Types of Business Ownership
Glencoe Entrepreneurship: Building a Business
Sole Proprietorships and Partnerships
Corporations
7.1
Section
7.2
Section
7
Section Objectives
Glencoe Entrepreneurship: Building a Business
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Chapter 7 Types of Business Ownership
Entrepreneurs need to understand the advantages and disadvantages of various types of businesses so that they can choose the one that best suits their needs.
The Main Idea
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Sole Proprietorships and Partnerships
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Chapter 7 Types of Business Ownership
Content Vocabulary
sole proprietorship
liability protection
unlimited liability
partnership
general partner
limited partner
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Chapter 7 Types of Business Ownership
Sole Proprietorship
The easiest and most popular form of business ownership is the sole proprietorship.
sole proprietorship
a business that is owned and operated by one person
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Sole Proprietorships and Partnerships
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Chapter 7 Types of Business Ownership
The owner of a sole proprietorship:
Sole Proprietorship
Glencoe Entrepreneurship: Building a Business
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7.1
Chapter 7 Types of Business Ownership
Sole Proprietorship
In a sole proprietorship the owner must decide how much liability protection he or she needs.
liability protection
insurance against the debts and actions of a business
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Chapter 7 Types of Business Ownership
Advantages
Sole Proprietorship
8
Sole proprietorship is easy and inexpensive to create.
The owner has complete authority over all business activities.
It is the least regulated form of business ownership.
The business pays no taxes; income is taxed at the�personal rate of the owner.
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Disadvantages
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The owner has unlimited liability.
Raising capital is more difficult.
The business is totally reliant on the skills and abilities of the owner.
The death of owner dissolves the business unless �there is a will to the contrary.
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Chapter 7 Types of Business Ownership
Disadvantages
The biggest disadvantage of a sole proprietorship is financial.
In this form of business ownership, the owner has unlimited liability.
unlimited liability
full responsibility for all debts and actions of a business
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Chapter 7 Types of Business Ownership
Partnerships
A partnership draws on the skills, knowledge, and financial resources of more than one person.
partnership
an unincorporated business with two or more owners who share the decisions, assets, liabilities, and profits
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Chapter 7 Types of Business Ownership
General versus Limited Partners
The law requires that all partnerships have at least one general partner.
A partnership may be set up so that all of the partners are general partners.
general partner
a participant in a partnership who has unlimited personal liability and takes full responsibility for managing the business
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Chapter 7 Types of Business Ownership
General versus Limited Partners
Some partnerships include a limited partner.
limited partner
a partner in a business whose liability is limited to his or her investment; a limited partner cannot be actively involved in managing the business
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Advantages
Partnerships
14
Partnerships are inexpensive to create.
General partners have complete control.
Partners can share ideas.
Partners can secure investment capital more easily and in greater amounts.
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Disadvantages
Partnerships
15
It is difficult to dissolve one partner’s interest without �dissolving the partnership.
There may be personality conflicts.
Partners can be held liable for each others’ actions.
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7.1
Chapter 7 Types of Business Ownership
After You Read
1. Discuss the sole proprietorship legal form.
Sole proprietorship is the easiest and most popular form of business to create. The owner receives the profits, incurs any losses, and is liable for the debts of the business.
Glencoe Entrepreneurship: Building a Business
Sole Proprietorships and Partnerships
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7.1
Chapter 7 Types of Business Ownership
After You Read
2. Explain the partnership legal form.
A partnership is an unincorporated business with two or more owners. The partners share the decisions, assets, liabilities, and profits. The partnership can draw on the skills, knowledge, and financial resources of more than one person, which is an advantage when seeking loans.
Glencoe Entrepreneurship: Building a Business
Sole Proprietorships and Partnerships
SECTION
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Chapter 7 Types of Business Ownership
Glencoe Entrepreneurship: Building a Business
Sole Proprietorships and Partnerships
SECTION
7.1
Chapter 7 Types of Business Ownership
Section Objectives
Corporations
Glencoe Entrepreneurship: Building a Business
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7.2
Chapter 7 Types of Business Ownership
In a corporation, the owners of the business are protected from liability for the actions of the company.
The Main Idea
Corporations
Glencoe Entrepreneurship: Building a Business
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7.2
Chapter 7 Types of Business Ownership
Content Vocabulary
corporation
C-corporation
shareholders
limited liability
Subchapter S corporation
nonprofit corporation
limited liability company (LLC)
Corporations
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What Is a Corporation?
