Chapter -2 OF

FORMS
BUSINESS
OWNERSHIP
Learning Objectives
1. To discuss the advantages and disadvantages of sole proprietorship.

2. To discuss the advantages and disadvantages of partnerships.

3. To list the features that should be included in a written partnership contract.

4. To discuss the advantages and disadvantages of corporations.

5. To define the term merger and identify three types of mergers.

6. To identify other incorporated forms of business.

Introduction
The landscape of business ownership is varied and dynamic, providing investors and
entrepreneurs with a range of options for founding and running businesses. The choice of an
appropriate corporate ownership structure has a significant influence on a number of
operational characteristics of a company, including liability, governance, taxation,
decision-making, and access to finance. Each ownership structure has its own pros and
disadvantages, ranging from the ease of a sole proprietorship to the complexity of corporations
and new arrangements. The goal of this investigation of the various types of corporate
ownership is to provide readers a thorough grasp of each types unique traits and repercussions.
Each ownership form has its own set of operational, financial, and legal issues, from sole
proprietorships to co-operative partnerships to legally separate companies.
Sole Proprietorships
A business owned and managed by one individual. The
oldest and most typical form of private company ownership
in the US is a sole proprietorship. It occurs when a single
person, even if they have assistance, owns and runs the
company. This person serves as both the company's only
CEO and principal owner. Typically the sole proprietor
owns a small service or retail enterprises like roadside
stalls, hardware stores, bakeries, or restaurants are
frequently owned by one entrepreneur.
Advantages of Sole Proprietorship
Ease of starting: A simple and hassle-free company structure is a sole
proprietorship. For instance, Jane Deleri decided to start a deli in Hammond,
Indiana as a sole proprietorship. Jane encountered only a few challenges. She had
to verify courthouse records to make sure her selected company name was
accessible and obtain a food permit from the Hammond Health Department.
Advantages of Sole Proprietorship
Sole participation in profits and losses: Jane was solely responsible for any gains or
losses incurred from running the deli. Partners, on the other hand, split gains and
losses.

Tax breaks: The absence of corporation tax is a major advantage of proprietorships.

In contrast to corporations, where earnings and dividends are taxed, Jane, a sole
owner, was exempt from paying company profit taxes.
Advantages of Sole Proprietorship
Easy starting : Setting up a sole proprietorship is straightforward, involving
minimal paperwork and low costs. It's a simple way to start a business.
Control : The owner has full control over decision-making and operations. This
agility can be crucial for quick adjustments and adaptations to market changes.
Flexibility : Sole proprietors have the flexibility to adapt their business model,
change strategies, and make decisions without needing to consult partners or
board members.

Ease of dissolving : If the business needs to be closed, it can be done relatively

easily without the complexities associated with dissolving partnerships or
corporations.
Disadvantage of Sole Proprietorship
Unlimited liability: By virtue of the law, Jane is legally liable for any debt, regardless of
how much money she has. In the event that her deli collapses, she could have to sell
personal belongings like Jewellery or her vehicle to pay off remaining business
obligations that won't be satisfied by selling deli assets like equipment or inventory.

Difficulty in raising capital: Jane was only allowed to invest her own money, which was
also limited how much she could borrow. Due to financial constraints, companies that
require significant money, such as those operate an East Coast shuttle aircraft or building
a gas pipeline, are often not established up as sole proprietorships.
Disadvantage of Sole Proprietorship
Lack of stability: The proprietorship comes to an end at the owner's death, sickness, bankruptcy
or retirement. The deli would no longer exist in its current form even if Jane's company was sold
to someone else.

Demands on time: Jane enjoys bowling and baseball, but she doesn't have much free time
because the deli needs to be open all day to develop customer base. Jane and other business
owners sometimes work 60 to 80 hours per week, especially in the beginning.

Difficulty in hiring and keeping high-achievement employees: In Sole proprietorship, the

owner is synonymous with the business. Highly motivated and energetic employees may find
limited room for personal growth within such a structure.
Partnership
A partnership is a business structure where
two or more individuals or entities
collaborate, sharing responsibilities, risks and
profits through operating the business.
Partnerships are formed through a legal
agreement outlining roles, contributions and
profit distribution.
 Types of Partnership
There are three types of partnership-general partnership, limited
partnership , joint venture. One partner has limitless
responsibility in general partnerships. There is a general partner
and limited partners in limited partnerships. Partnerships for
certain tasks or periods of time are called joint ventures.
Types of Partnership
General partnership: Regardless of their ownership stake in the company, general partners
have the power to make decisions that have legal force. Unlike single owners, they may be
completely accountable for business obligations. According to their agreement, profits and
losses are split.

