Chapter 4-Business Ownership PDF

Chapter 4: Forms of Ownership  Company forms Sole proprietorship Partnership Corporation Cooperative societies Unlimited liability – the responsibility of business owners for all of the debts of the business. Limited liability – the responsibility of a business’s...

Chapter 4: Forms of Ownership  Company forms Sole proprietorship Partnership Corporation Cooperative societies Unlimited liability – the responsibility of business owners for all of the debts of the business. Limited liability – the responsibility of a business’s owners for loses only up to the amount they invest.  Sole Proprietorships A sole proprietorship is the simplest form of business ownership. A sole proprietorship is a business owned and managed by one person. A sole proprietorship has only one owner. That sole owner may engage in any form of legal business activity any time and anywhere. The owner is liable for the debts of the organization and the organization is liable for the owner’s debts. 4  The owner is responsible for securing and investing the funds for the business. These funds may come from the owner's existing or borrowed financial resources. There is no separate legal identity for the organisation rather than that of its owner.  A sole proprietorship is one person alone. He/she has unlimited liability for all debts of the business, and the income or loss from the business will be reported on his/her personal income tax return along with all other income and expense he/she normally reports (although it will be on a separate schedule). It is the easiest to start and require very little start-up capital  Sole Proprietorships Strengths (Advantages)  Easiest and least expensive form of ownership to organize.  Sole proprietor is in complete control, and within the parameters of the law, may make all the decisions.  Sole proprietors receive all income generated by the business to keep or reinvest. Profits from the business flow-through directly to the owner's personal tax return.  The owner has no constraints other than general law on his/her operations. He/she has no partners or shareholders to constrain business activity.  The owner is close to the market and customer, so he/she can respond quickly and can change faster than other companies.  The business is easy to dissolve, if desired. 7  Sole Proprietorships Weaknesses (Disadvantages) Unlimited liability. They are legally responsible for all debt against the business. Their business and personal assets are at risk. He/she is often unwilling to take risks for fear of putting his/her personal assets at risk. Limited financial resources. The sole proprietor’s access to capital is often more difficult than for other forms of organisation. He/she has to rely on his/her own personal capital resources or borrowed money, secured against his/her assets. Because of the lack of separate legal identity, the sole proprietor risks all of his/her assets on the success of the organisation. Management difficulties. All managerial decisions and work is on the owner. Difficult to attract good qualified employees because sole proprietors can not compete with the salary and other benefits offered by large companies. Limited growth and limited life span. Expansion is often slow since it relies on its owner for most of its creativity, business know- how and funding. The business lacks continuity when the owner 8 dies.  Partnership A legal form of business with 2 or more owners. A partnership is a business consisting of two or more people doing business together for profit. Any two or more people can get together and form a partnership. Each partner agrees to provide some fraction of the work and capital, to share 10  A partnership is formed by a Deed of Partnership creating legal relationship between the owners Partnership does not operate under company law and it is not required to file their accounts. The partners are liable (jointly and severally) for debts of the partnership  General Partnership: General Partnership – is a partnership in which all owners share in operating the business and in assuming liability for the business debts. General partner – an owner (partner) who has unlimited liability and is active in managing the firm. In a General Partnership, each partner has unlimited liability for the debts of the business. The income and expense is reported on a separate return for tax purposes, but each partner then reports his or her pro-rata share of the profit or loss from the business as one line on  Limited Partnership: Limited Partnership – is a partnership with one or more general partners and one or more limited partners. General partner has unlimited liability for the debts of the partnership and is active in managing the company. Limited partner is an owner who invested money in business but does not have any managerial responsibility or liability for losses beyond the investment – their liability is limited to the amount they put into the company, their  Limited partners – partners who are financial investors in a partnership, cannot participate in the day-to-day management of a company, and have limited liability for the partnership’s debts. 2 types of limited partners: – Silent partners – not active in a business but generally are known to be members of the partnership. – Dormant partners – neither active nor generally known to be associated with the business  Partnership Strengths (Advantages)  More financial resources. A partnership is normally in a strong position to raise capital and expand the business. More funds can be borrowed because of the presence of more owners.  Shared management and responsibilities. Easier to manage, more managerial skills are available as partners are specialists in different disciplines.  Longer life span. Being watched by a partner can help a businessperson become more disciplined and motivated.  The partnership can also be legally dissolved without much difficult by mutual consent of the partners.  