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CHAPTER 5

PROPRIETORSHIP

AND

PARTNERSHIP

CHAPTER 6

CORPORATE FORMS OF BUSINESS OWNERSHIP

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ASSETS – Things owned by the business

-- Merchandise, equipment, land, building

CREDITORS -- Anyone you owe money

LIABILITIES -- Debt of the business

BALANCE SHEET OR STATEMENT OF FINANCIAL POSITION--

Document that shows what a business owns and owes after subtracting what the owner’s share of the business is worth

NET WORTH, CAPITAL, OR EQUITY -- Owner’s value in the business

Assets – Liabilities = Net Worth

What we know so far. . .

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ENTREPRENEURSHIPBEING IN BUSINESS FOR YOURSELF IS WORKING 8O HOURS PER WEEK TO AVOID WORKING 40 HOURS FOR

SOMEONE ELSE

AND WHAT ELSE WE KNOW. . .

• Half of all new business fail within the first five to six years.

• Most new business fail because of financial reasons.• A business with a balance sheet showing assets valued

at$100,000 and capital valued at $100,000 is in a weak financial position.

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ENTREPRENEUR French: undertake or take action

SOMEONE WHO UNDERTAKES THE RISK OF STARTING, OWNING, OPERATING A SMALL BUSINESS FOR THE PURPOSE OF MAKING A PROFIT

ENTREPRENEUR – the person

PROPRIETORSHIP – legal aspect of the business

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PROPRIETORSHIP

SOLE PROPRIETORSHIP – BUSINESS OWNED AND MANAGED BY

ONE PERSON

PROPRIETOR –

OWNER-MANAGER

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SELF-EMPLOYMENT 1.Be your own boss

2.Make your own decisions

3. Profit from your hard work

AND 1. Work 60 hours a week 2. Go years without a vacation3. Make less money than you did when you

were employed4. Lose your life savings if you get sick and

can’t work for a long period of time.

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•TO FOLLOW YOUR DREAM

•PROVE YOURSELF

•BE ALL YOU CAN BE

•FED UP WITH POLITICS/POLICIES OF CURRENT JOB

•BELIEVE YOU CAN DO IT BETTER

•ONCE IS LIFETIME OPPORTUNITY

•RECENTLY PROMOTED, DEMOTED, GIVEN WALKING PAPERS

Why do people become entrepreneurs?

OR

IS IT TO BE

RICH????

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ENTREPRENEUR CHARACTERISTICS1. RISK TAKER – calculated risks

2. DECISIVENESS –

--where am I now?

--where do I want to be in the future?

--how can I reach that goal?

3. ACTION TAKER – initiative to make decisions a reality

4. INNOVATIVE – ability to see a need and fulfill a demand

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GETTING A BUSINESS STARTED

BUSINESS PLANWritten document that describes the nature of the

business, the company’s goals and objectives, and how they will be achieved.

1.FUNDS2.KNOWLEDGE OF BUSINESS INTERESTED

IN3.WORK EXPERIENCE4.OPPORTUNITY

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WHAT TYPE OF BUSINESS IS SUITED TO BEING A PROPRIETORSHIP?

1) One that can be managed by the proprietor or those hired by the proprietor, and

2) Those that do not require a great amount of money.

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Why do you think many small business fail?

1) lack of capital

2) impatient

FYI Did you know that small businesses (those employing less than 50 employees)

account for 50% of the GDP

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PARTNERSHIPUNINCORPORATED BUSINESS

ORGANIZATION OWNED BY TWO OR MORE PERSONS CALLED GENERAL PARTNERS AND

SHARE EQUALLY IN THE DEBT.

PARTNERSHIP AGREEMENTCLEARLY AGREED UPON TERMS OF EACH

PERSON’S RESPONSIBILITIES AND ALL CONDITIONS OF CONTRACT.

CREATING A

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COMBINING BUSINESSESPartner A invests $_______Partner B invests $_______

Total investment = $_______ Equal partnership?____

To have an equal partnership, how much would ___ have to invest? $________

What % of the partnership would each partner have if not an equal partnership? (% of invest./total invest.)

