CHAPTER 3 TYPES OF BUSINESS OWNERSHIP. Amie Bala Subject Instructor.
Through this chapter , the students should be able to: Compare the advantages and disadvantages of purchasing an existing business and starting a new business Explain the steps involved in buying a business Evaluate the different legal forms of business.
When most people consider going into business for themselves, they think about starting a new business. But there are two ways of becoming an entrepreneur: purchasing an existing business entering a family business.
Advantages The existing business already has customers, suppliers, and procedures. The seller of a business may train a new owner There are prior records of revenues, expenses, and profits Financial arrangements can be easier Disadvantages Many businesses are for sale because they are not making a profit Serious problems may be inherited Capital is required.
Advantages Entrepreneurs who start their own business are completely independent and create their own destinies. Many entrepreneurs find great satisfaction in starting their own businesses Many are attracted to the challenge of creating something entirely new Many get a feeling of triumph when their business turns a profit. Disadvantages There is no certainty that customers will purchase what you offer You must make decisions that other types of entrepreneurs need not make. What product or service to offer, the location, what employees to hire, and other decisions must be made It is difficult to start a new business from scratch Customers may not consider your business location to be convenient Contacting suppliers might be more difficult than anticipated and many of them might be unreliable..
Write specific objectives about the kind of business you want to buy, and identify businesses for sale that meet your objectives. Meet with business sellers or brokers to investigate specific opportunities. Visit during business hours to observe the company in action Ask the owner to provide you with a complete financial accounting of operations for at least the past three years. Ask for important information in written form Determine how you would finance the business Get expert help to determine a price to offer for the business.
Types of Business Arrangements Sole proprietorship Partnership Corporation.
SOLE PROPRIETORSHIPS- a business that is owned exclusively by one person Advantages Ease cost of formation- the only requisites for its legal existence to commence are the following: • The sole owner’s resolution to start operating • Getting the required permit and license Secrecy- the sole proprietor does not have, and he is not required by law, to share information with anyone. His competition can only guess what his intended moves are. Distribution and use of profits- the sole proprietor does have to share the profits with anyone. If he decides to invest his profits for expanding his business, he is not required to consult anybody. Control of the business- the power to control the business is vested solely to the single proprietor. He has the advantage of making an instant decision. Government regulation- single proprietorships are required to submit fewer reports to the government Taxation- the net income of the sole proprietorship is regarded as the personal income of the sole owner and is taxed accordingly. This is not so in the case of partnership and corporations wherein net incomes are taxed and will be subject to taxation again when the owners individually receive their share of the profits. Closing the business- sole proprietorship can be dissolved at will. Although this is done only when necessary, it remains an option of the owner. Once the owner makes a decision to cease operations, he does not need to seek the approval of others..
Disadvantages The possibility that the owner lacks ability and experience - The success of the sole proprietorship depend largely on the management and entrepreneurial skill of the owner Difficulty in attracting good employees - The assurance that the firm will survive for a long period is not a feature of sole proprietorships. As a consequence, good employees will tend to join a more stable enterprise which is most often a corporation. Difficulty in raising more capital - The amount of capital that could be raised will depend on the financial resources of the sole owner. Even if he can obtain credit, the amount will depend on his sole capacity to pay. Limited life of the firm - The existence of the sole proprietorship depends on the physical well-being of the owner. Ill health on the part of the owner could cause bankruptcy. Unlimited liability of the proprietor - Any liability incurred by the sole proprietorship extends to the owner’s personal assets. In theory, the sole proprietor could lose even his shirt if all his other assets have been exhausted in liquidating all claims against his business..
PARTNERSHIPS- a legal association of two or more persons as co-owners of an unincorporated business. Types of Partnerships General Partnership- is an association of two or more persons, each with unlimited liability, and who are actively involved in the business . Limited partnership- an arrangement in which the liability of one or more partners is limited to the amount of assets they invested in the business..