No special taxes. All profits of partnerships are taxed as the personal income of the owners. 15  Partnership Weaknesses (Disadvantages)  Each owner has unlimited liability and may have to cover the debts of other partners. The partners are personally and jointly responsible for all the debts of the firm.  Division of profits. Sharing risk means sharing profits and that can cause conflicts.  Disagreement among partners. Distribution of responsibilities and power, management and obligations are always subjects for conflicts among partners. In case of any dispute among the partners, a delay may take place in decision-making process.  The duration of the partnership is always uncertain.  Difficult to liquidate or transfer partnership. 16  Corporations An incorporated company is an organisation with a legal identity – the body corporate – separate from that of its owners. A corporation or a ‘Company’ is a business entity where there are a number of owners. Each owner is called a shareholder, whose liability is limited to the extent of his shareholding. His/her personal assets cannot be touched. Owners are not responsible for debts or any other problem of the corporation beyond the money they invest. A corporation enables many people to participate in the ownership and profits of the business without working there of having other commitments to it. Corporations can choose whether to offer such ownership to outside investors or whether to remain privately held. 17  Corporation The common forms of companies are: Limited Liability Company (LLC) S.A.O.C. Company (Societe Anonyme Omani Closed) S.A.O.G. Company (Societe Anonyme Omani General)  Limited Liability Company: A limited liability company provides limited liability for all of its members, personal assets are protected. State laws may differ as to whether it is treated as a partnership or a corporation for state income tax purposes. It can be managed by all of the members or can have centralized management in one or more of the members. Profit or losses don’t have to be distributed in proportion to the money each person invests. Owners agree on the percentage to be distributed to each member  Limited Liability Company (LLC) Features:  This Company may be formed by a minimum of 2 and a maximum of 30 persons.  Each person’s liability is limited to their shares in the company’s capital.  The minimum capital of a LLC is R.O.10,000.  This capital cannot be increased by public subscription. Shares are not offered to the public and are not listed on the Muscat Securities Market (MSM).  Examples: OUA Travel LLC, Bahwan Engineering LLC 20  S.A.O.C. (Societe Anonyme Omani Closed) Company Features:  Three or more persons may form this Company.  The shares are not issued for public subscription.  It must have a minimum capital of R.O.50,000.  Its shares cannot be traded on the Muscat Securities Market (MSM)  Examples: Oman Arab Bank SAOC, Oman Aviation Services Company SAOC 21  S.A.O.G. Company (Societe Anonyme Omani General) Features:  Three or more persons may form this company.  At least 40% of its shares are issued for public subscription.  It must have a minimum capital of R.O.150,000.  Its shares can be freely traded on the Muscat Securities Market (MSM)  Examples: Oman United Insurance Company SAOG, Shell Oman Marketing Company SAOG 22  Strengths of Corporations  The owners have limited liability. This means that they cannot lose more than they have invested  Can raise more money by selling more shares  Ownership (shares) can be easily transferred  It has a long life.  It can hire professional managers and attract skilled employees by offering stock option (the right to buy shares of the corporation for a fixed price) benefits  Separation of ownership from management 23  Weaknesses of Corporations  It is more expensive and difficult to organize than other business forms  There is higher government regulation  It lacks secrecy, because the shareholders must receive all the financial reports.  Double taxation  Difficulty of termination  Conflicts between owners and managers 24  Co-operative Societies Cooperative – is a business owned and controlled by the people who use it – producers, consumers, or workers with similar needs who pool their resources for mutual gain. A Consumers' cooperative society is a A Producers’ cooperative society is cooperative business owned by its a cooperative business owned by its consumers for their mutual benefit. It is a producers for their mutual benefit. form of free enterprise that is oriented These co-operatives are formed where toward service rather than profit. suppliers feel they can produce and The consumers of the goods and services sell their output more effectively by are also the individuals who have provided pooling their resources, for example the capital required to launch the business. by sharing manufacturing equipment The major objective of consumers’ and jointly selling output. cooperatives is to provide quality goods Producer co-operatives are popular and services at the lowest cost to the among groups of farmers, allowing consumer/owners. individual farmers to market their Members vote on major decisions, and produce more effectively than they elect the board of directors from amongst could achieve individually. their own number. 25  Class Activity Imagine you want to start your own business. 1. What kind of products or services would you offer? 2. What talents or skills do you have that you could use to run the business? 3. Do you have all of the skills and resources you would need to start the business? Would you need to find one or more partners? If so, what skills would your partners need to have? 4. What form of business would you choose? Why?  Progress Assessment 1. What are the advantages and disadvantages of sole proprietorships? 2. Why is unlimited liability one of major drawbacks of sole proprietorships? 3. What is the difference between a limited partner and a general partner? 4. What are the advantages and