A B

______/________= ______% ________/_______=_____%

Assets= Bldg+ what each brings. Total worth=all assets combined

What is significant about equal status over non-equal status?DECISION MAKING

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CARLTON – BAKER EQUAL PARTNERSHIP

• Business Fails Amount of debt? $_________

• Assets = _____________________

• Liabilities = ___________________

• Baker – Personal Assets of $__________

• Carlton – Personal Assets of $_________1. What is each partner’s share of the debt?_______

2. What will Carlton pay?$____________

3. What will Baker pay? $____________

4. Why? ____________________

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THREE PARTNERS – EQUAL PARTNERSHIP

ABC PARTNERSHIP DISSOLVING

$____________ owned to creditors after converting everything to cash.

Partner A has only $______ to give.

Partner B and Partner C liable for? $__________

Why?

1)Who will creditors go after?

2) As long as unlimited liability, can sue for what?

3) Can partners sue another partner?

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LIMITED PARTNERSHIPRestricts the liability of the partner to the

amount of the partner’s investment

1. One partner must have unlimited liability

2. Name of limited partner not in firm name

3. Legal notice must be given to all creditors of those with limited partnership

4. Advantageous for investment of money but lack of time or interest to actively manage

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LIMITED PARTNERSHIP ABC CORPORATION

A UNLIMITED LIABILITY $_________INVESTED

B/C LIMITED LIABILITY $_________INVESTED\

ABC CORPORATION: Debt: $________________

1)How much will B owe?__________________

2)How much will C owe?__________________

Total of B/C toward debt= $___________

3)How much will A owe?____________________

4)Why?

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BUSINESS NAMEProprietorship or partnership –can be conducted under name or names of owner or owners

And Company or & Co. –if two partners, not permissible to use name such as Jones, Smith & Co—name indicates more than two partners.

Names included in “Company” must be identified by registration at public recording office.

Artificial Name (Superior Shoe Store) acceptable

Proper registration required for creditors to know who is responsible for business.

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CORPORATE FORMS OF BUSINESS OWNERSHIP

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ROLE OF BIG BUSINESS IN THE AMERICAN ECONOMY

• Can supply goods and services to a more people• Operate more efficiently than small businesses• Sales are over 17 times more than sales from

proprietorships • Sales over 15 times more than sales from

partnerships in the U.S.• Can sell their products at lower prices

WHY? large volume, small costs per unit sold.

FYI: Started in 1860 with the end of the civil war and before WWI when oil, steel, mining,

forestry were on the rise.

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Advantage in the marketplace

1. Consumers attraction to well-known brand names (Proctor & Gamble, Microsoft, Martha Stewart, Jimmy Buffett)

2. IMPORTANCE TO OVERALL ECONOMY3. More financial resources than small firms

to conduct research and develop new goods.

4. Offer more varied job opportunities5. Greater job stability6. Higher wages7. Better health and retirement benefits.

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SO WHY DO CORPORATIONS GET SUCH A BAD RAP?Viewed with ambivalence

• Recognize their important contribution to economic well-being

• Worry that they could become so powerful as to stifle new enterprises and deprive consumers of choice.

Inflexible in adapting

In the 1970s, for instance, U.S. auto-makers were slow to recognize that rising gasoline prices were creating a demand for smaller, fuel-efficient cars. As a result, they lost a sizable share of the domestic market to foreign manufacturers, mainly from Japan.

2001-2, over 29 major companies were involved in creative-accounting scandals.

2008, the four major car makers flew into Washington on their private jets and went before Congress asking for a bailout with no business plan.

2008,$700B bailout to banks with no strings attached. So where’d the bailout go? Shhhh it’s a secret.

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In the United States, most large businesses are organized as corporations.

Many small businesses (generally considered up to 500 employees) that become successful often convert from sole proprietorships and partnerships to corporations as they grow in size.

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Basic Features of a Corporation

DEFINITION: business owned by a group of people and authorized by the state in which it is located to act as though a single person

a) making contracts

b) owning property

c) ability to sue

d) ability to be sued

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CHARTER

the official document granted by a state giving power to run a

corporation.

