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Selecting a Form of Business Ownership

Three basic forms of business


ownership
Sole proprietorship

Partnership

Corporation

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Sole proprietorship

A business owned and


operated by one
person.
Approximately 76
percent of all
businesses in the U.S.
are sole
proprietorships.
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Sole Proprietorship
A business owned by a single owner.
Four Characteristics:
Single owner.
Bears all responsibility.
Represents most part of business (70% of all firms in
U.S)
Generate less than 10 percent of all business revenue.

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Advantages of sole proprietorships

Easy and inexpensive to create.


Owner makes all business decisions.
Owner receives all profits.
Least regulated form of business
ownership.
Business itself pays no taxes.

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Disadvantages of sole proprietorships
Owner has unlimited liability for all debts and
actions of the business. Unlimited liability:
The debts of the business may be paid from
the personal assets of the owner.
Difficult to raise capital.
Sole proprietorship is limited by his/her skills
and abilities.
The death of the owner automatically
dissolves the business.
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Partnership

A form of business
ownership in which
two or more people
share the assets,
liabilities, and profits.

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Types of Partnerships
General partnership: A partnership in which all
partners have unlimited personal liability and take
full responsibility for the management of the
business.
Limited partnership: A partnership in which the
partners liability is limited to their investment.
Joint venture: A partnership in which two
companies join to complete a specific project. The
partnership ends after a specified period of time.
Strategic alliance: A partnership in which two
businesses
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work together for mutual benefit.
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Types of Partnerships

Strategic alliance:
According to "An Overview of Strategic
Alliances," Apple has partnered with Sony,
Motorola, Phillips, and AT&T in the past. Apple
has also partnered more recently with Clearwell
in order to jointly develop Clearwell's E-
Discovery platform for the Apple iPad. E-
Discovery is used by enterprises and legal
entities to obtain documents and information in
a "legally defensible" manner, according to a
2010 press release.
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Advantages of partnerships
Shared decision making and management
responsibilities.
Easier to raise capital than in a sole
proprietorship.
Few government regulations.
Business losses are shared by all partners.

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Disadvantages of partnerships

Partnerships may lead to disagreements.


Some entrepreneurs are not willing to share
responsibilities and profits.
Some entrepreneurs fear being held legally
liable for the error of their partners.
Each owner has unlimited liability.

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Corporation

A business that is chartered by a


state and legally operates apart
from its owners.

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Corporations
Individualor group must adopt corporate
charter and file it with the state
Describes name of the firm, stock issued,
firms operations
Must also establish bylaws
Shareholders have limited liability
Shareholders elect members of board of
directors

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Stockholders/Shareholders/
Owners
Elect members of board of directors who
are responsible for establishing general
policies of the firm
Elect president and other key officers who
run the business
Earn return on investment in two ways
May receive dividends
Stock may increase in value

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Private vs Publicly Held
Corporations
Privately Held
Ownership is restricted to small group of
investors.
Stock is not traded publicly.
Publicly Held
Larger corporations.
Stock is traded publicly.
Act of initially issuing stock: going
public.

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Advantages of corporations
Can raise money by issuing shares of stock.
Offers owners limited liability.
Limited liability:
Owners are liable only up to the amount of
their investments.
People can easily enter or leave the business
by buying or selling their shares of stock.
The business can hire experts to
professionally manage each aspect of the
business.
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Disadvantages of corporations
Legal assistance is needed to start a
corporation.
Start-up is costly.
Corporations are subject to more
government regulations than partnerships
or sole proprietorships.
A lot of paperwork is involved in running a
corporation.
Income is taxed twice.
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Double Taxation in
Corporations

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Business Ownership Statistics
Alternate approaches to starting a
business
Buy an existing business.
Enter a family business.
Own a franchise business.

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Advantages of buying an existing
business
Existing businesses already have
customers, suppliers, and procedures.
Seller of the business may be willing to
train the new owner.
There are existing financial records.
Financial arrangements may be easier.

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Disadvantages of buying an existing
business

Business may be for sale because it is not


making a profit.
Problems may be inherited with the
purchase of an existing business.
Many entrepreneurs may not have the
capital needed to purchase an existing
business.

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Advantages to entering a family
business
There is a certain sense of pride and
accomplishment that comes from being part of a
family endeavor.
A business can remain in the family for
generations.
Some people enjoy working with relatives.
The efforts of running a family business give one
the benefit of knowing that their efforts are helping
those whom they care about.
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Disadvantages to entering a family business
Senior management positions are often held by
family members who may not be the best qualified.
It may be difficult to retain qualified employees
who are not members of the family.
Family politics may affect decisions regarding the
business.
It is often difficult to separate business life and
private life in family-run businesses.
It is often difficult to set policies and procedures
and to make decisions.
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Which form of ownership?
Four physicians wish to start a practice
together, and each wants to have
limited liability.
A friend wants to start her own
convenience store.
An entrepreneur wants to acquire a
large U.S. business.
Five friends want to build an apartment
complex and are not concerned about
limited liability.
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Own a franchise business
Franchise: A legal agreement that
gives an individual the right to market a
companys products or services in a
particular area.
Franchisee: A person who purchases a
franchise agreement.
Franchisor: The person or company who
sells a franchise.
Initial franchise fee: The fee the franchise
owner pays in return for the right to run
the business.
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Three Types of Franchises
Distributorship
Dealer sells products produced by a manufacturer.
Example: Car dealers.
Chain-Style Business
Firm uses trade name of a company and follows
guidelines. Example: McDonalds.
Manufacturing Arrangement
Firm manufactures a product using a formula from
another company. Example: Microsoft.

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Advantages of purchasing a franchise
business
An established product or service is being
provided.
Franchisors often offer management, technical,
and other assistance.
Equipment and supplies may be less
expensive.
A guarantee of consistency attracts customers.

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Disadvantages of purchasing a franchise
business
The cost of franchises may be high, which can
reduce profits.
Franchise owners are limited in the decisions they
can make regarding the business.
The performance of other franchises impact on the
franchisee.
The franchise agreement may be terminated by the
franchisor.

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Impact of Ownership on
Return
Return on Investment (ROI)
After-tax earnings represent the return in
dollars to the business owners.
Return on Equity (ROE)
Reflects earnings as a proportion of the
firms equity
Equity is the total investment by the firms
stockholders.
Return on Equity= Earnings after tax

Equity
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Impact of Ownership on Risk
Risk represents uncertainty about the
firms future earnings
Depends on future revenues and expenses
Sole proprietorships tend to be riskier
than larger businesses, such as
partnerships and corporations.
Limitedfunding restricts ability to diversify
and spread business risk

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Additional Resources
Starting a business in NYS:
www.gorr.state.ny.us/Main_GORR_Pages/Permits/Startbu
s.html

Growth company guide:


www.growco.com

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