Chapter 3
Forms of Business
Three most common forms of
business ownership in the U.S.



Sole Proprietorship (simplest)
Partnership
Corporation (most complex)
Sole Proprietorship



Is the oldest and simplest form of business.
Account for 2/3 of all businesses in the U.S.
Most common – retailing, agriculture, and
service industries.
Advantages of Sole Proprietorship

Ease and Low cost of Formation and Dissolution.
–
–

Retention of all profits
–

All profits are the owner’s, to do what he wants with.
Flexibility
–

No contracts, agreements or legal documents required.
No minimum capital required to start.
Free to make decisions about the firm’s operations.
Possible Tax Advantages
–
–
Profits are taxed as personal income of the owner.
Proprietorship does not pay any special state or federal
taxes.
Disadvantages of a Sole Proprietorship

Unlimited Liability
–

Lack of Continuity
–

Usually most banks or lending agencies will not lend large
amounts of money.
Limited Business Skills and Knowledge
–

If the owner dies or is declared legally insane, the business
essentially ceases to exist.
Limited Ability to Borrow
–

Owner is held responsible for all debts
Owner does everything for the business, buyer, accountant, janitor.
Lack of Opportunity for high level employees
–
Hard to attract competent help (less likely for advancement)
Partnership

Is an association of two or more persons to
act together as a business.
–
–
Approximately 1.5 million partnerships
10.4% of all businesses
Types of partnerships

General Partnership
–
–
–

A person who assumes full co-ownership of a
business.
Responsible for day to day actions.
Each is taxed on owns behalf
Limited Partnership
–
Contributes Capital to the business

Nominal, Ostensible, Active, Secret, Dormant, or Silent






Nominal – by name only, no actual part of the
partnership agreement.
Ostensible – Active and known partner in the
partnership
Active – Active in management, but may or may not
be know to the public
Secret – active, but not known to public
Dormant – inactive, not know to public
Silent – inactive, but know to public as partner
Advantage of a partnership


Ease and Low Cost of Formation
Availability of Capital and Credit.
–

Retention of Profits
–


Owners receive all profits and debts
Higher Personal interest
–

Partners can pool their money and assets for loans
All actions can interfere and effect other partners within the
business.
Greater Knowledge with partners on how to run a business
Tax advantages
–
Partners taxed only on their individual income form the business
Disadvantage of Partnership

Unlimited Liability
–

Lack of Continuity
–

Termination of business if death, withdrawal, or legally
declared insane
Effects of Management Disagreements
–

Responsible for all of the debt
Must “Play” with other well.
Frozen Investments
–
Easy to put money in, but at times difficult to get it out….
The Partnership Agreement


Are you in a partnership?
You will need one of these…….
–
Articles of Partnership


Listing and explaining the terms of the partnership
Parts of the agreement
–
–
–
–
–
–
–
–
–
–
–
Identity of partners
Nature of business
Name and location of firm
Duration of partnership
Investments of partners
Sharing profit/loss
How are the books going to be kept
Partner drawings
Duties of partners
Restraints of partners
Termination of Partners
The Corporation

Is an artificial person created by law, with
most of the legal rights of a real person
–
–
More than 2.9 million in the U.S.
They comprise only about 1/5 of all businesses,
but account for 9/10 of sales and ¾ of all
business profits.
Types of Corporations

Close Corporation
–

A corporation whose stock is owned by relatively
few people and is not traded on the market.
Open Corporation
–
A corporation whose stock is traded open on the
stock market and can be purchased by individuals
Forming a Corporation

Where to incorporate (three kinds)
–
–
–
Domestic Corporation – any corporation who
does business within its own state.
Foreign Corporation – any corporation who does
business outside of its states borders.
Alien Corporation – any corporation who does
business with another government and
conducting business within the U. S. borders.
Forming a Corporation (con’t)
• Corporate charter
– You have to choose a “home state”
– The charter is a contract between the
corporation and the state, in which the
state recognizes the formation of the
artificial person that is the corporation.
• Stockholders rights
– Common stockholders – vote on
corporate matters
– Preferred – don’t vote, but receive
earnings
– Proxy – is a legal form that allows
someone else vote for the owner of the
Still forming a corporation
• Organizational Meeting
– Election of the first board of directors
How is the Corporation
Structured
• Board of Directors
– Is the top governing body of a
corporations and directors are elected
by the shareholders.
– Setting company goals
– Develop general plans to meeting those
goals
• Corporate Officers
– Appointed by the board of directors.
– Make the smaller plans, carry out the strategies and
manage day to day operations.
Advantages of a Corporation
• Limited Liability
– People of the corporation are not
responsible for debt.
• Ease of Transfer of ownership
• Ease of raising capital
• Perpetual Life
• Specialized management
– Recruit more skilled people
Disadvantages of
Corporations
• Difficulty and expense of Formation
• Government Regulations
• Double Taxations
– Corporations must pay taxes
– Shareholders must pay taxes
• Lack of Secrecy
Types of Corporations
• Government-Owned Corporations
– Are owned and operated by local, state,
or federal government.
– Usually provides a service that the
business sector is reluctant or unable to
offer. Nuclear, Department of Revenue
– Quasi-government
• Partly private, partly government owned
• Boeing,
• Not-for-Profit
– A corporation that is organized to
provide a social, educational, religious,
or other non-business service rather
than to earn a profit.
– Exempt for taxes.
• S- Corporation
– Is a corporation that is taxed as thought
it were a partnership.
– A firm must meet certain criteria
Corporate Growth
• Growth from with
– Adding a different section or a new part
of a company
• External Growth
– Mergers
• Horizontal Merger – is a merger between
firms that make and sell similar products in
a similar market. AT&T and Cingular
• Vertical Merger – is a merger between firms
that operate at different but related levels in
the production of marketing of a product.
Chevrolet and Mercedes - Diamler-Chrysler
• Conglomerate Merger – is a merger between
firms in completely unrelated fields.
Other forms of business
• Cooperatives
– Is an association of individual or firms
for the purpose of performing some
business function for all its members.
Cooperative may be found in all
segments of our economy.
– Most prevalent in agriculture.
– Farmer and a silo owner
Other forms of business
• Joint Ventures
– A joint venture is a partnership that is
formed to achieve a specific goal or to
operate for a specific period of time.
Once the goal is reached or the period
of time elapses the partnership is
dissolved.
Other forms of business
• A syndicate
– Is a temporary association of individuals
or firms, organized to perform a specific
task that requires a large amount of
capitals. Syndicates are most
commonly used to underwrite large
insurance polices, loans and
investments.