Chapter 02: Forms of Business Ownership


Chapter 02: Forms of Business Ownership
Layout of Chapter:
1.                  What type of business is right for you?
2.                  Sole Proprietorship.
3.                  Partnership.
4.                  Other Unincorporated Forms of Business.
5.                  Corporations.
6.                  Mergers.
7.                  Other Incorporated Forms of Business.
1.                  What type of business is right for you?
A person thinking about owning a business should examine the following factors:
A)                Capital Requirements: The amount of funds necessary to finance the operation.
B)                Risk: The amount of personal property a person is willing to lose by starting the business.
C)                Control: The amount of authority the owner exercises.
D)                Management Abilities: The skills needed to plan, organize, and control the business.
E)                Time Requirements: The time needed to operate the business and provide guidance to the employees.
F)                 Tax Liability:  What taxes a business must pay to various governments on earnings of the business.
Each of these factors should be considered along with your own personal Values and Philosophy.
2.                  Sole Proprietorship.
A business owned and managed by one individual.
That person may seek help from others to conduct the business, but is the only boss; the sole proprietor is the company. E.g. hardware store, a bakery or a restaurant.  
Advantages of a Sole Proprietorship:
·        Ease of starting - Sole Proprietorship is the easiest way to start a business. It involves a minimum number of problems.
·        Control - You can be your own boss.
·        Sole participation in profits and losses.
·        Use of owner’s abilities - Largely dependent on owner’s efficient use of abilities, managerial expertise for the success of the business.
·        Tax breaks - Business pays no income tax.
·        Secrecy - Not easily available information to the public.
·        Ease of dissolving.
Disadvantages of a Sole Proprietorship:
·        Unlimited liability[1].
·        Difficulty in raising capital.
·        Limitations in managerial ability.
·        Lack of stability.
·        Demands on time.
·        Difficulty in hiring and keeping high-achievement employees.
3.                  Partnership.
A business owned by two or more people.
An association of two or more persons to carry on as co-owners of a business for profit. A partnership can be based on a written contract or a voluntary and legal oral agreement, but oral contracts are not recommended.
Other than the difference in the number of owners, a partnership is similar in many respects to a sole proprietorship.
Types of Partnerships: Three (3) Kinds.
General Partnership: A partnership in which at least one partner has unlimited liability for the debt of the business; a general partner has authority to act and make binding decisions as an owner.
Limited Partnership: A partnership with at least one general partner, and one or more limited partners who are liable for loss and up to the amount of their investment.
Joint Venture: The joining/ unification of two or more individuals and businesses to accomplish a specific purpose or objective or to complete a single transaction.
The Partnership Contract: A contractual agreement is called Articles of Partnership. A written partnership agreement includes the following main features:
·        Name of the partnership business.
·        Types of business.
·        Location of business.
·        Expected life of the partnership.
·        Names of the partners and the amount of each one’s investment.
·        Procedures for distributing profits and covering losses.
·        Amount that partners will withdraw for services.
·        Procedure for withdrawal of funds.
·        Duties of each partner.
·        Procedures for dissolving the partnership.
Advantages of a Partnership:
·        More capital
·        Combined managerial skills
·        Ease of starting
·        Clear legal status
·        Tax advantages.
Disadvantages of a Partnership:
·        Unlimited liability.
·        Potential disagreement.
·        Investment withdrawal difficulty.
·        Limited capital availability.
·        Instability.
4.                  Other Unincorporated Forms of Business.
A)    Syndicates: Two or more businesses joined together to accomplish specific business goals; a popular form in underwriting large amounts of corporation stocks.
Unlike a joint venture, a syndicate need not be dissolved after the transaction is completed. The members of a syndicate can sell their ownership interest to buyers of their choice. But in a partnership, the remaining partners can veto a new partner.
B)    Business Trusts: A business used to hold securities for investors; allows the transfer of legal title to a property of one person for the use and benefit of another.
Under the business trust, a trustee or group of trustees is legally permitted to do business. The trustees issue shares, called trust certificates, to investors. These shares show that the holder has transferred funds to a trustee and has the legal right to benefit from the success of the trust investment. Shareholders have no right to vote or manage the business. They can sell their trust certificates to buyers of their choice.
5.                  Corporations.
A business that is a legal entity separated from its owners.
The owners of a corporation are spread over a wide geographical are and can hire professional managers to operate the business. In the eyes of law, the corporation is an artificial being. It has legal rights of an individual: it can own property, purchase goods and services, and sue other persons or corporations.
Forming a corporation:
The legal status of a corporation stems from a charter, so it is a state issued document authorizing its formation.
Charter: A state’s written agreement giving a corporation the right to operate as a business.
The individuals forming the corporation are called the incorporators.
·        Domestic Corporation: An enterprise organized under the laws of one state or country and doing business within that state or country.
·        Foreign Corporation: A business incorporated in one state or country and doing business within that state or country.
After the charter has been granted, the incorporators and all subscribers or the owners of the stock of the business meet and elect a Board of Directors. They also approve the bylaws of the corporation. The board of directors then meets to select the professional managers, and to make any other decisions needed to start the business.
The actual owners of the business are the shareholders, those who have invested their money. The corporation is run by professional managers who plan, organize, control, and direct the activities needed to sell goods and/or services to customers. The managers also decide what property to purchase, what employees to hire, and where to borrow required funds.
Types of Corporation:
·        Non-profit corporations - An enterprise (e.g. University, Charity, Church, Mosque, religious or government organization) that is not driven by a profit-seeking motive.
Corporate Policy Makers:
A Corporation’s policy is established by a Board of Directors, which is elected by the shareholders, or owners.
·        Directors make judgments in the interest of all owners/ shareholders.
·        Directors are elected by shareholders. (usually for their business abilities).
·        Each share of common stock entitles the shareholder one vote.
Proxy:
A written statement signed by a shareholder of a corporation, allowing someone else to cast his/ her number of votes.
Advantages of a Corporation:
·        Limited liability.
·        Skilled management team.
·        Transfer of ownership.
·        Greater capital base.
·        Stability.
·        Legal entity status.
Disadvantages of a corporation:
·        Difficulty and expense of starting.
·        Lack of control.
·        Multiple taxation: Businesses must pay an annual fee for the right to operate as a corporation. There is also a corporate income tax. The shareholders must pay income tax on the dividends they receive through ownership. This is referred to as double taxation. 
·        Government involvement.
·        Lack of secrecy.
·        Lack of personal interest.
·        Credit limitations.
6.                  Mergers:
Combining two or more business enterprises into a single entity.
Mergers have always been a concern in government policy because of increased market share and reduced competition.
HORIZONTAL MERGER:
A merger involving competitive firms in the same market. (e.g. Republic steel and Jones & Laughlin Steel merged to for LTV Steel.)
VERTICAL MERGER:
A merger in which a firm joins with its supplier. (e.g. General Motors purchased Electronic Data Systems).
CONGLOMERATE MERGER:
A merger involving firms selling goods in unrelated markets. (e.g. Xerox Corporation purchased and insurance firm, Crum and Foster.)

