BUSINESS OWNERSHIP
Many people think they would like to own a business. The chance to be in control, make decisions, and invest money to make a profit is challenging and exciting. Thousands of people are business owners. The amount of control they have, how decisions are made, the sources of money for the business, and control over profits is not the same for every business owner. The form of ownership affects each of those aspects of the business.
There are three major forms of business ownership—proprietorship, partnership, and corporation. There are also several other specialized forms of ownership.
ProprietorshipA proprietorship is a business owned and run by just one person. It is the easiest
form of business to start and end. There are very few legal requirements regarding the business ownership or capital needs that must be met.
Many individuals like the proprietor-ship form of ownership. It gives them sole control over all business decisions. The owner receives all profits made by the business. He or she can determine how those profits are used. The owner is also responsible for all debts of the business. If the business fails, the owner has almost no shelter from creditors. Any money and other assets owned by the proprietor, whether used in the business or not, can be claimed by creditors to pay the business debts.
PartnershipA partnership is a business owned and controlled by two or more people who have entered into an agreement. A partnership is very similar to the proprietorship in several ways. It is quite easy to start. The owners are both responsible for key business decisions and functions. The partners share both investments and profits based on the terms of the partnership agreement. Each partner is liable for all of the debts of the business should it fail.
CorporationA corporation is a separate legal entity formed by documents filed with a state. It is owned by one or more shareholders and managed by a board of directors. Most corporations have several owners who invest in the business by purchasing shares of stock. Corporations are more difficult to form than either proprietorships or partnerships. They must also meet more legal requirements. Not all owners have direct involvement in decision-making about business functions. They will not have access to profits unless the board of directors approves it. Corporations protect the liability of stockholders to only the amount of money they have invested.
Most U.S. businesses are organized as proprietorships. However, as shown in Figure 5-2, proprietorships have a very small percentage of business revenues.
Many people think they would like to own a business. The chance to be in control, make decisions, and invest money to make a profit is challenging and exciting. Thousands of people are business owners. The amount of control they have, how decisions are made, the sources of money for the business, and control over profits is not the same for every business owner. The form of ownership affects each of those aspects of the business.
There are three major forms of business ownership—proprietorship, partnership, and corporation. There are also several other specialized forms of ownership.
ProprietorshipA proprietorship is a business owned and run by just one person. It is the easiest
form of business to start and end. There are very few legal requirements regarding the business ownership or capital needs that must be met.
Many individuals like the proprietor-ship form of ownership. It gives them sole control over all business decisions. The owner receives all profits made by the business. He or she can determine how those profits are used. The owner is also responsible for all debts of the business. If the business fails, the owner has almost no shelter from creditors. Any money and other assets owned by the proprietor, whether used in the business or not, can be claimed by creditors to pay the business debts.
PartnershipA partnership is a business owned and controlled by two or more people who have entered into an agreement. A partnership is very similar to the proprietorship in several ways. It is quite easy to start. The owners are both responsible for key business decisions and functions. The partners share both investments and profits based on the terms of the partnership agreement. Each partner is liable for all of the debts of the business should it fail.
CorporationA corporation is a separate legal entity formed by documents filed with a state. It is owned by one or more shareholders and managed by a board of directors. Most corporations have several owners who invest in the business by purchasing shares of stock. Corporations are more difficult to form than either proprietorships or partnerships. They must also meet more legal requirements. Not all owners have direct involvement in decision-making about business functions. They will not have access to profits unless the board of directors approves it. Corporations protect the liability of stockholders to only the amount of money they have invested.
Most U.S. businesses are organized as proprietorships. However, as shown in Figure 5-2, proprietorships have a very small percentage of business revenues.
CHOOSING A FORM OF BUSINESS OWNERSHIP
When a new business is started, the owner should carefully consider the form of ownership. While it is possible to change the form of ownership for an existing business, it is best to decide which form to use both for the long-term future of the business as well as for its first few years.
Choosing a ProprietorshipMost businesses begin as a proprietorship. They remain in that form as long as the sole owner operates the business. Often people choose to start a business because they prefer the freedom of working for themselves rather than for another person. They want to be in total control of the business. Many new business owners have limited knowledge of the forms of ownership and want to begin the business as easily as possible. Some people form a business from a hobby or operate a business on a part-time basis. They may expand the business over a few years and spend little time thinking about other ways the business could be organized.
