Chapter 03 – Forms of Ownership of Small Businesses
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CHAPTER OUTLINE AND TEACHING NOTES
3. LLC Disadvantages:
a. Expense to form is higher than
other forms of partnership
b. State laws may not include latest
federal tax changes
B. The Limited-Liability Partnership (LLP)
1. A LIMITED-LIABILITY PARTNER-
SHIP (LLP) is organized to protect in-
dividual partners from personal liability
for the negligent acts of other partners
C. The Family Limited Partnership (FLP)
1. A FAMILY LIMITED PARTNERSHIP
(FLP) is the organizational type where
the majority of the partners are related
to each other as spouses, parents,
D. The Professional Service Corporation
(PSC)
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CHAPTER OUTLINE AND TEACHING NOTES
1. A PROFESSIONAL SERVICE COR-
PORATION (PSC) must be organized
for the sole purpose of providing a pro-
E. A NONPROFIT CORPORATION is formed
for civic, educational, charitable, and reli-
gious purposes.
1. Nonprofit corporations are managed
by a Board of Directors or trustees.
REAL WORLD EXAMPLE 3.3
Due to lack of funds, a city council refused to build a dog
F. The Cooperative
1. A COOPERATIVE is a business
owned by and operated for the benefit
of patrons using its services.
2. It is composed of independent produc-
ers, wholesalers, retailers, or consum-
REAL WORLD EXAMPLE 3.4
An example of a real world co-operative is Delta Pride Cat-
fish. The Indianola, Mississippi cooperative is the largest U.S.
processor of fresh fish.
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CHAPTER OUTLINE AND TEACHING NOTES
G. The Joint Venture
1. Working relationships between non-
competing companies are becoming
popular.
2. The usual arrangement is a JOINT
VENTURE, a form of temporary part-
nership whereby two or more firms join
REAL WORLD EXAMPLE 3.5
BHP Billington Ltd. and four Chinese steel mills are plan-
ning to set up a joint venture to sell Australian iron ore to
China.
H. Fractional Ownership “Time Shares in
The Sky”
1. FRACTIONAL OWNERSHIP can be
defined as a percentage share of an
VI. HOW TO EVALUATE THE LEGAL FORM OF
ORGANIZATION.
A. A small business may change its legal
form many times.
Chapter 03 – Forms of Ownership of Small Businesses
CHAPTER OUTLINE AND TEACHING NOTES
1. Under what legal form of organization is
the firm now operating?
5. Is unlimited liability a serious or poten-
tial problem?
6. Has the present form limited financial
needs in any way?
7. What is the relative incidence of the
firm’s major risks?
LEARNING OBJECTIVES REVISITED
1. Name the legal forms of ownership a small business can have.
● Proprietorship
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2. Explain the reasons for and against forming a proprietorship.
● Reasons FOR forming a proprietorship:
○ Easy to organize, operate, and dissolve.
3. Explain the reasons for and against forming a partnership.
● Reasons FOR forming a partnership:
○ Easy to form
○ Division of labor and responsibility
4. Explain the reasons for and against forming a corporation.
● Reasons FOR forming a corporation:
○ Legal entity separate and distinct from owners
Chapter 03 – Forms of Ownership of Small Businesses
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5. Discuss some other legal forms a business can take.
● An S corporation is a special type of corporation that is exempt from multiple taxation and
excessive paperwork.
● Limited-liability company (LLC) combines the advantage of a corporation, such a liability
protection, with the tax benefits of a partnership.
KEY TERMS USED IN THIS CHAPTER
Articles of co-partnership are drawn up during the pre-operating period to show rights, duties, and re-
sponsibilities of each partner.
Articles of incorporation are the instrument by which a corporation is formed under the corporation laws
of a given state.
Chapter 03 – Forms of Ownership of Small Businesses
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Joint venture is a form of temporary partnership whereby two or more firms join in a single endeavor to
make a profit.
In a limited partnership one or more general partners conduct the business, while one or more limited
partners contribute capital but do not participate in the management and are not held liable for
debts of the general partners.
Chapter 03 – Forms of Ownership of Small Businesses
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NOTES FOR DISCUSSION QUESTIONS
1. What are some basic questions to ask when deciding on the legal form to choose for a small busi–
ness?
Factors to be considered include:
(1) Your vision regarding the size of your business
The most important questions are:
(1) To what extent is your family able to endure the physical, psychological, and emotional
strains associated with running a business?
2. Define proprietorship, partnership, corporation, limited liability corporation (LLC), cooperative,
and joint venture.
A proprietorship, also known as a sole-proprietorship, is a business that is owned and operated
by one person.
Chapter 03 – Forms of Ownership of Small Businesses
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Limited-liability partnership (LLP) is organized to protect individual partners from personal lia-
bility for the negligent acts of other partners or employees.
A limited liability corporation (LLC) combines the advantages of the corporation, such as liability
3. What are some advantages and disadvantages of a proprietorship?
4. What are some advantages and disadvantages of a partnership?
Some advantages are (1) ease of formation, (2) pooling of financial resources of more than one
5. What are some advantages and disadvantages of a corporation?
Some advantages are (1) it is relatively easy to raise large amounts of capital, (2) representative
Chapter 03 – Forms of Ownership of Small Businesses
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6. Distinguish between a general partnership and a limited partnership.
In a general partnership, each partner actually participates as an equal in managing the business
7. Distinguish between a C corporation, an S corporation, and a limited-liability company (LLC.)
A C corporation is a regular corporation that provides the protection of limited liability for share-
NOTES FOR CASE QUESTIONS
CASE 3.1: The Martin Family Grows a Business
1. Do you think the Martins did the right thing in selling out? Why or why not?
The “right decision” is the one that works for the individuals involved. The Martins clearly en-
2. Do you think the decision to incorporate as a C corporation rather than an S corporation was
correct? Explain.
3. What—if anything—would you have done differently from the Martins?
Many students would handle the decision differently than the Martins did. Students feel they are
Chapter 03 – Forms of Ownership of Small Businesses
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CASE 3.2: DB Bikes
1. What form of business was DB Bikes when David owned it alone?
2. What kind of business did it become when Becky joined the business?
3. What kind of partnership did David and Becky have? Explain the difference between this and
other kinds of partnership.
Assuming that Becky shares responsibilities and liability with David, the partnership is a general
4. What kind of business did it become when they sold shares and became an S corporation? Do you
think they made the proper decision? Why or why not?
When Becky and David incorporated and sold shares, they became a corporation, technically an S
BONUS EXERCISE
3.1 Choosing a Form of Business Ownership
Use Handout 3-A Choosing a Form of Business Ownership on the following page for this exer–
cise. Have students consider the list of new businesses on the handout. Have them indicate the form of
ownership they think would be best for each business and give their reasoning.
Chapter 03 – Forms of Ownership of Small Businesses
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HANDOUT 3-A
Choosing a Form of Business Ownership
The needs of the businessperson starting a new business are a major consideration when deciding
the best form of business ownership. The kind of business being started is also important to consider
when deciding to make your new business a sole proprietorship, partnership, or corporation. Look at the
list of new businesses below. Indicate the form of ownership you think would be best for each business.
Give the reason for your selection.
BUSINESS
FORM
REASON
Swimming pool
repair
Internet-based
specialty store
Termite control
service
Textbook publish-
ing company
Underwear
manufacturer