Chapter 6 Businesses by Type of Ownership • Choosing a form of ownership depends on many factors, including the type of business, the number of owners involved, current and future exposure to risks and liabilities, and the tax situations of the business and its owners. • The U.S. economy—as well as the global economy—is based on a variety of enterprises that include: o Sole proprietorships, which are businesses owned by one person. o Partnerships, in which where two or more people legally share ownership of a business. o Corporations, or businesses that are formed as separate legal entities. Sole Proprietorship • A sole proprietorship is a business owned, and usually operated, by a single individual. o It is the most common form of business ownership because it’s easy to set up. o No legal paperwork needs to be filed to begin a sole proprietorship. (You might need local licensing or permits depending on your business and local laws.) o All the financial information can be reported on the owner’s personal tax returns. o Although a sole proprietorship has only one owner, it can have any number of employees.
The advantages of a sole proprietorship include: • They are easy to set up. • With only one person making all the decisions, sole proprietors have greater control and more flexibility to act quickly. • There are no specific corporate records to keep or reports to file, including tax reporting. • The income and expenses of a sole proprietorship flow through the owner’s personal tax return. • Financially, sole proprietors have the option of deducting business losses from their personal taxes, which reduces the personal taxes owed. The disadvantages of a sole proprietorship include: • Unlimited liability means that if business assets aren’t enough to pay business debts, then personal assets, such as the sole proprietor’s house, personal investments, or retirement plans, can be used to pay the balance. If the type of business you’re running has the potential for someone to sue you because of errors on your part, you may not want to operate as a sole proprietorship. A sole proprietor is personally responsible for all the debts and liabilities of the business. • Banks will be less willing to lend to you personally, not to your business, with a sole proprietorship structure, so they will be more reluctant to lend large amounts, and the loan will be limited to the amount of your personal assets. Partnership A partnership is a type of business entity in which two or more owners (or partners) share the ownership and the profits and losses of the business. The advantages of partnerships include: • More owners help contribute to both the starting and ongoing capital of the business.
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- Fall '13
- Business, Corporation, Types of companies