Business Ownership Types

• Business is an organization that aims for profit through goods and services demanded by its customers.
• Businesses satisfy consumer needs by offering various goods (tangible items like laptops) and services (intangible offerings like medical care).
• A country’s standard of living depends on the quantity of goods and services people can buy with their money.
• Businesses improve quality of life which refers to overall human happiness, including factors like life expectancy, education, health, and leisure.
• Quality of life improvement is a joint effort by businesses, government, and nonprofits.
• Before starting a business, one should consider questions about business organization to determine the best fit

Business Ownership Types

• Sole Proprietorship
• Partnership
• Corporation

Sole Proprietorship

• The business is owned by one person.
• The owner is personally liable for all business debts.
• This is the most common business structure, accounting for 72% of businesses.
• Sole proprietorships generate less revenue and profit than corporations because they tend to remain small.

Advantages

• The owner makes all the decisions.
• The owner receives all income generated
• Profits are taxed as personal income.

Disadvantages

• The owner must possess diverse skills to manage the business.
• The business dissolves when the owner is gone.
• The owner relies on personal resources for financing.
• The owner faces unlimited liability and personal assets.
• Insurance can mitigate risk, but liability exposure remains substantial.

Partnership

• A business is owned jointly by two or more people
• Partnerships make up ~10% of businesses.
• Forming a partnership is more complex than a sole proprietorship
• It is recommended you seek advice from professionals

Partnership agreement considerations

• Cash/contributions from each partner

• Division of income/loss

• Partner responsibilities

• Conditions for selling company interest

• Conditions for dissolving the company

• Dispute resolution conditions

• A key issue is unlimited liability, meaning partners are liable for their actions and the actions of their partners.

• Personal assets are at risk if the business cannot cover losses.

• A limited partnership involves a general partner with full liability and limited partners with liability up to their investment.

Advantages

• Combines talents
• Easier financing due to combined resources
• Potential for continuity if agreed upon

Disadvantages

• Unlimited liability
• Shared decision-making leading to disagreements
• Profit sharing disagreements

Corporation

• Unique from sole proprietorships/partnerships because it is a separate legal entity.
• Can enter contracts, buy/sell property, can be sued, is responsible for actions, and can be taxed.
• Owners have limited liability.
• Most large businesses are corporations.

Corporate Structure

• Stockholders (shareholders): Owners of the corporation w/ shares of stock, may receive dividends, can sell their ownership, attend meetings, elect directors, and vote on various matters.

• Board of directors: Elected by stockholders to govern the corp., set goals/policies, hire officers, and oversee operations/finances.

• Officers: Top management (CEO, VPs, etc.), hired by the board, responsible for achieving goals and policies.

• Shareholders elect a board of directors who governs the corporation

• The board makes the major decisions/policies

• The board hires a CEO who is held responsible for achieving the goals

Benefits of Incorporation

• Limited liability: Shareholders are not responsible for the corporation's debts.
• Financial resources: Corporations can raise funds by selling stock.
• Specialized management: Corporations can attract skilled employees and offer high compensation.
• Continuity: Corporations can exist indefinitely.
• Transferability: Ownership is easily transferred.

Drawbacks to Incorporation

• Potential conflict between managers who may focus on career advancement and stockholders who want profits.
• Agency problem: A conflict of interest where one party is expected to act in the best interest of another.
• Higher setup costs compared to sole proprietorships and partnerships
• Increased regulation and governmental oversight
• "Double taxation": Corporate profits are taxed, and dividends are taxed again.

Other Types of Business Ownership

Limited Liability Companies (LLC)

• Combines the features of corporations, sole proprietorships and partnerships

• Owners (members) are not personally liable for company debts (like corporations)

• Earnings are taxed only once at the personal level (like sole proprietorships and partnerships).

• An LLC member can be held liable if the business personally guarantees a debt, doesn't pay employment taxes, engages in fraud/illegal behavior, or mixes personal/company assets.

Cooperatives

• A business owned and controlled by those who use its services (also known as a co-op).
• Members join together to market products, purchase supplies, or provide services.
• Increases profits for producer-members and reduces costs for consumer-members.

Not-for-Profit Corporations

• Formed to serve a public purpose rather than for financial gain.
• Exempt from income taxes if the activity is charitable, religious, educational, scientific, or literary
• Contributions are tax deductible.

Franchises

• A franchisor (company with product/service concept) grants a franchisee (individual/company) the right to sell goods/services.

• The franchisee purchases a package including the product/service, operating methods, and training.

• It is is one of the fastest growing segments of the economy

• A franchise agreement allows the franchisee to use the franchisor’s business name, trademark, and logo.

• The franchisee follows the franchisor’s rules, and in return, the franchisor provides support and resources.