Forms of Business Ownership
Chapter 4: Forms of Business Ownership
1. What is a sole proprietorship? What are the major advantages and disadvantages of this form of business ownership?
A sole proprietorship is a business operated, established, owned, and often financed by one person.
Advantages:
- Easy and inexpensive to form
- Profits go to the owner
- Freedom from government regulations
- No special taxation
- Ease of dissolution
Disadvantages:
- Difficulty raising capital
- Limited managerial expertise
- Trouble finding qualified employees
- Personal time commitment
- Unlimited liability
- Unstable business life
- Losses are the owner’s responsibility
2. How does a partnership differ from a sole proprietorship? Which disadvantages of sole proprietorship does the partnership tend to eliminate or reduce?
A sole proprietorship differs from a partnership in that it is a business run by a single individual. It is not considered to be an entity that is separate from the individual. A partnership is considered to be an entity apart from the partners. It’s a business of two or more individuals or entities, and a partnership is governed by state law. A sole proprietorship has disadvantages, such as unlimited liability and limits on one person’s ability to borrow or to be an expert in all fields. Because of that, the sole proprietorship will likely have lower revenue than the partnership.
3. What is the difference between a general partner and a limited partner?
A limited partner can be held liable for only the amount of money he or she invested in the company. The limited partner is a business partner that is co-owned by one or more general partners who manage the business and limited partners who invest money. A general partner is a person who assumes full or shared responsibility for operating a business. The individual liability for debts is the partner’s share of the total amount of debts accrued by the partnership. A general partner is a business co-owned by two or more general partners who are liable for everything the business does. They are responsible or liable for losses beyond the amount that was invested in the partnership.
7. What rights do stockholders have?
A stockholder is one who owns shares of stock in a corporation or mutual fund. For corporations, along with the ownership comes a right to declared dividends and the right to vote on certain company matters, including the board of directors. There are two main types of stocks: preferred stocks and common stocks. The owner of preferred stock usually has no voting rights, but their claims on dividends are paid before those of common-stock owners. An owner of common stock has one vote for each share owned. The most important right of owners of common and preferred stock is sharing in the profit earned by the corporation through the payment of dividends. Common stockholders usually live all over the nation, but they vote by proxy. A proxy is a legal form listing issues to be decided at a stockholders’ meeting and enabling stockholders to transfer their voting rights to some other individual. Nowadays, most corporations allow stockholders to exercise their right to vote by proxy using the internet or a toll-free phone number.
8. What are the primary duties of a corporation’s board of directors? How are directors selected?
Duties of the Corporation’s Board of Directors
- The individuals who are selected to be on the board of directors of a corporation have overall responsibility for the activities of the corporation.
- The board acts on behalf of the stockholders to make overall policy decisions and provide oversight.
- It has to be responsible for setting corporate goals, developing strategic plans to meet those goals, and the firm’s overall operation.
The board of directors is the top governing body of a corporation and is elected by the stockholders. The stockholders control the activities of the corporation through its directors.
9. What are the major advantages and disadvantages associated with the corporate form of business ownership?
Advantages:
- Specialized Management: Corporations can recruit more knowledgeable, skilled, and talented managers than proprietorships and partnerships.
- Ease of Transfer of Ownership: Practically no restrictions apply to the sale and purchase of stock issued by an open corporation, and the ownership is transferred when the sale is made.
- Perpetual Life: A corporation exists independently of its owners and survives them.
- Limited Liability: This is a feature of corporate ownership that limits each owner’s financial liability to the amount of money that he or she has paid for the corporation’s stock.
- Ease of Raising Capital: This is one of the most effective forms of business ownership for raising capital.
Disadvantages:
- Double Taxation: Corporate profits are taxed twice: once as corporate income and a second time as personal income of stockholders.
- Lack of Secrecy: Corporations cannot keep their operations confidential.
- Conflict Within the Corporation: Because of the large number of employees, some conflicts are inevitable.
- Difficulty and Expense of Formation: The cost of incorporating, including legal and filing fees, may discourage many owners of smaller businesses from forming corporations.
- Government Regulation and Increased Paperwork: Corporations are subject to more government regulation than other business forms. Even small corporations need the help of an attorney, a certified public accountant, and other professionals on a regular basis to ensure compliance. They must also prepare and file various reports with government agencies.
10. If you were to start a business, which ownership form would you choose? What factors might affect your choice?
I would choose a corporation. I think that it will be easier to work with a larger number of persons, and at the same time, it is an easier way to start up with money and investments. The reasons I would choose this type of ownership are mainly about the number of members. At the same time, I think that it is important to be able to transfer the ownership. It will be easier to raise capital in a corporation. Other advantages include being a separate legal entity, continuous existence, and the benefits for retirement.
4. What kinds of services do not-for-profit corporations provide? Would a career in a not-for-profit corporation appeal to you?
A nonprofit corporation is a corporation formed to carry out a charitable, educational, religious, literary, or scientific purpose. A nonprofit corporation doesn’t pay federal or state income taxes on profits it makes from activities in which it engages to carry out its objectives. It would be really interesting to study nursing and be part of a corporation related to helping children in Africa or other developing countries. I would want to help children or people who are at risk of having different illnesses but do not have the resources to have insurance and really need it.