There are three types of corporations:
corporation
a business that is registered by a state and operates apart from its owners; it issues shares of stock and lives on after the owners have sold their interest or passed away
Corporations
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C-Corporation
A C-corporation is the most common corporate form.
C-corporation
an entity that pays taxes on earnings; its shareholders pay taxes as well
Corporations
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C-Corporation
In smaller corporations, the founders generally are the major shareholders.
shareholders
the owners of a corporation
Corporations
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Advantages
C-Corporation
25
status
limited liability
shareholders not personally responsible for debts and actions of the corporation
ability to raise investment money
perpetual existence
employee benefits
tax advantages
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Advantages
Corporate shareholders have limited liability, but some banks require officers to personally guarantee the debts of the company.
limited liability
partial responsibility of a corporate shareholder; he or she is responsible only up to the amount of his or her individual investment
Corporations
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Disadvantages
C-Corporation
27
expensive to set up
must file a Certificate of Incorporation
income more heavily taxed
subject to double taxation on income
pays taxes on profits
stockholders taxed on dividends
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Chapter 7 Types of Business Ownership
Subchapter S Corporation
An entrepreneur can avoid the double taxation of a �C-corporation by setting up a Subchapter S corporation.
subchapter S corporation
a corporation that is taxed like a partnership; profits are taxed only once at the shareholder’s personal tax rate
Corporations
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Chapter 7 Types of Business Ownership
Nonprofit Corporation
A nonprofit corporation must fall within one of four categories:
nonprofit corporation
a legal entity that makes money for reasons other than the owner’s profit; it can make a profit, but the profit must remain within the company
Corporations
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Chapter 7 Types of Business Ownership
Limited Liability Company
There are many benefits to forming a limited liability company (LLC).
limited liability company (LLC)
a company whose owners and managers have limited liability and some tax benefits, but which avoids some restrictions associated with Subchapter S corporations
Corporations
Glencoe Entrepreneurship: Building a Business
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Chapter 7 Types of Business Ownership
Before deciding on a legal form, ask yourself key questions about:
Making the Decision
Corporations
Glencoe Entrepreneurship: Building a Business
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7.2
Chapter 7 Types of Business Ownership
After You Read
1. Explain how the corporate form gives owners more protection from liability.
A corporation offers limited liability. In other words, shareholders are liable only up to the amount of their individual investments.
Corporations
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After You Read
2. Discuss the advantages and disadvantages of a C-corporation.
Advantages: A corporation has a more professional appearance, its shareholders are liable only up to the amount of their individual investment, it can raise money by issuing shares of stock, it has perpetual existence, it is structured to accommodate employee benefits, and it has tax advantages. �Disadvantages: A corporation is expensive to set up and its income is more heavily taxed.
Corporations
Glencoe Entrepreneurship: Building a Business
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Chapter 7 Types of Business Ownership
After You Read
3. Describe a Subchapter S corporation.
The Subchapter S corporation is taxed like a partnership; profits are taxed only once at the shareholder’s personal tax rate. Therefore, the Subchapter S corporation is not a tax-paying entity. Generally, it can have no more than 75 stockholders, who must be U.S. citizens. It can have only one class of stock.
Corporations
Glencoe Entrepreneurship: Building a Business
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Chapter 7 Types of Business Ownership
After You Read
4. Compare nonprofit corporations to C-corporations.
Nonprofit corporations can make a profit, but the profit must remain within the companies and not be distributed to shareholders. Any type of business can be a corporation, but a nonprofit must be formed for religious or charitable purposes, public benefit, or mutual benefit. A C-corporation is created to make a profit for its owners, or shareholders.
Corporations
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Chapter 7 Types of Business Ownership
After You Read
5. Explain the limited liability company.
The limited liability company protects owners with the limited liability of a corporation. That is, the company’s owners are not liable for its debts. It also provides pass-through tax advantages; shareholders are taxed only once. There are no limitations on the number of members or on their status.
Corporations
Glencoe Entrepreneurship: Building a Business
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Chapter 7 Types of Business Ownership
After You Read
6. Discuss how to decide which legal form to use.
You should consider your skills, access to capital, living expenses, willingness to assume personal liability for any claims against the business, and control desired. Also, ask yourself: do you expect to have initial losses, or will the business be profitable from the beginning? Do you expect to sell the business someday?
Corporations
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End of
Chapter 7
Types of Business Ownership
Types of Business Ownership
Glencoe Entrepreneurship: Building a Business
Sole Proprietorships and Partnerships
Corporations
7.1
Section
7.2
Section
7