Limited partnership: A general partner is a requirement for partnerships. General and limited
partners make up limited partnerships; general partners administer while limited partners invest
while receiving tax breaks and liability protection. Rarely are limited partners capable of
managing.
Types of Partnership
Joint venture: For specific objectives or transactions, corporations and groups of people
frequently work together to create joint ventures. Investments in real estate or
manufacturing agreements are two examples. Joint ventures can involve many nations; for
example, Hewlett-Packard and Samsung established a partnership Cantered on technology,
while Wheeling-Pittsburgh Steel Corporation collaborated with Japan's Nichia Steel
Co-Joint ventures between Western and Soviet companies grew in popularity in the Soviet
Union, taking advantage of a sizable market.
Advantages of a Partnership
More capital: Capital in sole proprietorships is limited to the owner's own assets and credit.
Partnerships enable the use of more money , such as who have ideas but lack the resources
to develop and promote such ideas might look for partners with those resources.

Combined managerial skills: Partnerships allow people with different abilities to work
together. For instance, a partner who excels in marketing can support a partner who excels
in accounting and finance.
Advantages of a Partnership
Ease of starting: Due to their private contractual character and resemblance to sole
proprietorships, partnerships are easy to set up. They have little government regulation
and are inexpensive to start. A written agreement is typically covered by a minor legal
charge and is preferred over an oral one.
Clear legal status: Partnership-related legal precedents from court decisions have
addressed issues including rights, obligations, liabilities and duties. The legal position of
partnerships is clarified as a result, allowing attorneys to give knowledgeable counsel on
partnership-related matters.
Disadvantages of a Partnership
Unlimited liability: The obligations of the partnership are owed by the general partners.
Someone has to pay the $25,000 in overdue invoices if a partnership like Jack and Jill's fails.
Jill will be responsible for payment if Jack doesn't have enough assets but she does. This
emphasizes how crucial careful partner selection is.

Potential disagreements: Decisions made in collaboration with partners might be helpful

since they benefit from many views. However, the possibility for conflict and a lack of unity
in authority make having several decision-makers dangerous. As a result, poor decisions may
be made more slowly and with inferior quality since a consensus must be obtained before
taking any action.
Disadvantages of a Partnership
Investment withdrawal difficulty: It might be more difficult to withdraw from a
partnership than it was to make the first commitment. The invested capital frequently turns
into a "frozen investment," intertwined with the activities of the company.

Instability: The partnership ends when one partner leaves or passes away. In order to
create a new partnership or another type of company organization, legal processes are
required.
Corporation
A Corporation is a legal entity separate from its
owners basically formed to conduct business and
limit the personal liability of its shareholders.
Advantages of a Corporation
Limited liability: When you invest in a company and own shares of stock you liability is
limited to the amount you have invested, so if the company fails you only loss your
invested money.

Skilled management team: Owners appoint professional managers for partials ownership.
But lack full corporate control.

Transfer of ownership: Shareholder can freely sell their corporate shares at agreed prices
facilitating broad investment and attracting many shareholder.
Advantages of Corporations
Greater capital base: Unlike proprietorships or partnerships corporations can access
significant capital by offering shares of stock to a large pool of investors.

Stability: Corporations do not have a fixed end date, so they can keep running even if
ownership leadership or stock ownership changes and their rules and policies may stay the
same.
Disadvantages of a corporation
Lack of control: Individual shareholders typically have limited influence over a company
activity with their main power the ability to buy and sell stock.
Credit limitations: Lenders and banks must take into account the restricted liability of
businesses. Only corporate assets may be used to pay off debts when a firm fails. In partnerships,
creditors may seize personal assets of participants to pay off corporate obligations.
Difficulty and expense of starting: Starting a corporation can be complex and expensive due to
legal and administrative requirements, such as filing fees and legal documentation.
Lack of control: Shareholders in a corporation may have limited control over decision-making,
especially if they own a minority stake. Management decisions are often made by a board of
directors.
Disadvantages of a Corporation
Multiple taxation: Corporations may face double taxation, where the company's profits are taxed at the
corporate level, and then shareholders are taxed again on dividends received. This can lead to a higher
overall tax burden.

Lack of personal interest: In large corporations, employees and even shareholders may feel a lack of
personal interest or connection to the company's operations and objectives, potentially affecting
motivation and commitment.

Government involvement: Corporations are subject to various regulations and government oversight,
which can lead to compliance burdens and potential legal issues. Changes in government policies can also
impact operations.
Mergers
Government policy has long been concerned about mergers, the
coming together of two firms, due to the increased market
share and less competition. Merger that reduce market
competition can result in government action under the
Caller-Kefauver Act and review by the justice Department and
the Federal Trade Commission (FTC).
Mergers
There are several types of merger :

Horizontal Merger:
● Involves companies that operate in the same industry and produce similar goods and service.
● Aims to achieve synergies, reduce competition and increase market share. (e.g., Republic Steel and Jones & Laughlin
Steel merged to form LTV Steel )

Vertical Merger :
● Involves companies in the same industry but different stages of production process .
● Aims to improve efficiency , control costs and enhance the supply chain. (e.g., General Motors purchase Electronic
Data System)

Conglomerate Merger :
● Involves companies that are in unrelated industries .
● Aims to diversify the business portfolio, spreading risk across different markets. (e.g., Xerox Corporation purchased