Business Ownership: How Sweet It Can Be!

Standard: 12.5.3

Grades: Grade Twelve

  • Students analyze the aggregate economic behavior of the U.S. economy.
  • Distinguish between short-term and long-term interest rates and explain their relative significance.

Standard: 12.4.4

  • Students analyze the elements of the U.S. labor market in a global setting.
  • Explain the effects of international mobility of capital and labor on the U.S. economy.

Standard: 12.4.1

  • Students analyze the elements of the U.S. labor market in a global setting.
  • Understand the operations of the labor market, including the circumstances surrounding the establishment of principal American labor unions, procedures that unions use to gain benefits for their members, the effects of unionization, the minimum wage, and unemployment insurance.

Standard: 12.1.4

  • Students understand common economic terms and concepts and economic reasoning.
  • Evaluate the role of private property as an incentive in conserving and improving scarce resources, including renewable and nonrenewable natural resources.

SOCIALIZEBRAINSTORM

In this lesson, you will research the three basic types of business organization: sole proprietorships, partnerships, and corporations. Considering the advantages and disadvantages of each, they function as consultants offering advice on which form of business is best suited for different business scenarios. The case studies all feature real- life entrepreneurs who started businesses producing chocolate candy and cookies—they all result ultimately in “sweet” success stories. Once students have made their recommendations, they are provided the identities of their clients and asked to prepare reports that tell the rest of the story—what happened to each founder and business. Products featured in this lesson that almost every student will recognize are the Hershey chocolate bar, Mars M&Ms and Famous Amos chocolate cookies.

KEY CONCEPTS

Business, Entrepreneur, Entrepreneurship, LegalFormsofBusiness, Risk

YOU WILL

  • Identify the advantages and disadvantages of sole proprietorships, partnerships and corporations.
  • Provide advice on choosing a form of business organization to people interested in starting a business.

INTRODUCTION

You have a small bag of M&Ms or Hershey’s kisses. The chocolate candy is a hint as to what you will be studying next.

You are going to be studying the “sweets” industry—more specifically, people and businesses that produce chocolate and chocolate-related products

PROCESS

Activity 1: Three Types of Business Organization
There are many different goods and services that a new business can offer, but there are only only a few ways to organize a business. The vast majority of businesses start out as sole proprietorships or partnerships. A third option is to set up a corporation. In the United States, about 70 percent of all businesses are sole proprietorships, 20 percent are corporations and the remaining 10 percent are partnerships. Each type of business has distinctive characteristics.

A sole proprietorship a business that is owned and managed by one individual who receives all the profits and bears all losses.

Advantages of a Sole Proprietorship

  • Easy and inexpensive to form: A sole proprietorship is the simplest and least expensive business structure to establish. Costs are minimal, with legal costs limited to obtaining the necessary license or permits.
  • Complete control. Because you are the sole owner of the business, you have complete control over all decisions. You aren’t required to consult with anyone else when you need to make decisions or want to make changes.
  • Easy tax preparation. Your business is not taxed separately, so it’s easy to fulfill the tax reporting requirements for a sole proprietorship. The tax rates are also the lowest of the business structures.

Disadvantages of a Proprietorship

  • Unlimited personal liability. Because there is no legal separation between you and your business, you can be held personally liable for the debts and obligations of the business. This risk extends to any liabilities incurred as a result of employee actions.
  • Hard to raise money. Sole proprietors often face challenges when trying to raise money. Because you can’t sell stock in the business, investors won't often invest. Banks are also hesitant to lend to a sole proprietorship because of a perceived lack of credibility when it comes to repayment if the business fails.

Heavy burden. The flipside of complete control is the burden and pressure it can impose. You alone are ultimately responsible for the successes and failures of your business.

A partnership a business that is owned and managed by two or more individuals who receive all profits and bear all losses. Types of Partnerships

There are three general types of partnership arrangements:

  • General Partnershipsassume that profits, liability and management duties are divided equally among partners. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.
  • Limited Partnerships(also known as a partnership with limited liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partner’s investment percentage. Limited partnerships are attractive to investors of short-term projects.
  • Joint Venturesact as general partnership, but for only a limited period of time or for a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.

Forming a Partnership

To form a partnership, you mustregister your businesswith your state, a process generally done through your Secretary of State’s office.

You’ll also need to establish yourbusiness name. For partnerships, your legal name is the name given in your partnership agreement or the last names of the partners. If you choose to operate under a name different than the officially registered name, you will most likely have to file afictitious name(also known as an assumed name, trade name, or DBA name, short for "doing business as").

Once your business is registered, you must obtain businesslicenses and permits. Regulations vary by industry, state and locality.

If you are hiring employees, read more aboutfederal and state regulations for employers.

