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Hello, and welcome to this tutorial on Non-corporate Business. As always with these tutorials, please feel free to fast forward, pause, or rewind as many times as you need, in order to make the most out of the time that you spend here.
Let me ask you a question. Have you ever thought of opening your own business? And if so, what kind of business would it be? How would you organize it? How many people would be involved in the business?
So what we're going to be covering during this lesson are the characteristics of a sole proprietorship, the different types of partnerships that are out there, and comparing the sole proprietor versus the partnership. Lastly, we're going to be taking a look at something called a co-op. The key terms for this lesson will be sole proprietor, partnership, and liability.
So let's start off with sole proprietor. Now, a sole proprietor is simply a business which is owned and operated by one person, and there over 21 million sole proprietorships in the United States alone. How many can you think of? I'll bet if you think about it, you could think of a half a dozen simply in your town, where you do business every day.
Now just because a sole proprietorship starts off that way, doesn't mean it has to stay that way forever. In fact, Ford Motor Company, Walmart, and some of the other biggest companies in the world today began life as a sole proprietor.
So what are some of the advantages of being a sole proprietor? For one, they're easy to start, and easy to close down. Simply say, I want to be in business, or I don't want to be in business anymore, and pretty much, that's it. I, as the owner, get to retain all the profits generated by the business. Taxes are really simple, because I as the owner are simply taxed on the profits that I take from the business.
You get to take pride in a job well done. You are the business, so all of its successes come back to you. And you get to build great customer relationships with folks. So if you're one of these people who really loves building a relationship with a customer, this is probably the business model for you.
Now there are some disadvantages to this model. For instance, the workload. You are it. You have to do everything associated with the business. Funding can be an issue, especially when you're starting out. You're considered a risky investment. And people may not want to invest in you, because you may not be unproven. And you've got that big workload hanging over you.
It's difficult to attract employees, because, starting out, especially, there's not a whole lot of money to go around. So attracting employees with a salary that they would want to accept can be pretty difficult.
You have unlimited liability in the business. Which means, if the business is sued, they're actually suing you, and you're putting your personal assets at risk. And continuity is a big issue here. Very rarely will a sole proprietorship survive past the death of its owner. Once the owner dies, the business dies with him.
And we talked a little bit about liability. Let's take a look at what that is. Liability is simply a legal obligation or responsibility. And being a sole proprietor, having that unlimited liability means if someone sues the business-- because I am the business-- they're actually suing me.
A partnership, on the other hand, is defined as a business that's owned by two or more people. These are both folks who are actively involved in the business. So let's say you and I wanted to start a business. We would be partners in a partnership.
Now, there are different types of partners out there. A general partner is a member of a partnership that plays an active role in the business. Now a limited partner is someone who enters the partnership by investing capital, but they don't play any active role.
So if you and I are general partners, and we have someone come along and invest money to help us grow or expand the business, that person would be a limited partner. They're shielded from some liability, and they get to take a portion of the profits for the investment that they made. But they don't play an active role in the decision making.
Lastly, a master limited partnership is like a limited partnership, but in this case the company issues units of ownership to attract a larger number of limited partners. So you and I are running the business. We can't find one big investor to give us the capital that we need. So we sell units of ownership that represent limited partnership in our business.
And we sell this to lots of different people. So more people can get in for less money. They each have a piece of ownership of the business, and we get to attract the capital that we need to run the business, or cover operating expenses.
Now, partnership agreements are absolutely vital in any partnership. This document details how final decisions are made-- who gets to make them, and how. It defines who has what responsibility in the business. Who does what job?
It has the profit and loss breakouts. So it defines how much of the profit goes to each of the partners, general or limited, and how we're going to handle any losses that arise from the operating of the business.
It also helps define what happens in a disagreement. And let's face it-- if you're in a partnership, eventually there's going to be a disagreement. So having a plan in place for dealing with that is a very, very good idea.
So what are the advantages of a partnership? Well, just like a sole proprietor, they're easy to start up. And more people initially means more access to skills, and initial access to money and credit. Profits go directly to the partners, just like with a sole proprietorship. And the partners are each taxed individually. The business itself is not taxed as a separate entity. So each partner will simply be responsible for their share of the profits.
The disadvantages of a partnership are, the general partners enjoy an unlimited liability, just like the sole proprietor does. There will be partnership disagreements, and I can't mention this enough-- a partnership agreement is a very good idea to help smooth these things over.
Continuity can be an issue. Once a partner dies or decides to leave the business, continuing the business can be very difficult for the other partners that are left. And lastly, there's frozen assets, especially at the beginning. When money gets to be tight, any investment that a general or limited partner made into the business can be next to impossible to get back out again, because the assets simply are not there. So you can't use this like liquid assets, like a bank account, to draw money in and out.
So the sole proprietor versus the partnership. Let's take a look at Henry Ford. Now, Henry Ford, he was the sole owner to begin with, and he had complete control over all of his processes. In fact, when Henry Ford started the Ford Motor Company, that was his third automotive business that he'd started. He would not let a car leave the line unless it met his a specific specifications, and that became quite a problem for he and his investors. They wanted product out the line, and he wanted something that was perfect.
And there's also the issue of frozen assets. Now, when Henry closed his second automotive business, basically, he left with simply his name, and that's about it. And he used that in order to attract investors and start what we now know as the Ford Motor Company.
And, of course, he had an incredible workload. And because he was such a perfectionist, this served as a big detriment, and a big source of disagreement between him and his investors.
Now Larry Page and Sergey Brin, they started a small company called Google out of their dorm room in Stanford. Now before they were partners, before they incorporated the company, they were able to split the workload quite effectively. And as a result, one was able to market the product while the other one worked on coding. And this created a large customer base that was already in place before they ever incorporated the business, and took it to a national level.
It also helped them attract capital. On day one when they started the business, they had an uncashed check for $100,000 of capital, simply because of the work that they had done prior to incorporation.
Now, a co-op is the last thing we're going to talk about, and it's owned and operated by its members. And it's organized around a common goal. Some great examples of a co-op would be a farmer's co-op, if some of you are familiar with that. Farmers are members of the co-op, and they're able to order supplies in greater numbers, so as to get a better price for the individual members of the co-op. Another good example of this type of organization is a credit union.
So to recap. We've talked about the characteristics of a sole proprietorship. We've talked about the different types of partnerships that are out there, and the different types of partners-- general and limited.
Next we looked at a sole proprietor versus a partnership-- in this case, Google versus the Ford Motor Company. Each one had its advantages and disadvantages starting off, but both turned out to be extremely successful. And lastly, we looked at those co-ops-- the organizations that are owned and operated by the members.
So I want to thank you for spending some time with me today, and have a great day.
A legal obligation or responsibility.
A business which is owned and operated by two or more people.
A business which is owned and operated by one person.