Starting a proprietorship is easy. You just have to begin buying and selling as a business. You don't even need a business name. You do need to obtain any required government licenses and permits. You will need to account for income and expenses and pay taxes on the profits of the business. If operating the business for several years will be your primary job, it is best to choose a name for the business. You will need to register the name with local, state, and federal governments.
A proprietorship provides a tax advantage for the owner. All income is taxed as a part of your personal income. Many business expenses can be used to reduce the income. That benefit also carries the most significant disadvantage of a proprietorship. In the eyes of the law, the owner is the same as the business. Any debts of the business are the responsibility of the owner. Personal assets not connected to the business will need to be used to pay business debts if the business assets are not adequate to cover those debts. In that way, a failed business may result in the owner losing almost everything.
For people who want total independence, do not want to be exposed to significant government regulation, want to be in control of all business decisions, and are willing to take on the entire risk of a business, the proprietorship offers an effective form of ownership. For a person who wants to expand the business, is willing to share control and decision-making in return for additional resources and reduced risk, and wants some protection for money invested, other forms of ownership are better.
Choosing a PartnershipA partnership is a bit more complex and formal than a proprietorship. In many states, a partnership can be formed by the verbal agreement of two or more people. It is usually better to have a written partnership agreement. The partnership agreement is a written agreement among all owners. It details the rules
and procedures that guide ownership and operations. It typically identifies the business name, the investments, and other contributions of each partner. The agreement shows how profits and losses will be divided among the partners. It defines the authority and responsibilities granted to each person and how the partnership can be dissolved. Most states require that partnerships register a business name as well as the name of each person in the partnership.
The advantage of a partnership is that two or more people can contribute to the investment needed to start the business as well as the expertise required to run a business. At the same time, each partner is responsible for decisions made by all other partners. There is no protection for the personal assets of any partner. If the business fails, each person can lose much more than the amount of the original investment. If a partner chooses to leave the partnership or dies, the partnership normally must be dissolved.
A partnership is a good ownership form for people who share an idea for a business. They want to cooperate in managing and investing in the business. It is the easiest form for people who work well together and want to share the risks and rewards of the business. It has the same liability of a proprietorship and presents problems if other people want to join the partnership or if it needs to be dissolved.
Choosing a CorporationMost people think of corporations as very large businesses. It is the most popular form of ownership for large businesses. It is becoming increasingly popular for new and small businesses as well. Corporations are subject to many more laws and are more difficult to form than either proprietorships or partnerships. They offer a number of advantages to the owners as well.
When a new business is started, the owner should carefully consider the form of ownership. While it is possible to change the form of ownership for an existing business, it is best to decide which form to use both for the long-term future of the business as well as for its first few years.
Choosing a ProprietorshipMost businesses begin as a proprietorship. They remain in that form as long as the sole owner operates the business. Often people choose to start a business because they prefer the freedom of working for themselves rather than for another person. They want to be in total control of the business. Many new business owners have limited knowledge of the forms of ownership and want to begin the business as easily as possible. Some people form a business from a hobby or operate a business on a part-time basis. They may expand the business over a few years and spend little time thinking about other ways the business could be organized.
Starting a proprietorship is easy. You just have to begin buying and selling as a business. You don't even need a business name. You do need to obtain any required government licenses and permits. You will need to account for income and expenses and pay taxes on the profits of the business. If operating the business for several years will be your primary job, it is best to choose a name for the business. You will need to register the name with local, state, and federal governments.
A proprietorship provides a tax advantage for the owner. All income is taxed as a part of your personal income. Many business expenses can be used to reduce the income. That benefit also carries the most significant disadvantage of a proprietorship. In the eyes of the law, the owner is the same as the business. Any debts of the business are the responsibility of the owner. Personal assets not connected to the business will need to be used to pay business debts if the business assets are not adequate to cover those debts. In that way, a failed business may result in the owner losing almost everything.
