Chapter 03 – Forms of Ownership of Small Businesses
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CHAPTER
Forms of Ownership
of Small Businesses
CHAPTER CONTENTS
Learning Objectives 3.2
Chapter Overview 3.2
Brief Chapter Outline 3.2
3
Chapter 03 – Forms of Ownership of Small Businesses
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LEARNING OBJECTIVES
After studying the material in this chapter, the student will be able to:
1. Name the legal forms of ownership of a small business.
2. Explain the reasons for and against forming a proprietorship.
CHAPTER OVERVIEW
Chapter two discusses the legal forms of ownership, ( advantages and disadvantages): proprietor-
ship, partnership, corporation, as well as the S Corporation, limited liability corporations, limited liability
partnerships, trusts, cooperatives, joint ventures, and fractional ownership.
BRIEF CHAPTER OUTLINE
I. SELECTING THE RIGHT LEGAL FORM
A. Factors to Consider
B. Relative Importance of Each Form
II. WHY FORM A PROPRIETORSHIP?
III. WHY FORM A PARTNERSHIP?
A. How a Partnership Operates
IV. WHY FORM A CORPORATION?
A. How to Form a Corporation
V. OTHER FORMS OF BUSINESS
A. The Limited-Liability Company (LLC)
B. The Limited Liability Partnership (LLP)
Chapter 03 – Forms of Ownership of Small Businesses
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VI. HOW TO EVALUATE THE LEGAL FORM OF ORGANIZATION
Chapter 03 – Forms of Ownership of Small Businesses
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CHAPTER OUTLINE AND TEACHING NOTES
CHAPTER OPENING PROFILE:
Spring Hill Kitchens, LLC
Barkely Shreve and Susan Thompson learned in detail all the steps of turning an idea into a
I. SELECTING THE RIGHT LEGAL FORM
A. One of your first decisions is how to struc-
ture your company.
Learning Objective 1.
Name the legal forms of ownership a small business can
have.
B. Factors to Consider
1. Factors to take into consideration:
a. Your vision regarding the size of
your business.
2. The choice of legal form does not
have to be final, but may be part of a
progression.
C. Relative Importance of Each Form
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CHAPTER OUTLINE AND TEACHING NOTES
1. Proprietorship is the most popular
form of business in the U.S. with about
72% of all businesses.
2. Although proprietorships are more
popular in all industries, partnerships
are used more frequently in finance,
II. WHY FORM A PROPRIETORSHIP?
Learning Objective 2.
Explain the reasons for and against forming a proprietor-
ship.
A. A PROPRIETORSHIP, ALSO KNOWN AS
A SOLE-PROPRIETORSHIP is a business
that is owned by one person.
C. Most small business owners prefer the
proprietorship because of its advantages:
1. Simple to enter, operate, and termi-
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CHAPTER OUTLINE AND TEACHING NOTES
3. Has a favorable tax status, as it is
taxed at owner’s rate.
REAL WORLD EXAMPLE 3.1
Sanford Bryant used his previous experience in the fashion
D. Some Negative Factors:
1. From a legal point of view, the busi–
ness and its owner are one and can-
III. WHY FORM A PARTNERSHIP?
Learning Objective 3.
Explain the reasons for and against forming a partnership.
A. A PARTNERSHIP is a business co-owned
by two or more persons.
1. Like a proprietorship, the law does not
2. The Uniform Partnership Act gov-
erns the operations of partnerships in
3. Authority, duties and responsibilities of
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CHAPTER OUTLINE AND TEACHING NOTES
4. Partnerships are similar to proprietor-
ships, but more difficult to form, oper-
Real World Example 3.2
Potential business partners can be found in some of the
strangest places. Brian Reynolds and Jason Moody met while
trying out for the U.S. Rowing Nationals Championship.
B. How a Partnership Operates
1. The Uniform Partnership Act (UPA)
governs the operations of partnerships
in the absence of other expressed
agreements.
2. Each partner is responsible for the
C. Types of Partnerships
1. In a GENERAL PARTNERSHIP, each
partner actually participates as an
equal in managing the business and
being liable for the acts of other part-
ners.
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CHAPTER OUTLINE AND TEACHING NOTES
2. In a LIMITED PARTNERSHIP, one or
more general partners conduct the
business, while one or more limited
D. Rights of Partners
1. If there is no agreement to the con-
2. The ARTICLES OF CO-PARTNER-
SHIP are drawn up during the plan-
ning period to show rights, duties, and
IV. WHY FORM A CORPORATION?
Learning Objective 4.
Explain the reasons for and against forming a corporation.
A. The U.S. Supreme Court defined a corpo-
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CHAPTER OUTLINE AND TEACHING NOTES
1. A CORPORATION is a business
formed and owned by a group of peo-
2. The traditional form is called a C COR-
PORATION, a regular corporation that
3. The owners and shareholders elect a
Board of Directors to oversee major
decisions.
4. Corporate Advantages
a. Each owner’s liability for the firm’s
debt is limited to the amount
invested.
7. Corporate Disadvantages:
a. The main disadvantage is double
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CHAPTER OUTLINE AND TEACHING NOTES
B. How to Form a Corporation
1. ARTICLES OF INCORPORATION are
the instrument by which a corporation
3. A CORPORATE CHARTER states
what the business can do and pro-
vides other organizational and finan-
cial information.
6. The articles of incorporation contain
eleven specific types of information:
Corporation name, duration, stock or
no stock, organization “Will”, purpose,
7. Incorporators can make provisions
during the incorporation process for
recovering damages for any loss the
firm suffers by insuring all key parties.
8. A BUY-SELL AGREEMENT explains
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CHAPTER OUTLINE AND TEACHING NOTES
C. How a Corporation is Governed
1. The stockholders are the corporation’s
owners. However, founders often re-
tain the controlling interest.
D. The S Corporation
1. An S CORPORATION is a special
type of corporation that is exempt from
multiple taxation and excessive paper-
4. While the payment process is similar
to a partnership, S corporations must
file numerous federal tax forms.
5. S corporations can issue only one
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CHAPTER OUTLINE AND TEACHING NOTES
7. S corporations are increasing in popu-
V. OTHER FORMS OF BUSINESS
Learning Objective 5.
Discuss some other legal forms a business can take.
A. The Limited-Liability Company (LLC)
1. The LIMITED-LIABILITY COMPANY
(LLC) combines the advantages of the
corporation, such as liability protec-
tion, with the benefits of a partnership,
such as tax advantages.
a. Provides benefits similar to the S
Corporation, without the special
2. LLC Advantages:
a. Limited personal liability provides
some shield from personal liability.