Basic Forms of Business Ownership and Management Principles

Sole Proprietorship

A business owned and usually managed by one individual.

Key Characteristics of Sole Proprietorship

Not a separate legal entity; the owner and the business are legally the same; the owner is personally responsible for all debts and obligations.

Advantages of Sole Proprietorship

1. Ease of Start-Up and Closure: Few legal requirements and paperwork. 2. Full Control: The owner makes all decisions without consulting others. 3. Pride of Ownership: A personal sense of accomplishment and autonomy. 4. Retention of Profits: The owner receives all profits. 5. No Special Taxes: Profits are taxed as personal income—no separate corporate tax.

Disadvantages of Sole Proprietorship

1. Unlimited Liability: The owner is personally responsible for business debts. 2. Limited Financial Resources: Raising funds is often difficult. 3. Management Challenges: One person must handle all functions. 4. Time Commitment: Running a business alone is extremely demanding. 5. Few Fringe Benefits: Health insurance, retirement plans, etc., are not typically provided. 6. Limited Life Span: The business ends if the owner dies or becomes incapacitated. 7. Limited Growth Potential: Scaling up may be hard due to lack of resources.

Partnership

A legal form of business with two or more owners.

Types of Partnerships

Different types, each with distinct legal responsibilities and benefits.

General Partnership

All partners actively manage the business; all partners share equal liability for debts.

Limited Partnership (LP)

Consists of at least one general partner and one or more limited partners; general partners manage the business and have unlimited liability.

Limited Partners

Contribute capital but have limited liability and no role in day-to-day operations.

Master Limited Partnership (MLP)

Traded on stock exchanges like a corporation; avoids corporate income tax—taxed like a partnership.

Limited Liability Partnership (LLP)

All partners are limited partners, shielding them from personal liability due to the misconduct or negligence of other partners.

Advantages of Partnership

1. More Financial Resources: More owners can contribute capital. 2. Shared Skills & Expertise: Diverse backgrounds lead to complementary skills. 3. Longer Survival: Shared workload and resources can sustain the business longer. 4. No Special Taxes: Pass-through taxation, like sole proprietorships.

Disadvantages of Partnership

1. Unlimited Liability (for general partners). 2. Profit Sharing: Profits must be split among partners. 3. Potential Conflicts: Disagreements can arise over business direction. 4. Difficult to Exit: Ending or changing the partnership can be legally and emotionally complex.

Corporation

A legal entity separate from its owners; can own property, sue or be sued, and enter contracts independently of its owners.

Conventional (C) Corporation

Owners are stockholders/shareholders; liability is limited to the amount invested in shares.

Advantages of Corporation

1. Limited Liability: Stockholders are not personally liable for debts. 2. Raising Capital: Can issue stock and attract investment.

Size and Scale

Easier to expand operations.

Perpetual Life

Existence is not dependent on any one owner.

Transferability of Ownership

Shares can be easily bought and sold.

Professional Management

Attracts skilled managers and employees.

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High Start-Up Costs

Legal and administrative fees.

Double Taxation

Profits taxed at the corporate level and again when distributed as dividends.

Two Tax Returns

One for the corporation, one for shareholders.

Size Can Be a Drawback

Bureaucracy and slow decision-making.

Potential Conflicts

Between stockholders and management.

S Corporation

Combines the legal protection of a corporation with tax advantages of a partnership.

Avoids double taxation

Profits are taxed only once as shareholder income.

Requirements for S Corporation

No more than 100 shareholders, all shareholders must be U.S. citizens or residents, only one class of stock, no more than 25% of income from passive sources.

Limited Liability Company (LLC)

An LLC is a hybrid entity combining features of partnerships and corporations, without the complex restrictions of an S corp.

Choice of Taxation

Can be taxed as sole proprietor, partnership, or corporation.

Flexible Ownership Rules

No limit on number or type of owners.

Less Formality

In management and structure.

No Stock

Ownership is harder to transfer.

Limited Incentives

For investors.

Complex Operating Agreements

And state-by-state rules.

Mergers

A merger occurs when two firms join to form one company.

Vertical Merger

Combines firms at different stages of production (e.g., bakery + wheat supplier).

Horizontal Merger

Combines competitors in the same industry (e.g., two coffee chains).

Conglomerate Merger

Combines firms in completely unrelated industries (e.g., food company + tech company).

Acquisition

One company buys another's assets and assumes responsibility.

Going Private

A publicly traded company is bought out and converted to private ownership.

