Unit 2: Entrepreneurship and Legal Forms of Business
In this unit we explore various forms of ownership (sole proprietorship, partnerships, and corporations) which affects how businesses are taxed, how profits are distributed, and what regulations must be followed. The form of ownership you choose corresponds to the growth, taxation, and future of your company. In this unit we examine some techniques business owners use to analyze profitability. We review the characteristics of successful entrepreneurs, how small businesses impact the economy, and the role of the Small Business Administration in the United States.
Completing this unit should take you approximately 10 hours.
Upon successful completion of this unit, you will be able to:
- describe legal forms of businesses, including sole proprietorships, partnerships, corporations, limited-liability corporations, and subchapter S corporations;
- evaluate the appropriateness of the different legal forms of business for various business contexts;
- identify and describe the function of the major components of a business plan;
- analyze the potential of a business to be profitable, when considering legal form of business, tax rates, and break-even analysis; and
- analyze the impact of small business on the economy.
2.1: Legal Forms of Business
Read Module 2, pages 149 – 158, to get an overview of the various forms of business ownership including advantages and disadvantages. Continue reading pages 158 – 159 to learn about some of the factors that go into deciding which form is best for any given situation.
As the text states, there is no hard and fast formula that helps an entrepreneur pick the right form, however, there are some important considerations such as risk, taxes, transferability, and even image.
Read Section 4.1 in Exploring Business for a more in depth look at these factors and some questions entrepreneurs can ask themselves to help them decide which form is right for them. Then we'll look at each of the forms in more detail.
2.1.1: Sole Proprietorship
Many new business owners choose the sole proprietorship because it is the easiest form to initiate and provides the most control since only one person makes the decisions (for good or ill).
Read section 4.2 in the Exploring Business resource. Pay particular attention to the discussion on unlimited liability as this is a major drawback for sole proprietorships. It might be interesting to try the exercise at the end of the section and find a sole proprietor in your area.
2.1.2: Partnerships (General and Limited)
Now let’s look at partnerships: Just like in any other element of society, when more than one person is involved, things become a little more complicated. As you’ll see, unlimited liability is an issue with partnerships as well.
Read section 4.3 in the Exploring Business resource. In light of what you learn, think about what advice you would give Jason in the exercise at the end of the section.
2.1.3: Corporations (LLC and Subchapter S)
Corporations are the most complicated form of business ownership. Remember, while it is more complicated, it does provide some safeguards that sole proprietorships and partnerships do not.
Read section 4.4 in the Exploring Business resource where you’ll learn about the most common type of corporation, the C Corporation. You’ll also learn some important information about purchasing ownership in a publicly traded corporation in the form of stocks.
While C-corporations are the most common type of corporate ownership, there are other forms that you should be aware of.
Read section 4.5 in the Exploring Business resource to learn about S-corporation, Limited Liability companies, cooperatives, and non-profit organizations. Completing the exercise at the end of the section will give you a nice table to use as you prepare for the final exam.
Go to pages 171 and 172 for the "Team Assignment: Forms of Business." Try to complete this exercise, though note that as you are working individually, you only have to choose one scenario to consider what would happen if it was a different form of business: sole proprietorship, partnership, or corporation. Of course, you may alternatively consider all of six scenarios provided, though this is not required.
Activity: Business Structures
Review the various options and select two business structures to compare and contrast. Review the various options and select two business structures to compare and contrast. You will write about these structures in the following writing activity.
Using what you learned from the resource above, compare and contrast the various components of these two types. Be explicit in providing the pros and cons of each option examined. This comparison and contrast paper should be approximately 800-1000 words.
2.2: Entrepreneurship and How Small Businesses Impact the Economy
Now that we have an understanding of the forms of business ownership, let’s take a look at the people who start businesses and how the US Small Business Administration can help them be successful.
Review section 5.1 in the Exploring Business resource to learn about entrepreneurs.
2.2.1: Qualities of Successful Entrepreneurs
Read this brief webpage to determine if you have what it takes to be an entrepreneur. Then, write a summary paragraph that explains the characteristics of an entrepreneur that you believe you have and ones that you feel you could work on improving.
2.2.2: How Small Businesses Impact the Economy
Read section 5.2 of the Exploring Business resource to learn more about the importance of small businesses to the US economy.
Read section 5.3 to gain an understanding of the industries you are likely to find small business operations. You’d be surprised at how much of the US economy is driven by small businesses.
Now read sections 5.4 and 5.5 for more detail about starting a business and some of the advantages and disadvantages in store for small business owners.
2.2.3: Role of the US Small Business Administration (SBA)
Read this article for a detailed explanation of what duties are assigned to the U.S. Small Business Administration.
This article goes into more detail on specific programs the SBA offers including a guaranteed loan program.
2.3: Analyzing the Potential of a Business to be Profitable
Understanding the different forms of business ownership is only part of the picture. One key piece to being in business is to make a profit, meaning that all expenses can be paid with something left over (that’s the profit!). Knowing whether or not the business is making a profit comes from analysis. In their analysis, business owners must understand what their break-even numbers are and how taxes will affect their business. They can use tools such as a business plan to help them with their analysis.
Read the introduction section of Chapter 5 to gain an understanding of the challenges facing business owners.
2.3.1: Components of a Business Plan
Reading Section 5.6 in the Exploring Business resource will give you an idea of why business plans are important and what sections should be included.
- Read Module 2, pages 159 – 167, in the Introduction to Business resource for another look at business plans.
- To see some examples of already written business plans and learn how to write a business plan of your own, review this article provided by the SBA.
2.3.2: Break-even Analysis
- You can find a nice explanation of Break-Even analysis in Module 2, on pages 167-169.
For a more detailed look at how Break-Even analysis calculations are performed read section 10.6 in the Exploring Business resource then try the exercise at the end of the section.
2.3.3: The Role of Taxes
Read this article about the impact taxes have on the U.S. economy. Be sure to view the short video within the text for additional information.