Chapter 6: Forms of Business Ownership

Sole Proprietorship

  • Owned and operated by one individual.

  • Advantages:

    • Easy to establish.

    • No formal legal requirements.

    • Income/expenses reported on owner's tax return.

  • Disadvantages:

    • Personal and business assets at risk.

Partnership

  • Structure involves two or more individuals sharing business responsibilities.

  • No formal legal requirements for establishment.

  • Partnership agreements outline partners' responsibilities and profit-sharing.

  • Disadvantages include:

    • Personal and business assets at risk.

    • Potential for disagreements on business ethics/management.

  • Types of partnerships:

    • General Partnership: Equal liability among partners.

    • Limited Partnership: Some partners have limited liability.

    • Limited Liability Partnership (LLP): Offers protection from liabilities beyond personal negligence.

Corporation

  • Structured as separate legal entities with multiple management levels.

  • Advantages over sole proprietorships and partnerships:

    • Limited liability protects personal assets.

    • Ability to sue and be sued.

  • Disadvantages:

    • Difficult to set up.

    • Requires ongoing paperwork and separate tax returns.

  • S Corporations:

    • Allow income/expenses to flow through to personal tax returns.

    • Restrictions on shareholders.

  • Limited Liability Company (LLC):

    • Unlimited members and similar liability protections to S Corporations.

    • Profits not required to be distributed proportionally.

Not-for-Profit Organizations and Cooperatives

  • Not-for-Profit:

    • Serve public interest and are tax-exempt.

    • Donors can deduct contributions.

  • Cooperatives:

    • Owned by members who use their products/services.

    • Profits returned based on ownership share.

Mergers and Acquisitions

  • Used to achieve synergy, economies of scale, or competitive advantage.

  • Acquisition: One company buys another.

  • Merger: Two companies of similar size combine.

  • Types of mergers:

    • Horizontal: Same product line, direct competitors.

    • Vertical: Company/customer or supplier relationship.

    • Product extension: Related products, same market.

    • Market extension: Same products, different markets.

    • Conglomerate: Diversification through unrelated business areas.

Key Terms

  • Acquisition

  • Board of Directors

  • Liability

  • Limited Liability Company (LLC)