Advantages Ease of formation- the only requirement before the partnership starts to operate is for the partners to agree on basic aspects of the business like the nature of the business, location, capitalization, and the like. Pooling of knowledge and skills- the combined knowledge and skills of the partnership will be a distinctive advantage. More sources of capital- the combined resources of the partners provide a bigger source of funding. Also, the partnership can enjoy the benefits of a higher credit rating. Ability to attract and retain employees- partnerships are able to overcome the difficulty in attracting and retaining good employees by offering partner status to valuable employees. Tax advantage- the income of the partnership is not taxed separately from the partners’ incomes. Any profits derived by the partners are taxed as their individual incomes..
Disadvantages Unlimited liability- partnerships, like sole proprietorships, are saddled with the disadvantage of unlimited liability. Limited life- when a partner dies or withdraws from the business, the partnership is terminated. In essence, the life of the partnership is more limited than that of the sole proprietorship. Potential conflict between partners- there are occasions when partners disagree on certain ways of operating the business, and there are many potential areas for disagreement. Among these are the following: • Adding new products or services carried by the business • Hiring new employees • Decisions on credit extensions • The grant of additional benefits to employees Difficulty in dissolving the business- it may not be easy to divide whatever assets are left for distribution to the partners as some of the assets may be fixed or immovable. The more difficult the dissolution becomes when certain debts are to be shared by the partners..
Partnership Agreement- a written agreement drawn to formalize what has been agreed upon. A document designed to prevent or at least minimize disagreements between partners. It usually covers the following: The purpose of the business The terms of the partnership The goals of the partners and the partnership The financial contribution made by each partner at the beginning and during the lifetime of the business The distribution of profits and losses The withdrawal of contributed assets or capital by a partner The management powers and work responsibilities of each partner The provisions for admitting new partners The provision of expelling a partner The provision for continuing the business in the events of a partner’s death, illness, disability, or withdrawal The provision for determining the value of a departing partner’s interest and method of payment of that interest The methods of settling disputes through mediation or arbitration The duration of the agreement and the terms of dissolution of the business..
CORPORATION- is owned by stockholders. They are issued certificates of ownership called stocks. Advantages Limited liability - The liability of a stockholder is limited to his shareholdings. He may lose the entire value of his stocks in the event of bankruptcy. Beyond the said value, he has no more liability. Ease of expansion - The authority granted to a corporation to sell its own share of stock provides a means to pool large amounts of funds. The price per share of the stocks can be made low enough to attract even the smallest investor. Ease of transferring ownership - If a stockholder loses interest in maintain part ownership of the corporation, he may disassociate himself from it by selling or donating his shares to another person. Relatively long life - Corporations are established to have a life up to 50 years and is extendible for longer periods. Because the ownership is readily transferable, the death or withdrawal of any or all stockholders do not terminate the corporation. Greater ability to hire Specialized Management - The expanded operations of corporations make it possible to subdivide the overall task into smaller specialized positions..
Disadvantages 1. More expensive and complicated to organize - A corporation may start operations only after receiving from the Securities and Exchange Commission (SEC) a certificate of incorporation. The SEC will only issue the certificate of incorporation after reviewing the articles of incorporation previously submitted by the initial set of corporate officers. The Articles of Incorporation contains the following: a. The name of the corporation b. Specific purpose or purposes c. Principal office of the Corporation d. Term of existence of the corporation e. Names, nationalities and residences of incorporators f. Number of directors g. Amount of authorized capital stock h. And other matters. Treasurer’s affidavit- an affidavit indicating payment of minimum subscribed capital stock.
2. Double taxation - The profits derived by stockholders are taxed twice by the government: First , when the corporation realizes profits Second , when individual stockholders declare as part of their personal income the dividends they receive from the corporation. 3. More extensive government restrictions and reporting requirements - The submission of financial statements is an example of annual reports required by the SEC. The reports submitted give competitors the chance to take a look at the company’s status 4. Employees lack personal identification and commitment - Many stockholders are detached from the daily operations of the corporation. Those who are employed by the corporation mostly do not own even a share of the company’s stocks. Employees do not feel identified with the corporation and therefore, lack commitment to their work ..