Chapter 5

Section 2: Forms of Business Ownership

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Lesson 7.2

Choose a Legal Form of Business

Objective:
Students will be able to:
Discuss advantages and disadvantages of a sole proprietorship, partnership, and corporation.

Chapter 7 Slide 2

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Terms
sole proprietorship partnership corporation share of stock board of directors dividends

Chapter 7 Slide 3

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Sole Proprietorship
sole proprietorship
a business that is owned exclusively by one person

Chapter 7 Slide 4

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Advantages of a Sole Proprietorship

Easy to get established Full control over all business decisions Owners keep all profit Flexibility Tax advantages

Chapter 7 Slide 5

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Disadvantages of a Sole Proprietorship

It can be difficult to raise money for the business. Responsible for every aspect of the business Unlimited liability
Personally liable for business debts

Limited skills and knowledge

Chapter 7 Slide 6

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Partnership
partnership
a business owned by two or more people

Chapter 7 Slide 7

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

 Disadvantages of a partnership include:

Responsibilities, profits, and losses are shared can be held liable for errors of partners unlimited liability for business expenses responsible for all debts business income is taxed as personal income

Chapter 7 Slide 8

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

 Advantages of a partnership include:

easy to establish multiple sources of capital risks are spread among partners minimal government regulation profits are taxed once

Chapter 7 Slide 9

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Corporation
corporation
a business that has the legal rights of a person but is independent of its owners

Chapter 7 Slide 10

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Corporation
You must file articles of incorporation with the appropriate state government office.
Articles of incorporation is a written document that defines:
Ownership Operating procedures Conditions for the business.
Chapter 7 Slide 11

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Corporation
Must create corporate bylaws that are the operating procedures for the corporation.
It must name a board of directors

Issue share of stocks to investors

Chapter 7 Slide 12

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Corporation
board of directors
a group of people who meet several times a year to make important decisions affecting the company in addition to strategic decisions, they also determine dividend payments

Chapter 7 Slide 13

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Corporation
share of stock a unit of ownership in a corporation
The individual or group that owns most shares maintains control of the company. dividends distributions of corporate profits to shareholders
Chapter 7 Slide 14

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Advantages of Incorporation
Personal liability is limited to the amount of money each shareholder invested in the company.
Personal assets of shareholders are protected.

Corporations can raise money by selling stock.

Chapter 7 Slide 15

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Disadvantages of a Corporation
The disadvantages of a corporation include:
A lawyer is required to establish a corporation because a corporation is complex.
costly

Chapter 7 Slide 16

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Disadvantages of a Corporation
Corporations are subject to more government regulation that other types of businesses.
Income is taxed twice.
corporate income individual income

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Entrepreneurship: Ideas in Action

Cengage Learning/South-Western

Choosing a Legal Form of Business

Is it easy to establish? Start-up Cost Liability Taxation Distribution of profits Management Control
Chapter 7 Slide 18

Entrepreneurship: Ideas in Action

Cengage Learning/South-Western