Chapter-2

Forms of Business Ownership

 What types of business is right for you?
If you are planning to go into business, you need to review the
advantage and disadvantage of each types of business to determine
which form of ownership meets your needs, style and talents.
A person thinking about owning a business should examine the
following factors:
❖ Capital requirements: the amount of funds necessary to finance
the operation. For example: in sole proprietorship business the
capital requirement is comparatively low than partnership and
company business.
❖ Risk: the amount of personal property a person is willing to lose by
starting the business. For example: in sole proprietorship business
the liability of the owner is unlimited.
Managerial ability: the skills needed to plan, organize, and control the
business. For example in company business the skill requirement is
more than sole proprietorship.

❖ Time requirements: The time needed to operate the business and

provide guidelines. For example In company business the number of
workers are more than sole proprietor and partnership business, so
the time requirement is more in company business than the other
two.
❖ Tax liability: what taxes a business must pay to various governments
on earnings of the business.
❖ Control: the amount of authority the owner exercises. For example
in sole proprietorship business the owner exercises full control over
His/her business.
Sole proprietorships: a business owned and managed by one
individual. It is the oldest, most common form of private business
ownership in most of the countries. Typically the sole proprietor owns
a small service or retail operation for example roadside produce stand,
hardware store, bakery or restaurant. The sole proprietor is usually an
active manager, working in the shop everyday. He/she (the owner)
controls the operations, supervises the employees, and makes the
decisions. Success depends on the managerial ability of the owner.
Advantages of a sole proprietorship:
❖ Ease of starting: sole proprietorship is the easiest way to start a
business. It involves a minimum number of requirements.
❖ control: The owner is the boss who made the final decisions. The
owner can work as many hours as he/she wanted. This freedom
indicates the total control.
❖ Sole participation in profits and losses: The owner solely enjoy the
profits and solely take the liabilities incurred by operating the
business.
❖ Use of owners abilities : the success and failure of this type of
business completely depends on the owners ability.
❖ Tax sole proprietorship is that the business pays no income tax. pays
no taxes on business profit rather the owner pays taxes as an
individual on all her income earned from the business.
❖ Secrecy: the internal information about the operation of business
like income expenses hours worked, are not made available to the
public.
❖ Ease of dissolving: if the owner wants to dissolve the business for
any reason then there would be no legal complications. If the owner
paid all the outstanding bills than his/her decision would be all to
dissolve the business.
Disadvantages of a sole proprietorship:
❖ Unlimited liability: the law provides that the owners wealth may be
used to satisfy the claims of the business. This is called unlimited
liability. This means almost everything the owner owns could be
sold to pay any debts from operating the business.
❖ Difficulty in raising the capital: the investments in sole
proprietorship business is limited to the personal wealth of the
owner. The amount the owner could borrow to operate the
business is also limited by his/her personal wealth.
❖ Limitations in managerial ability: the owner must obtain know-
how needed to manage the business. Operating a business requires
planning, organizing, marketing, controlling, financial, motivational
and customer relations skills.
❖ Lack of stability: death, illness, bankruptcy, or retirement of the
owner terminates the proprietorship.
❖ Demands on time: the owner must spend a lot of time in operating
the business. Sometimes it really becomes difficult to spend huge
amount of time.
❖ Difficulty in hiring and keeping high- achievement employees :
sometimes workers with their own visions and goals and a high drive
succeed often must quit the one-person business to find
opportunities for personal growth.
 Partnership

Partnership is an association of two or more persons to carry on as

co-owner of a business for profit. Other than the difference in the
number of owners , a partnership is similar in many respects to a sole
proprietorship.
 Types of partnerships:

❖ General partnership: A partnership in which at least one partner has

unlimited liability: a general partner has authority to act and make
binding decisions as an owner. The general partner may be liable for
all the debts of the business.
❖ Limited partnership: A partnership with at least one general partner,
and one or more limited partners who are liable for loss only up to
the amount of their investment. The general partners arrange and
run the business while the limited partners are investors only. A
limited partner has limited liability.
 Advantages of a partnership:

❖ More capital: in the sole proprietorship, the amount of capital is

limited to the personal wealth of the owner but in a partnership the
amount of capital may increase significantly.
❖ Combined managerial skills: in a partnership, people with different
talents and skills may join together. One partner may be good at
marketing; the other may be expert at accounting and financial
matters. Combining these skills could provide a greater chance of
success.
❖ Ease of starting: A partnership is fairly easy to start because it
involves a private contractual arrangement . It is nearly free from
government regulation as a sole proprietorship. The cos of starting is
low.
❖ Clear legal status: over the years, legal precedents for partnership
have been established. The questions of rights, responsibilities ,
liabilities and partner duties have been covered. Thus, the legal
status of the partnership is clearly understood.
❖ Tax advantages: the partnership has some potential tax advantages
over a corporation. In a partnership, as in a sole proprietorship, the
owner pay taxes on their earnings.
 Disadvantages of a partnership

❖ Unlimited liability: each general partner is liable for a partnership's

debts. If one partners fails to pay the debts’ the other partners
must pay off the debts. This is one reason for choosing partners
carefully.
❖ Potential disagreements: decisions made by several people are
often better than those made by one. However, having two or more
people deciding on some aspect of the business can be dangerous.
Power and authority are divided, and the partners will not always
agree with each other.
❖ Investment withdrawal difficulty: A person who invests money in a
partnership may have a hard time withdrawing the investment. It is
much easier to invest in a partnership than to withdraw.
❖ Limited capital availability: The partnership may have an advantage
over the sole proprietorship in the availability of capital, but it has
less ability to raise capital than a corporation. In most cases,
partners have a limited capability and cannot compete in business
requiring outlays.
❖ Instability: If a partner dies or withdraws from the business,. The
partnership is dissolved. A new partnership or some other form of
business organization must be legally established.
 Corporations

A business that is a legal entity separate from its owners. The

corporation, by contrast, provides a form of business ownership in
which owners spread over a wide geographical area can hire
professional managers to operate the business.
 Types of corporations

❖ Domestic corporation: A corporation that conducts business in the

state in which its chartered is known as a domestic corporation.
❖ Foreign corporation: A business incorporated in one state or
country and doing business in another state or country.
❖ Non profit corporation: An enterprise ( e.g. university, charity,
church) that is not driven by a profit- seeking motive.
 Advantages of a corporation

❖ Limited liability: A person investing funds in a corporation receives

shares of stock and becomes an owner. The liability of that
shareholder is limited by the amount of fund invested.
❖ Skilled management team: The board of directors has the duty of
hiring professional managers . Professional managers are trained
and experienced career executives.
❖ Transfer of ownership: share holder have the right to sell their
shares of a corporation's stock to whomever please. These shares of
ownership can be sold whenever the share holders desires and at
the price the buyers willing to pay. Thus, the shareholder can freely
buy and sell ownership.
❖ Greater capital base: Corporation can attract capital from a large
number of investors by selling shares of stock.

❖ Stability: shareholders death, retirements, or sale of stock need not

dissolve the business. Nor will the death or retirement of board of
directors or the chief executive officer stop the corporation from doing
business.

❖ Legal entity status: A corporation can purchase property make

contacts or sue and be sued in its corporate name. these
characteristics distinguish it most clearly from other forms of business
organization.
 Disadvantages of a corporation

❖ Difficulty and expense of starting: Starting a corporation has

involves applying for a charter from a state. It has many
complication and expense to start a corporation.
❖ Lack of control: The individual shareholder has little control over
the operations of the corporation except to vote for a slate of
individual for the board of directors.
❖ Multiple taxation: It also known as double taxation. Taxing a
corporate owners’ money twice by taxing it as income of a
corporation and as dividends of the individual owner.
❖ Government involvement: State and federal governments have the
right by law to exercise certain controls on, and to require certain
reports from , businesses. For example a corporation can not conduct
its business in a state which it is not registered.

❖ Lack of personal interest: In most corporations except the small ones,

management and ownership are separate . This separation can result
in a lack of personal interest in the success of the corporation.

❖ Credit limitations: Banks and other lenders have to consider the

limited liability of corporations. if a corporation fails, its creditors can
look only to the assets of the business to satisfy claims.
 Mergers

Combining two or more business enterprises into a single entity.

Horizontal merger: a merger involving competitive firms in the same

market.

Vertical merger: a merger in which a firm joins with its supplier.

Conglomerate merger: a merger involving firms selling goods in

unrelated markets.