Leveraged Buyout (LBO)

A company is purchased using borrowed funds, often by employees or private investors.

Franchise

A business agreement in which a franchisor licenses its operations—its products, branding, and processes—to franchisees.

Franchise Agreement

Legally binding; allows franchisee to use name, logo, business model, and product/service.

Established Brand

Reduces risk for new owners.

Training & Support

Ongoing help from franchisor.

National Marketing

Brand-level marketing benefits franchisees.

Profit Sharing

With franchisor.

Lack of Flexibility

Rules set by franchisor.

Coattail Effects

Your success is tied to the overall brand reputation.

Fraud Risk

From dishonest franchisors.

Home-Based Franchises

Pros: Low overhead, family time, flexibility; Cons: Isolation, blurring of home/work boundaries.

E-Commerce Franchising

Franchisors often restrict franchisee-run websites.

Technology in Franchising

Used to enhance operations, marketing, brand visibility, and efficiency.

Global Franchising

Expanding abroad poses cultural and legal challenges.

Cooperative

An organization owned and operated by its members for mutual benefit.

Characteristics of Cooperatives

Members include producers, consumers, or workers; members vote to elect a board of directors; operates democratically: one member, one vote; often found in agriculture, utilities, credit unions, and housing.

Advantages of Cooperatives

Shared resources and risk; greater bargaining power; profits distributed among members.

Modern Managers

Managers today work collaboratively with employees, focusing on building strong teams and supporting their development.

Collaborative Management

Today's managers don't just give orders; they work with employees to foster respect and involvement.

Team-Oriented Management

Managers focus on building and leading strong teams, encouraging cooperation rather than competition.

Supportive Leaders

Managers train, support, motivate, and coach employees so everyone can do their best work.

Good Communicators

Managers must listen, explain, give feedback, and resolve conflicts effectively.

Globally Aware Managers

Managers need to understand different cultures, laws, and markets as businesses often work internationally.

Management

The process of achieving an organization's goals through four core activities.

Planning

Figuring out what the business should do, how it will do it, and who will do it.

Real-Life Example of Planning

During COVID-19, restaurants had to plan quickly to shift from dine-in service to delivery and takeout.

Key Elements of Planning

Vision, Goals, Objectives.

Vision

A big-picture idea of where the company wants to go in the long term.

Goals

Broad, long-term targets (e.g., 'Become a global brand').

Objectives

Specific, short-term steps to reach the goals (e.g., 'Increase online sales by 10% in 6 months').

Mission Statement

Explains why a company exists and what it stands for, including its core values and role in society.

SWOT Analysis

A planning tool that helps managers understand their situation by identifying strengths, weaknesses, opportunities, and threats.

Types of Planning

Strategic, Tactical, Operational, Contingency.

Strategic Planning

Big-picture, long-term goals (e.g., 'Expand into Europe in 5 years').

Tactical Planning

Short-term, detailed actions (e.g., 'Hire 10 new sales reps this quarter').

Operational Planning

Day-to-day operations (e.g., 'Assign weekly shifts and tasks').

Contingency Planning

Backup plans (e.g., 'If supplier fails, use backup vendor').

Decision Making

Choosing the best option among several choices.

Rational Decision-Making Model

A process that includes defining the problem, collecting information, developing choices, choosing the best option, taking action, and reviewing and adjusting.

Problem Solving Tools

Brainstorming and PMI Table (Pluses, Minuses, Implications).

Top Management

Makes long-term plans, sets strategy.

Middle Management

Implements strategy, oversees teams.

Supervisory (First-Line)

Manages day-to-day tasks.

Technical Skills

Ability to do specific tasks (e.g., coding, bookkeeping).

Human Relations Skills

Communication, leadership, and emotional intelligence.

Conceptual Skills

Seeing the big picture, thinking strategically.

Staffing

Hiring, training, motivating, and keeping the right people.

High-tech companies

Essential in competitive industries.

Fair pay

Companies must offer this to attract talent.

Retention

Just as important as hiring.

Leading

Inspiring people to reach goals.

Empowerment

Giving employees authority to make decisions without waiting for a manager.

Enabling

Giving employees the tools and training to make good decisions independently.

Knowledge Management

Organizing, storing, and sharing useful information across the company.

Controlling

Making sure everything is going according to plan and fixing it if it's not.

Key Control Steps

1. Measure performance 2. Reward success 3. Make changes if goals aren't being met.

Graduation rates

Colleges track this to measure success.

Micromanagement

Managers who don't delegate and constantly monitor staff.