Business Formation PDF

CHAPTER THREE BUSINESS FORMATION  Forms of Business There are three basic legal forms of business: 1. Proprietorship 2. Partnership 3. Corporation 1. Proprietorship – a form of business with single owner who has unlimited liability, controls all decisions, and receives all...

CHAPTER THREE BUSINESS FORMATION  Forms of Business There are three basic legal forms of business: 1. Proprietorship 2. Partnership 3. Corporation 1. Proprietorship – a form of business with single owner who has unlimited liability, controls all decisions, and receives all profits.  Formation Cont’d... Features of a sole proprietorship Single ownership  One man control  Undivided risk  Unlimited liability  No separate entity of the business  Less government regulation  Formation Cont’d... Advantages Disadvantage Simplicity Limited funds Quick decision Limited skills High secrecy Unlimited liability Direct motivation Uncertain life Personal touch Less synergy Flexibility  Formation Cont’d... 2. Partnership – owned by two or more individuals having unlimited liability who have pooled resources to own a business. is an agreement among two or more persons to carry on jointly to lawful business and to share the profits arising there from.  Persons who enter into such agreement are known as partners.  Formation Cont’d... Characteristics Association of two or more persons  Contractual relationship  Existence of lawful business  Sharing of profit and loss  Mutual agency among partners  No separate legal entity of the firm  Formation Cont’d... Unlimited liability  Restriction on transfer of interest  Utmost good faith 3.Corporation: Separate & legal entity that is run by stockholders having limited liability. Characteristics Has a separate and legal personality distinct from owners  Formation Cont’d... Continuity, unaffected by debt or transfer of stock shares  Income tax on corporate profit and dividend  Professional managers as distinct from the shareholders mostly manage a corporation.  Formation Cont’d... 4. Cooperatives - are an association of persons, with a common bond of interest,  who have voluntarily joined together to achieve a lawful  common social or economic end,  making equitable contributions to the capital required and  Formation Cont’d... accepting a fair share of the risks and benefits of the undertaking in accordance with the universally accepted principles of cooperation. Characteristics Open and voluntary membership  Democratic control  Limited interest on capital  Division of net surplus  Cooperative education  Concept of Small Business There is no single and universally accepted definition for Small Business, because it varies from country to country, institution to institution, country’s level of development, time etc.  Small business are catalyst of economic development in both developed and developing countries.  Cont’d… Small business owners vs. Entrepreneurial venture? Entrepreneurial venture is a growth-oriented innovative company with product or service offerings that are new to the market.  Definition of SMEs There are two approaches to define small business. 1. Size criteria (the number of employees and startup capital i.e can be quantified) 2. Economic/control criteria (market share, independence, and personalized mgmt. i.e qualitative ).  Definition Cont’d… 1. Size Criteria Size refers to the scale of operation.  The size may be measured in the following ways number of employees; (mostly used,