Chapter 6 Lecture.docx - Chapter 6 Lecture Forms of...

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Chapter 6 Lecture Forms of Business Ownership Introduction The most important issues entrepreneurs should consider when they are evaluating the various forms of ownership include: Tax considerations Liability exposure Start-up and future capital requirements Control Managerial ability Business goals Management succession plans Cost of formation The major forms of ownership discussed in this chapter include: Sole proprietorship, general partnership, limited partnership, corporation, S corporation, and limited liability
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company. Refer to Figure 6.1, Forms of Business Ownership (A) Percentage of Businesses; (B) Percentage of Sales: (C) Percentage of Net Income, to see the data regarding the distribution of the percentage of each business form and the percentage of total business sales revenues illustrates the dominant forms of business ownership. Sole Proprietorships and Partnerships The Sole Proprietorship. The sole proprietorship is the most popular type of ownership, defined as business owned and managed by one individual. The Advantages of a Proprietorship . Advantages of the sole proprietorship include: Simple to create Least costly form of ownership to begin Profit incentive Offers total decision-making authority No special legal restrictions Easy to discontinue The Disadvantages of Proprietorship. Disadvantages include: Unlimited personal liability means that the sole proprietor is personally liable for all of the business’s debts, as the owner is the business. Limited skills and capabilities Feelings of isolation Limited access to capital Lack of continuity for the business
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The Partnership. A partnership is an association of two or more people who co-own a business for the purpose of making a profit. This association between the owners is defined by the partnership agreement , a document that states in writing the terms under which the partners agree to operate and that protects each partner’s interest in the business. If no partnership agreement exists, the Revised Uniform Partnership Act (RUPA) codifies the body of law dealing with partnerships in the United States. It specifies three key elements of a partnership, which include common ownership, how the business’s profits and losses will be shared, and the right to participate in managing the operation of the partnership. It also sets forth the partners’ general obligations such as sharing any business losses, working without salary, settle disagreements, etc. The Advantages of the Partnership. Advantages include: Easy to establish Complementary skills Division of profits Larger pool of capital Ability to attract limited partners Types of partnerships include: General partners – partners share in owning, operating, and managing a business. All partners have unlimited personal liability.
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