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Chapter 35 Discussion
If you were going to be opening a new restaurant, do you think it would be better to be a sole proprietor or to open a franchise? Discuss the reasons that support your decision.4/1/2018
Chapter 35
Forms of Business Organization
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Overview
• LO35-1: What are the major forms of
business organization, and what are the
differences among them?
• LO35-2: What are the specialized forms of
business organization?
• LO35-3: What is a franchise?
35-2
Major Forms of Business
Organizations
• Sole proprietorship
• General partnership
• Limited partnership
• Corporation
35-5
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Sole Proprietorship
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Definition: Unincorporated business owned by one person
Owner has total control
Owner has unlimited liability
Profits taxed directly as income to sole proprietor
Advantages
• Ease of creation (start-up)
• Owner has total managerial control
• Owner retains profits
• Disadvantages
• Personal liability for all business debts/obligations
• Funding limited to personal contributions and loans
35-6
General Partnership
• Definition: Unincorporated business owned and operated by
two or more persons
• Each partner has equal control of business
• Each partner has unlimited, personal liability for business
debts/obligations
• Profits taxed as income to partners
• Advantages
• Ease of creation (start-up)
• Partnership income is partner income
• Business losses qualify for tax deduction
• Disadvantages
• Personal liability for all business debts/obligations, including
those incurred by other partners on behalf of partnership
35-7
Limited Partnership
• Definition: Unincorporated business with at least one general
partner, and one limited partner
• General partner in limited partnership has
managerial/operational control over business
• Limited partner’s liability limited to extent of his/her capital
contributions
• Limited partner has no managerial/operational control over
business
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Corporation
• Definition: State-sanctioned business with legal identity
separate and apart from its owners (shareholders)
• Owners’ (shareholders’) liability limited to amount of
investment in corporation
• Profits taxed as income to corporation, plus income to
owners/shareholders (double taxation)
• S Corporation can avoid double taxation
• Advantages
• Limited liability for shareholders
• Ease of raising capital by issuing (selling) stock
• Disadvantages
• Double taxation
• Formalities required in establishing and maintaining corporate
existence
35-9
S Corporation
• Definition: Business organization formed under
federal tax law that is considered corporation,
yet taxed like a partnership
• Formed under federal law
• No more than 100 shareholders
• Shareholders must report income on their
personal income tax forms
35-10
Limited Liability Company (LLC)
• Definition: Business organization with limited
liability of a corporation, yet taxed like
partnership
• Formed under state law
• Owners of LLC (members) pay personal income
taxes on shares they report
• No limitation on number of owners permitted in
LLC
35-11
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Specialized Forms of Business
Organizations
• Cooperative: Organization formed by individuals to market products
• Joint stock company: Partnership agreement in which company
members hold transferable shares, while all company goods are held
in names of partners
• Business trust: Business organization governed by group of trustees,
who operate trust for beneficiaries
• Syndicate: Investment group that forms for purpose of financing
specific large project
• Joint venture: Relationship between two or more
persons/corporations created for specific business undertaking
• Franchise: Agreement between franchisor (owner of trade
name/trademark) and franchisee (person who, by specific terms of
agreement, sells goods/services under trade name/trademark)
35-12
Advantages and Disadvantages of
Franchise to Franchisee
• Advantages
• Assistance from franchisor in starting franchise
• Trade name/trademark recognition
• Franchisor advertising
• Disadvantages
• Must meet contractual requirements or possibly
lose franchise
• Little/no creative control over business
35-13
Advantages and Disadvantages of
Franchise to Franchisor
• Advantages
• Low risk in starting franchise
• Increased income from franchises
• Disadvantages
• Little control (except contractually) over individual
franchise
• Can become liable for franchise, if franchisor
exerts too much control
35-14
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Types of Franchises
• Chain-style business operation
• Franchisor helps franchisee establish a business (using
franchisor’s business name and franchisor’s standard methods
and practices)
• Distributorship
• Franchisor licenses franchisee to sell franchisor’s product in
specific area
• Manufacturing arrangement
• Franchisor provides franchisee with technical knowledge to
manufacture franchisor’s product
35-15
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