For people who want total independence, do not want to be exposed to significant government regulation, want to be in control of all business decisions, and are willing to take on the entire risk of a business, the proprietorship offers an effective form of ownership. For a person who wants to expand the business, is willing to share control and decision-making in return for additional resources and reduced risk, and wants some protection for money invested, other forms of ownership are better.
Choosing a PartnershipA partnership is a bit more complex and formal than a proprietorship. In many states, a partnership can be formed by the verbal agreement of two or more people. It is usually better to have a written partnership agreement. The partnership agreement is a written agreement among all owners. It details the rules
and procedures that guide ownership and operations. It typically identifies the business name, the investments, and other contributions of each partner. The agreement shows how profits and losses will be divided among the partners. It defines the authority and responsibilities granted to each person and how the partnership can be dissolved. Most states require that partnerships register a business name as well as the name of each person in the partnership.
The advantage of a partnership is that two or more people can contribute to the investment needed to start the business as well as the expertise required to run a business. At the same time, each partner is responsible for decisions made by all other partners. There is no protection for the personal assets of any partner. If the business fails, each person can lose much more than the amount of the original investment. If a partner chooses to leave the partnership or dies, the partnership normally must be dissolved.
A partnership is a good ownership form for people who share an idea for a business. They want to cooperate in managing and investing in the business. It is the easiest form for people who work well together and want to share the risks and rewards of the business. It has the same liability of a proprietorship and presents problems if other people want to join the partnership or if it needs to be dissolved.
Choosing a CorporationMost people think of corporations as very large businesses. It is the most popular form of ownership for large businesses. It is becoming increasingly popular for new and small businesses as well. Corporations are subject to many more laws and are more difficult to form than either proprietorships or partnerships. They offer a number of advantages to the owners as well.
Corporations are treated as an “individual” by governments. They must follow the laws of the state in which they are organized. To form a corporation, you must file articles of incorporation with the appropriate state government office. The articles of incorporation is a written legal document that defines ownership and operating procedures and conditions for the business. Each state has specific information that must be included. States usually provide a form that can be filled out. The business must create corporate bylaws that are the operating procedures for the corporation. It must name a board of directors , the people who will make the major policy and financial decisions for the business. The corporation also issues shares of stock to the investors and details how more investments can be made.
Even though a corporation is more difficult to form and is subject to more government rules, it offers several advantages to owners. The liability of any owner is limited to the amount of money invested. The amount of debt of the business does not matter. People can invest in the business and receive some of the profit without having to take part in the day-to-day management and operations. The business can be easily expanded and ownership can be changed by the sale of stock.
Disadvantages of corporate ownership are that decision-making is shared among managers, the board of directors, and shareholders. Many more records are required and more laws regulate operations than for other forms of ownership. Because corporations are treated as individuals by governments, they must pay corporate taxes on profits earned. Then the investors also pay taxes on their individual earnings from the business.
Even though a corporation is more difficult to form and is subject to more government rules, it offers several advantages to owners. The liability of any owner is limited to the amount of money invested. The amount of debt of the business does not matter. People can invest in the business and receive some of the profit without having to take part in the day-to-day management and operations. The business can be easily expanded and ownership can be changed by the sale of stock.
Disadvantages of corporate ownership are that decision-making is shared among managers, the board of directors, and shareholders. Many more records are required and more laws regulate operations than for other forms of ownership. Because corporations are treated as individuals by governments, they must pay corporate taxes on profits earned. Then the investors also pay taxes on their individual earnings from the business.
OTHER FORMS OF OWNERSHIP
Most businesses are organized as one of the three common forms just discussed. There are other choices of ownership. Some are specialized forms of partnerships and corporations. Others are totally unique forms.
Specialized Partnerships and CorporationsIn a general partnership, all partners take part in ownership and operation of the business. A limited liability partnership identifies some investors who cannot lose more than the amount of their investment, but they are not allowed to participate in the day-to-day management of the business. This type of partnership is difficult and costly to set up. A joint venture is a unique business organized by two or more other businesses to operate for a limited time and for a specific project. It is a type of partnership.