Partnership Taxes

Most businesses will need to register with the IRS, register with state and local revenue agencies, and obtain atax ID number or permit.

A partnership must file an “annual information return” to report the income, deductions, gains and losses from the business’s operations, but the business itself does not pay income tax. Instead, the business "passes through" any profits or losses to its partners. Partners include their respective share of the partnership's income or loss on their personal tax returns.

Partnership taxes generally include:

  • Annual Return of Income
  • Employment Taxes
  • Excise Taxes

Partners in the partnership are responsible for several additional taxes, including:

  • Income Tax
  • Self-Employment Tax
  • Estimated Tax

Filing information for partnerships:

  • Partnerships must furnish copies of theirSchedule K-1 (Form 1065) to all partners by the date Form 1065 is required to be filed, including extensions.
  • Partners are not employees and should not be issued a Form W-2.

The IRS guide toPartnershipsprovides all relevant tax forms and additional information regarding their purpose and use.

Advantages of a Partnership

  • Easy and Inexpensive.Partnerships are generally an inexpensive and easily formed business structure. The majority of time spent starting a partnership often focuses on developing the partnership agreement.
  • Shared Financial Commitment.In a partnership, each partner is equally invested in the success of the business. Partnerships have the advantage of pooling resources to obtain capital. This could be beneficial in terms of securing credit, or by simply doubling your seed money.
  • Complementary Skills.A good partnership should reap the benefits of being able to utilize the strengths, resources and expertise of each partner.
  • Partnership Incentives for Employees.Partnerships have an employment advantage over other entities if they offer employees the opportunity to become a partner. Partnership incentives often attract highly motivated and qualified employees.

Disadvantages of a Partnership

  • Joint and Individual Liability.Similar to sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for their own actions, but also for the business debts and decisions made by other partners. In addition, the personal assets of all partners can be used to satisfy the partnership’s debt.
  • Disagreements Among Partners.With multiple partners, there are bound to be disagreements Partners should consult each other on all decisions, make compromises, and resolve disputes as amicably as possible.
  • Shared Profits.Because partnerships are jointly owned, each partner must share the successes and profits of their business with the other partners. An unequal contribution of time, effort, or resources can cause discord among partners.


A corporation is a business that is owned by stockholders and that has legal rights and responsibilities as if it were a person. Advantages of a Corporation

  • Limited Liability.When it comes to taking responsibility for business debts and actions of a corporation, shareholders’ personal assets are protected. Shareholders can generally only be held accountable for their investment in stock of the company.
  • Ability to Generate Capital.Corporations have an advantage when it comes to raising capital for their business - the ability to raise funds through the sale of stock.
  • Corporate Tax Treatment.Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.
  • Attractive to Potential Employees.Corporations are generally able to attract and hire high-quality and motivated employees because they offer competitive benefits and the potential for partial ownership through stock options.

Disadvantages of a Corporation

  • Time and Money.Corporations are costly and time-consuming ventures to start and operate. Incorporating requires start-up, operating and tax costs that most other structures do not require.
  • Double Taxing.In some cases, corporations are taxed twice - first, when the company makes a profit, and again when dividends are paid to shareholders.
  • Additional Paperwork.Because corporations are highly regulated by federal, state, and in some cases local agencies, there are increased paperwork and recordkeeping burdens associated with this entity.

An entrepreneur is a person who starts up a new business, taking on risk and hoping to make a profit.

PROCESS

Activity 1: Three Types of Business Organization
Additional information is provided below on several issues.
Liability:
You may not be familiar with the term “liability.” To help them grasp its importance, discuss specific circumstances in which liability could be an issue for sole proprietorships and partnerships. The most common situation is debts owed when a business experiences financial difficulties or fails. If a business is not fully insured, there is also the possibility of loss due to disaster (e.g., fire, flood) or lawsuits. Unlimited liability means that the owner’s personal assets can be used to pay for any debts of the business.
Finance Options:
Corporations have more options when they need to obtain additional financing. For sole proprietorships and partnerships, the only source of money is often personal assets. On rare occasions, they may be able to borrow money from family members, friends or a bank. Corporations have the option to issue more stock. Also corporations typically find it easier to borrow money – through loans from the financial markets (commercial banks, credit unions, insurance companies). And corporations can issue corporate bonds.
Tax Implications:
Tax law permits corporations to deduct the full cost of employee benefits, such as medical insurance, thus reducing corporate tax liabilities. But sole proprietorships and partnerships are not permitted to deduct these costs directly from their business income (the costs may be partially deductible as an adjustment to income). For some business owners, this is a major disadvantage of the sole proprietorship and partnership forms of ownership.
Sole proprietors and partners pay individual income tax on their companies’ earnings. In contrast, a corporation is taxed as a separate entity that pays tax on its income. The stockholders also pay personal income tax on any dividends they receive. The effect is referred to as “double taxation” and in this case, it is the corporate owners that have a tax disadvantage.