Charter is also referred to as Certificate of Incorporation

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Keys to the corporation:

stockholders, directors, officersStockholders

a. Owners

b. Right to stock certificate

a. Can transfer ownership

b. Right to vote (present or proxy—absentee ballot

c. Right to receive dividends based on shares

d. Dividends-–profits distributed to shareholders on per share basis

e. Right to buy new stock if issued

f. Right to share in net proceeds if dissolved

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Directors

Ruling body of corporationElected by stockholders

• Based on their knowledge in making good policy decisions • Ability to develop plans and policies to

guide the corporation as well as appoint officers to carry out plans

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Officers

People hired to manage the businessAppointed by Board of Directors

—President, Vice President,Secretaries, Treasurer, managers of the major areas of the companies, etc.

CEO—chief executive officer

CFO—chief financial officer

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CLOSE CORPORATION—OR CLOSELY HELD

CORPORATION—

Does not offer its shares of stock for the public. (Family-run businesses, many S-corporations would be considered closed corporations.)

Financial activities remain private.

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OPEN CORPORATION—PUBLICLY OWNED CORPORATION—

Offers shares of stock for public sale.

Must file detailed financial information with the federal government which the federal government and potential investors can examine.

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ADVANTAGES OF CORPORATIONS

1. Available Sources of Capital

2. Limited Liability of Stockholders

3. Permanency of Existence

4. Ease in Transferring Ownership

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DISADVANTAGES

1)Double Taxation

• Taxed as corporation

• Taxed as stockholder on dividends

2)Government Regulation and Reports

3)Stockholders Records

4)Charter restrictions

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SPECIALIZED TYPE OF ORGANIZATION

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JOINT VENTUREAgreement involving two or more businesses to

make and/or sell a particular good or service. (Goodrich Corp. and Rolls-Royce have formed a joint venture that will supply engine controls for Rolls-Royce aircraft engines)VIRTUAL CORPORATION aka Virtual Enterprises

Temporary alliance of enterprises that come together to share skills and resources in order to better respond to business opportunities, and whose cooperation is supported by computer networks. (Educational class operating worldwide--students in many locations come together in a "virtual classroom" to form a business. They do not conduct real transactions, nor do they sell real merchandise but learn how to start and run a business. The Business is usually replaced at the end of the year for the next group of students.

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S-CORPORATION1) must have no more than 100

stockholders2) business can’t own more than 80% of

stock in another corporation3) no more than 25% of income of

corporation can be from sources other than for the purpose stated in the chapter

4) stockholders must be permanent citizens or residents of this country

5) taxed as if partnership.

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Limited Liability Company (LLC)

•New business structure allowed by state statute.•Popular because, similar to a corporation, owners have limited personal liability for debts and actions of the LLC. •More like a partnership, providing management flexibility and the benefit of pass-through taxation.•Owners of an LLC called members. Most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities.•No maximum number of members. Most states permit “single member” LLCs, those having only one owner.•A few types of businesses generally cannot be LLCs, such as banks and insurance companies.

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PARTNERSHIP vs CORPORATION vs S-CORPORATION

1) Major weakness of partnership is unlimited liability whereas strength of corporation is limited liability

2) Major strength of partnership is lower income tax rate whereas weakness of corporation is higher income tax rate than that paid by partnership.

3) Stockholders have to pay personal income tax on dividends distributed by corporation (double taxation)

S-Corporation offers lower taxes and limited liability, profits from the corporation go directly to the stockholders who include them in their individual income tax returns avoiding double taxation

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NONPROFIT CORPORATIONS

Corporations that do not pay taxes and do not exist to make a profit.

Rotary, Boys Club, Veterans of Foreign Wars, etc. are non-profit

corporations.

Non-profit corporations account for 1/3 of the GDP.

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QUASI-PUBLIC CORPORATION•Privately-owned corporation whose stock is publicly traded and is backed by the government. •Specifically mandated responsibilities spelled out in the corporations charter.

•An example of a quasi-public company is Fannie Mae, Sallie Mae, Freddie Mac which was started by a congressional charter in order to encourage home ownership among low- to middle-income Americans. Sallie Mac was for student loans.

•SEPT. 2008

•FYI: FANNIE AND FREDDIE OWNED $5T IN U.S. MORTGAGES—HALF THE NATION’S TOTAL. BAILOUT: $600B in govt. buying of assets of F&F

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COOPERATIVES

Businesses owned and operated by its user-members for the purpose ofsupplying themselves with goods and services.

Purpose is to provide members with cost and profit advantages they would not otherwise have.