Types of Businesses

Good vs. Service

• What is the difference between a good and a service?

Types of Business Ownership

• There are three main types of businesses:– Sole proprietorships– Partnerships– Corporations*entrepreneurs must decide which type best fits

their situation**during the life of a business, its form can change*• These changes often occur when a business is growing

– Sole proprietorships– Partnerships– Corporations– Franchise– Non-Profit

Sole Proprietorships

• A Sole Proprietorship is a business owned by one person

• About 75% of all businesses in the U.S. are sole proprietorships

Sole Proprietorships• Advantages– It is easy to do

• Might need only a license or a permit to start– They are in charge of their own business

• They can make all the decisions and run the companies as they see fit– They can keep all of the profits– Their income taxes are lower than a corporation’s

• Corporations pay taxes on the income they receive• Then a corporation’s stockholders pay taxes on the income they

receive as dividends on stocks• A sole proprietor is only taxed on their personal tax rate, which is

often lower than the corporate tax rate

Sole Proprietorships – Unlimited Liability

• Disadvantages– Unlimited Liability, which means the owner is responsible for the

company’s debts• If the owner has more debt than income received, the owner has to make up

the difference– Limited access to credit

• If the owner doesn’t have much experience or money saved, lenders will be reluctant to offer credit

• Many sole proprietorships fail because they run out of money– The person in charge may not have all of the skills needed to run the

business• The owner may know everything about the skills needed for the service, but

nothing about record keeping– The company ends when the owner dies

Partnerships

• A Partnership is a business owned by two or more people who share its risks and rewards

• To start a partnership, you need a Partnership Agreement, which is a contract that outlines the rights and responsibilities of each partner

Partnerships

• Advantages– It is easy to do

• Might need only a license or a permit to start– It is easier for partnerships to obtain capital– Each partner usually contributes money to start the business– Banks are often more willing to lend money to partnerships

than to sole proprietorships– Not dependent on a sole person– The income of a partnership is taxed only once– Each partner brings difference skills and talents to the

business

Partnerships

• Disadvantages– All of the partners share the business risks– Problems occur when partners do not get along or

one of them decides to leave• The other owners must end the partnership and

reorganize the business since the original partnership no longer exists

– Partners share unlimited legal and financial liability• If one partner makes a bad decision, all partners are

responsible

Corporations

• A Corporation is a company that is registered by a state and operates apart from its owners

• To form a corporation, the owners must get a corporate charter from the state where their main office will be located– A corporate charter is a license to run a corporation

• To raise money, the owners can sell stock, or shares in the company

• The company must have a boards of directors, who will govern the corporation

Corporations

• Advantages– Limited Liability, which holds a firm’s owners

responsible for no more than the capital that they have invested in it

– The ability to raise money when people buy stock– The corporation does not end if an owner dies• The deceased owner’s shares are sold, and the business

continues

Corporations

• Disadvantages– Corporations pay taxes on their income, and

stockholders pay taxes on profits issued to them, which is called Double Taxation

– The government regulates corporations more than other types of businesses

– Corporations are difficult and costly to start

NIKE?

S Corporations

• S Corporations are special corporations that do not have double taxation– They do have other restrictions

Other Ways to Organize a Business

• Cooperative• Nonprofit Organization• Franchise

Cooperative

• A Cooperative is an organization owned and operated by its members– Groups of businesses, such as small farms, pool

their resources and form a cooperative– The purpose is to save money on the purchase of

certain goods and services– A cooperative can make marketing of goods and

services more efficient and profitable• Juice maker Ocean Spray is a cooperative of cranberry

growers

Nonprofit Organization

• A Nonprofit Organization, or nonprofit, is a type of organization that focuses on providing a service, but not to make a “profit”

• Nonprofits must also register with the government

• Because they do not make a “profit”, they do not pay taxes

Franchise

• A Franchise is a contractual agreement to use the name and sell the products or services of a company in a designated geographic area– Two common franchises are Taco Bell and Merry

Maids– To run a franchise, you have to invest money and

pay franchise fees or a share of the profits– In return, the franchiser offers a well-known name

and business plan

Churches?

Review

With a partner:

• Identify TEN businesses and determine which type of business structure they fall into.

• Create a PowerPoint Presentation showing the ten businesses your chose and the type of business they are.