership legal form.

Section 7.1 Sole Proprietorships and Partnerships 3

 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 4

 Types of Business Ownership

7.1

sole proprietorship partnership

liability protection general partner
unlimited liability limited partner

Section 7.1 Sole Proprietorships and Partnerships 5

 Types of Business Ownership

Sole Proprietorship

The easiest and most sole proprietorship

popular form of business a business that is owned
and operated by one
ownership is the sole person
proprietorship.

Section 7.1 Sole Proprietorships and Partnerships 6

 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 7

 Types of Business Ownership

Sole Proprietorship

In a sole proprietorship the liability protection

owner must decide how insurance against the
debts and actions of a
much liability protection business
he or she needs.

Section 7.1 Sole Proprietorships and Partnerships 8

 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 9

 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 unlimited liability

of a sole proprietorship is full responsibility for all
debts and actions of a
financial. 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 partnership an

skills, knowledge, and unincorporated business
with two or more owners
financial resources or more who share the decisions,
than one person. assets, liabilities, and
profits

Section 7.1 Sole Proprietorships and Partnerships 12

 Types of Business Ownership

General Versus
Limited Partners
The law requires that all general partner a
partnerships have at least participant in a partnership
who has unlimited
one general partner. 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 limited partner a partner
a limited partner. in a business whose
liability is limited to his or
her investment; a limited
partner cannot be actively
involved in managing the
business

Section 7.1 Sole Proprietorships and Partnerships 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 partner’s 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 Subchapter S corporation

C-corporation limited liability company (LLC)
shareholders nonprofit corporation
limited liability

Section 7.2 Corporations 21

 Types of Business Ownership

What Is a Corporation?

There are three types of corporation a business

that is registered by a state
corporations: and operates apart from its
owners; it issues shares of
C-corporation stock and lives on after the
owners have sold their
Subchapter S interest or passed away
corporation
nonprofit corporation

Section 7.2 Corporations 22

 Types of Business Ownership

C-Corporation

A C-corporation is the C-corporation an entity

most common corporate that pays taxes on
earnings; its shareholders
form. pay taxes as well

Section 7.2 Corporations 23

 Types of Business Ownership

C-Corporation

In smaller corporations, the shareholders an owner

founders generally are the of shares of stock in a
corporation
major shareholders.

Section 7.2 Corporations 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 limited liability partial

have limited liability, but responsibility of a
corporate shareholder; he
some banks require officers or she is responsible only
to personally guarantee the up to the amount of the
debts of the company. individual investment

Section 7.2 Corporations 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 subchapter S

the double taxation of a corporation a
corporation that is taxed
C-corporation by setting up a like a partnership; profits
Subchapter S corporation. are taxed only once at
the shareholder’s
personal tax rate

Section 7.2 Corporations 28

 Types of Business Ownership

Nonprofit Corporation

A nonprofit corporation nonprofit corporation

must fall within one of four a legal entity that makes
money for reasons other
categories: than the owner’s profit; it
can make a profit, but
religion the profit must remain
charity within the company

public benefit
mutual benefit

Section 7.2 Corporations 29

 Types of Business Ownership

Limited Liability Company

There are many benefits to limited liability

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

Section 7.2 Corporations 30

 Types of Business Ownership

Making the Decision

Before deciding on a legal form, ask yourself key

questions about:

your skills willingness to assume liability

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

Section 7.2 Corporations 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 shareholder’s 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 C-

corporations.

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 company’s
owners are not liable for its debts. It also provides pass-
through 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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