7.                  Other Incorporated Forms of Business.
·        S Corporation
·        Cooperatives (Co-op)
·        Savings and Loan Association
·        Professional Service Associations

1.      S Corporation: A corporation with 35 or fewer owners that files an income tax return as a partnership to take advantage of lower tax rates.
2.      Cooperatives (Co-op): An organization in which people collectively own and operate a business in order to compete with bigger competition.
Co-ops are often found where a large number of small producers can band together to become more competitive. E.g. Milk vita dairy products.
Dividends are paid to co-op members in proportion to the amount of goods that each member has bought or sold through the co-op. These patronage dividends are considered a refund of overpayment rather that a distribution of profits.
3.      Savings and Loan Association: A corporation that operates in much the same manner as a savings bank. The owner of an account is given a passbook in which deposits and withdrawals are noted.
In a mutually owned S&L, both savers and borrowers are members. They elect a board of directors to manage the association. Most S&L capital is invested in local home mortgages.
4.      Professional Service Associations: An organization of professional people, organized under professional association laws and treated as a corporation for tax purposes. (e.g. PSA of Doctors, lawyers, dentists etc.)
PSAs are treated as corporations for tax purposes. Thus members could have the tax advantages of profit sharing and pension plans, not available to private persons and partnerships.



[1] Unlimited Liability: Obligation of investors to use personal assets, when necessary, to pay off debts to business creditors; A disadvantage of sole proprietorships and partnerships.

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