5-2

Forms of Business
Ownership

Goal 1 Understand the three major forms of

business ownership.
Goal 2 Determine when each form of business
ownership is most appropriate.
Goal 3 Recognize other specialized business
ownership forms.
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SLIDE 1

C H AP T E R

BUSINESS OWNERSHIP

SLIDE 2

WOULD YOU LIKE TO OWN YOUR OWN

BUSINESS?
WHY OR WHY NOT?

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Principles of Business, 8e

C H AP T E R

SLIDE 3

PROPRIETORSHIP
A business owned and run by just one person.
Positives:
The easiest type of business to start and end

Few legal requirements or capital (financial) needs to be met

Gives you sole control over all business decisions

Owner receives all profits

Negatives:
Owner is responsible for all debt as well
If the business fails, there is not much protection from
creditors
Owner has unlimited liability personal assets can be
taken to pay debts.

2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e

C H AP T E R

SLIDE 4

PARTNERSHIP
A business owned and controlled by two or more
people who have entered into an agreement
Similar to a proprietorship in many ways
It is relatively easy to start
Owners are responsible for decisions and
functions
Partners share both profits and investments
based on the terms of the partnership agreement
Each partner is has unlimited liability on business
debt.

2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e

C H AP T E R

CORPORATION

SLIDE 5

A separate legal entity formed by documents filed with a state

Owned by one or more shareholders and managed by a
board of directors
Owners invest in the business by purchasing shares of stock
More difficult to form than the other two
Must also meet more legal requirements
Not all owners have direct involvement in decision-making
about business functions
And owners do not have access to profits unless the board of
directors approves it.
But, owners have limited liability, meaning their only potential
financial loss is the amount of money they chose to invest

2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e

C H AP T E R

SLIDE 6

Forms of Ownership
U.S. Business Comparison by Form of Ownership
Form of
Ownership
Proprietorship

Number of
Businesses
(2006)

Total Revenue
(Thousands)

Percent of All
Businesses

Percent of
Total Revenue

22,075,000

1,278,000,000

71.53%

4.06%

Corporation

5,841,000

26,070,000,000

18.93%

82.82%

Partnership

2,947,000

4,131,000,000

9.55%

13.12%

30,863,000

31,479,000,000

100.00%

100.00%

Total

2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e

C H AP T E R

SLIDE 7

Checkpoint
What are the differences between the
three main forms of business
ownership?
Business forms differ in the ways in which
decision-making and investments are made
and to whom liabilities are distributed.

2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e

CHOOSING A FORM OF
BUSINESS OWNERSHIP

C H AP T E R

SLIDE 8

When starting a new business the owner

should carefully consider the form of
ownership
The form of ownership can change, but it
is best to decide which form to use for
long term as well as during the first few
years.

2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e

C H AP T E R

SLIDE 9

Choosing a proprietorship
It is easy to start just have to begin buying and
selling as a business
Good for people that:
Want total independence
Do not want a lot of government regulation

You do not need to obtain any government licenses or

permits
Tax advantages because of being able to write off expenses
of business

Want to be in control of all business decisions

Are willing to take on the entire risk of a business
In the eyes of the law, the owner is the same as the business
A failed business may result in the owner losing almost
everything
2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e

C H AP T E R

SLIDE 10

Choosing a partnership

More complex than proprietorship it is common and preferred

practice to create a partnership agreement that spells out
exactly what each member will do, how they are paid, and how
they get out, etc.
Good if:
You want to expand the business and are willing to share control
in return for additional resources and reduced risk.
Need more money to invest, adding partners can add to the
amount of starting capital
You want more expertise added to your business
You and the partners share an idea for the business
You and partners work well together and enjoy sharing rewards

Same liability issues as with a proprietorship

If someone leaves the partnership, it is usually dissolved.
It is difficult if other people want to join the partnership or if it
needs to be dissolved.
2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e

C H AP T E R

Choosing a corporation

SLIDE 11

Subject to many more laws and is most difficult to form

You must file a legal document that defines the ownership and operation
conditions for the business called article of incorporation this can be
costly
They must follow laws of the state
Each state has a list of things that must be included

They offer a wide range of advantages:

It is treated as an individual by the government
Liability is limited to investment amount
The amount of debt to the business does not matter

People can own part of the business, but not have to deal with the day to
day business activites while still receiving profits
The business can be easily expanded and ownership can be changed
easily

Disadvantages:
Decision making is shared
Lots of record keeping
Corporate taxes and investors also pay taxes on earnings (taxed twice)

2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e

C H AP T E R

Checkpoint

SLIDE 12

Which form of business ownership is the

most complex and difficult to form?
The corporation is more complex to begin
than other business forms.
Forming a corporation requires much more
bureaucracy, is more subject to government
regulations, requires the organization of a
board, and must have clearly defined
bylaws.
2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e

C H AP T E R

OTHER FORMS
OF OWNERSHIP

SLIDE 13

Specialized partnerships and corporations

Limited Liability Partnership some investors cannot
lose more than the amount of their investment
They are not allowed to participate in the day-to-day
management of the business
Difficult and costly to set up

Joint Venture two or more businesses operated

together for a limited time on a specific project (a type
of partnership)
S-Corp offers limited liability of a corporation
All income is passed through the owners based on
investment
All income is taxed on owners individual tax returns
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Principles of Business, 8e

C H AP T E R

SLIDE 14

LL Company provides protection for owners

Simpler set of organizing and operating
requirements than a corporation
No articles of incorporation or by-laws needed
Only a simple document like a partnership
agreement is needed

Non-profit Corp a group of people that join

together to do some activity that benefits the
public
2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e

C H AP T E R

SLIDE 15

Cooperative owned by its members, serves

their needs, and managed in their interest
Formed so members can purchase goods and
services more cheaply
Or so that members can work together to sell
products collectively
Large numbers of small businesses together have much
greater bargaining power than the individual businesses

Franchise a written contract granting

permission to operate a business to sell
products and services in a specific way and in
a designated location.
2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e

C H AP T E R

SLIDE 16

Checkpoint
What are the other specialized forms of
business ownership?
Limited liability partnership
Joint venture
S corporation
Limited liability company (LLC)
Nonprofit corporation

2012 Cengage Learning. All Rights Reserved.

Principles of Business, 8e