Types of Business Ownership

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Types of Business Ownership

• Which type is Best for Your Venture?

2
Forms of Business Ownership

• One of the first decisions that you will have to
  make as a business owner is how the company
  should be structured

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Consider These Criteria

• Your vision regarding the size and nature of your
  business
• The level of control you wish to have
• The level of "structure" you are willing to deal
  with
• The business's vulnerability to lawsuits.

4
Consider These Criteria

• Tax implications of the different ownership
  structures
• Expected profit (or loss) of the business
• Whether or not you need to re-invest earnings
  into the business
• Your need for access to cash out of the business
  for yourself

5
What Are The Choices?

• A legally constructed business may take one of
  the following forms
• Sole Proprietorship
• Partnership
• Corporation

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Sole Proprietorships

• The vast majority of small business start out as
  sole proprietorships
• These firms are owned by one person
• Usually the individual looks after the day-to-day
  running the business.

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Sole Proprietorships

• Sole proprietors own all the assets of the
  business and the profits generated by it
• They also assume complete responsibility for any
  of its liabilities or debts
• In the eyes of the law and the public, you are
  one in the same with the business

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Sole Proprietorships
ADVANTAGES DISADVANTAGES
quick, easy, and inexpensive to establish limited in terms of employee compensation plans
only requires registration and appropriate licenses all business income is taxable
owner makes all decisions profits may be taxed at a higher rate than for an incorporated organization
owner includes all business profits/losses with personal income harder to raise capital than for a partnership or a corporation
9
Partnerships

• In a Partnership, two or more people share
  ownership of a single business.
• Like proprietorships, the law does not
  distinguish between the business and its owners.
• All partners may or may not be actively involved
  in the day-to-day operation of the venture.

10
Partnerships

• Each partner contributes something toward the
  partnership
• Startup money
• Material resources
• Talent
• Specialized skill
• Experience
• Specific knowledge
• Business contacts.

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Partnership Agreements

• Partners should create a legal partnership
  agreement that outlines
• The time and capital each will contribute
• How decisions will be made
• How profits will be shared (percentage)
• How disputes will be resolved
• How future partners will be admitted to the
  partnership
• How partners can be bought out
• Terminating the partnership

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Types of Partnerships

• General Partnership
• Partners divide responsibility for management and
  liability, as well as the shares of profit or
  loss according to their internal agreement.
• Equal shares are assumed unless there is a
  written agreement that states differently.

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Types of Partnerships

• Limited Partnership
• Most of the partners have limited liability based
  on the extent of their investment
• Limited input regarding management decisions
• Most partners are investors for short term
  projects, or for investing in capital assets

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Types of Partnerships

• Limited Partnership
• This form of ownership is not often used for
  operating retail or service businesses
• Forming a limited partnership is more complex and
  formal than that of a general partnership

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Types of Partnerships

• Joint Venture
• Acts like a general partnership, but is clearly
  for a limited period of time or a single project
• If the partners in a joint venture repeat the
  activity, they will be recognized as an ongoing
  partnership

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Types of Partnerships

• Silent Partnership
• One or more visible people
• A person might invest money in the partnership
  but do not take an active part in the management
  of it

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Partnerships
ADVANTAGES DISADVANTAGES
quick, easy, and inexpensive to establish general partners assume unlimited liability for all debts/obligations incurred by the partnership
each partner may deduct business losses (in proportion to the amount invested in the business) from whatever is earned within the business both business and personal income are taxed
favourable tax treatment, especially for startup losses profits may be taxed at a higher rate than for an incorporated organization
combines the talents and resources of two or more people unless otherwise stated in a partnership agreement, the partnership is automatically dissolved when one of the partners dies
if the partners cant agree on the day-to-day operation of the partnership, decisions become difficult to make
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Corporations

• A corporation is constituted by law and is
  considered to be a distinct legal entity from its
  shareholders
• This means it is separated and apart from those
  who own it
• A shareholders liability for the corporations
  debts are limited to his or her investment

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Corporations

• The goal of a corporation is to operate a
  business for profit and to distribute the profits
  among the shareholders
• A corporation can be taxed it can be sued it
  can enter into contractual agreements
• The owners of a corporation are its shareholders

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Corporations

• The shareholders elect a board of directors to
  oversee the major policies and decisions of the
  corporation
• The corporation has a life of its own and does
  not dissolve when ownership changes

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Corportaions
ADVANTAGES DISADVANTAGES
corporations have an unlimited life, so day-to-day business continues despite the illness or death of their owners more costly to set up because of government fees, name searches, legal fees
ownership is easily transferred requires more formal annual activities (annual meeting, minutes, report)
profits can be removed from the corporation in the form of dividends, which can be a tax benefit to the owner losses cannot be used by the owner to offset personal income
the corporation can arrange for employee benefits such as group insurance or registered pension plans owners personal assets can still be seized by the lending agency if he or she has put up personal collateral for a business loan
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Franchises

• A firm expands into new markets by selling the
  rights to use the company's name and products to
  individuals
• Franchising company provides training services
  and an advertising campaign for the purchaser of
  the franchise

23
Franchises

• Purchaser agrees to meet certain quality
  standards, provide certain products, and pay a
  franchise fee to the franchising organization

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Franchises
ADVANTAGES DISADVANTAGES
Smaller than usual capital investment Possible high franchiser fee
Prior public acceptance of product Some loss of independence
Better than average profit margins Possible difficulties in canceling contract
Management assistance