A corporate form that is favored by many small businesses is the S corporation. An S corporation offers the limited liability of a corporation. All income is passed through to the owners based on their investment and is taxed on their individual tax returns. A newer ownership form is the limited liability company (LLC). It combines the best features of a partnership and a corporation. A limited liability company provides liability protection for owners. It has a simpler set of organizing and operating requirements than a corporation. No articles of incorporation or bylaws are needed. A simple document much like a partnership agreement must be developed.
A nonprofit corporation is a group of people who join to do some activity that benefits the public. They work in areas such as education, health care, charity, or the arts. Nonprofit corporations are free from corporate income taxes. They can raise funds by receiving grants and donations from individuals and businesses. As with other corporations, they must organize as a corporation. The government must approve their purpose and operations.
Cooperatives and FranchisesSometimes a group of people forms a cooperative to provide goods and services that they all need. A cooperative is owned by members, serves their needs, and is managed in their interest. Members form a consumer cooperative so that they can purchase goods and
services more cheaply as a group than they could individually. A business cooperative forms to market the products produced by members or to purchase products needed by the members. Large numbers of small businesses will have greater bargaining power than the individual businesses.
A franchise is a written contract granting permission to operate a business to sell products and services in a set way. The company that owns the product or service and grants the rights to another business is known as the franchiser . The company purchasing the rights to run the business is the franchisee . A franchise is a way to expand a business using the investments of others while maintaining control over the name, product quality, and operating procedures.
The franchisee maintains day-to-day operations and receives the profits of the business. It pays a fee and percentage of the profits to the franchiser in return for operating assistance. Some popular and successful franchises include Jiffy Lube, Century 21 real estate offices, Mail Boxes Etc., Wild Birds Unlimited, Merry Maids, Dunkin' Donuts, MAACO Collision Repair and Auto Painting, and New York NY Fresh Deli.
Most businesses are organized as one of the three common forms just discussed. There are other choices of ownership. Some are specialized forms of partnerships and corporations. Others are totally unique forms.
Specialized Partnerships and CorporationsIn a general partnership, all partners take part in ownership and operation of the business. A limited liability partnership identifies some investors who cannot lose more than the amount of their investment, but they are not allowed to participate in the day-to-day management of the business. This type of partnership is difficult and costly to set up. A joint venture is a unique business organized by two or more other businesses to operate for a limited time and for a specific project. It is a type of partnership.
A corporate form that is favored by many small businesses is the S corporation. An S corporation offers the limited liability of a corporation. All income is passed through to the owners based on their investment and is taxed on their individual tax returns. A newer ownership form is the limited liability company (LLC). It combines the best features of a partnership and a corporation. A limited liability company provides liability protection for owners. It has a simpler set of organizing and operating requirements than a corporation. No articles of incorporation or bylaws are needed. A simple document much like a partnership agreement must be developed.
A nonprofit corporation is a group of people who join to do some activity that benefits the public. They work in areas such as education, health care, charity, or the arts. Nonprofit corporations are free from corporate income taxes. They can raise funds by receiving grants and donations from individuals and businesses. As with other corporations, they must organize as a corporation. The government must approve their purpose and operations.
Cooperatives and FranchisesSometimes a group of people forms a cooperative to provide goods and services that they all need. A cooperative is owned by members, serves their needs, and is managed in their interest. Members form a consumer cooperative so that they can purchase goods and
services more cheaply as a group than they could individually. A business cooperative forms to market the products produced by members or to purchase products needed by the members. Large numbers of small businesses will have greater bargaining power than the individual businesses.
A franchise is a written contract granting permission to operate a business to sell products and services in a set way. The company that owns the product or service and grants the rights to another business is known as the franchiser . The company purchasing the rights to run the business is the franchisee . A franchise is a way to expand a business using the investments of others while maintaining control over the name, product quality, and operating procedures.
The franchisee maintains day-to-day operations and receives the profits of the business. It pays a fee and percentage of the profits to the franchiser in return for operating assistance. Some popular and successful franchises include Jiffy Lube, Century 21 real estate offices, Mail Boxes Etc., Wild Birds Unlimited, Merry Maids, Dunkin' Donuts, MAACO Collision Repair and Auto Painting, and New York NY Fresh Deli.