Life of the Business:
There are probably examples of sole proprietorships and partnerships in your community that dissolved when a key person became ill or died – a medical practice, a law firm, a neighborhood store, or a mechanic’s shop. News reports occasionally tell of acrimonious splits among business partners (and even families) who are unable to agree on the management or sale of these forms of business.

REQUIRED ACTIVITY (YOU MUST COMPLETE)

Sweet Success
You will do this part as a sole proprietor, partner, or corporation, your choice.

Client 1: Elise MacMillan and her brother Evan co-founded The Chocolate Farm in Englewood, Colorado, in the late 1990s.

Siblings taste success, and how sweet it is Young brother and sister team share in a chocolate business By Ross Atkin Staff writer of The Christian Science Monitor / February 7, 2001

Like many youngsters, Elise Macmillan loves playing around in the kitchen. In her case, though, these culinary experiments haven't led to just messy pots and pans, but to profits.

Elise, 12, is co-founder with her brother, Evan, 15, of the Chocolate Farm, a successful gourmet business in Denver that sells her chocolate creations to a growing clientele.

The business has outgrown the family kitchen and now operates out of the Denver Enterprise Center, a small-business incubator, where the siblings share a commercial kitchen with other companies. The R&D work, however, is still handled by Elise in the Macmillan home, about a 20-minute drive away.

"At the Enterprise Center, where you pay by the hour to use the kitchen, we concentrate on making our products," says Elise during an early-morning phone conversation, conducted before leaving for middle school. "At home, when I have as much time as I want, I can experiment with things. I get ideas from friends and family, and then I change them a little bit."

Elise's kitchen adventures began at age 3, when her Canadian grandmother showed her how to make Rice Krispie Treats. Thereafter, says her mother, Kathleen Macmillan, Elise was forever creating confections from chocolate chips.

"I'd open the refrigerator and find chocolate melted on celery with peanut butter and all kinds of funny things," Mrs. Macmillan says.

These sessions, including an occasional microwave explosion, didn't go unnoticed by Evan, who several years ago was selected to serve on the advisory board of the Young Americans Bank, which is for those 21 and under.

The bank promotes financial education and entrepreneurship and holds an annual Holiday Marketplace, so Evan encouraged Elise to participate. She concocted something called a Pig in Mud, which is a marshmallow dipped in melted caramel and pecans, then dipped in chocolate. She also sold molded chocolate cows on a stick and "Farm Eggs," jelly beans dipped in chocolate.

The themed-base candies, inspired by the farming backgrounds of Evan and Elise's grandmothers, were a hit and sold out quickly.

After that the Macmillans' Chocolate Farm began filling orders from family and friends, but its reputation for fun, well-made products was soon to reach a wider audience, helped by a presence on the Internet and selection for the Ernst and Young Entrepreneur of the Year Award winner in 1999.

Elise has a knack for product development and packaging, and Evan is the "business guy" and computer master.

He knew the Internet's potential from designing a website about author John Steinbeck for a school project. E-mails poured in, making it one of the most visited Steinbeck sites on the web. "It was amazing," says Evan. "I've taken down the site because it was taking a lot of time to answer all the questions people sent it."

For the Chocolate Farm, he's developed an inviting website ( that reflects a grasp of e-commerce.

Mrs. Macmillan and her husband stay in the background. They support the business while making sure Evan and Elise run it as much as possible. "It's their business, and we want them to learn," she says. "But like any parents, we want to prevent huge mistakes, the pain of which will be more than the lesson."

David Gonzales, director of the Denver Enterprise Center, says young people have more entrepreneurial potential than many realize, but the key to its proper development is parents.

Speaking of the role Elise and Evan's mother plays, Dr. Gonzales says, "She's kept everything in perspective for them. These kids don't have a big head about the business, which could tend to happen. They've had a lot of publicity, but the kids are really grounded."

Gonzales says he was impressed with their demeanor and the way they carried themselves from the moment they applied for space in the Enterprise Center. The Chocolate Farm is viewed as a pilot project that could lead to a youth-business incubator.

The center provides a sense of community to budding entrepreneurs, and the Macmillan children have fit right in. "The other people in the kitchen really like them," says Gonzales, who adds they have a good relationship with low-income people from the neighborhood hired by the Chocolate Farm and other companies. The Chocolate Farm generates more orders than the Macmillans can handle alone, so about a dozen part-time workers help, in addition to friends, who also get paid.