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Forms of Business Ownership

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Hey there, I'm Sally and I really want to open my own bakery. The problem is I'm unsure if I should open a sole proprietorship, a partnership, or a corporation. To find out a little more about the advantages and disadvantages of each form of business ownership I'm going to interview some local business owners. Come along with. Sally: Hey Dave! You've owned your fitness club for about 10 years now. I'm wondering if you can tell me a little bit about owning a sole proprietorship and some of the advantages and disadvantages? Dave: Sure Sally, no problem! A sole proprietorship is usually owned and managed by one person. It can be easier to start and end than other forms of business. And to start out you need to lease or buy the equipment, and the rental space, and obtain any permits or licenses you may need for your particular type of business. Since you're the owner, you're your own boss - which to me is a great benefit! And also I have pride in ownership because I started and created this fitness club to be what it is today; I'm leaving a legacy because I feel like this is something I can pass along to my children. I also retain the company's profits and because it's a sole proprietorship there's no special taxes, which means that all the profits are taxed as personal income and I pay the normal tax on that money as well as self employment tax. As far as disadvantages, I would say that unlimited liability is one of the greatest factors you and your business are considered "one" and if the business suffers the money comes out of your pocket. So, you're required to pay even if it requires you to sell your home or car to pay that balance. There's also limited financial resources; so the funds that I have for the business are only what I can gather. And also there can be some management difficulties because I need to be the "jack of all trades" and I need to be very well rounded with the different departments such as accounting, marketing, and so on. It's also not your normal 9 to 5 job. I will often get here at 6 in the morning and you're working until 9:30 or 10 at night. I also need to purchase my own 401K and health insurance. And lastly, there can be limited growth and life span with a sole proprietorship. Sally: That's great! Thanks for sharing with me Dave! Sally: Hi Jamie and Bill! You've owned your accounting firm for awhile now and I'm wondering if you can share with me a little about your experience in starting a partnership business. Jamie: Well, I would say that one of the advantages is that we can pool our financial resources and we can often times get a larger loan or be able to raise more money and we have complimentary skills and knowledge. For example, Bill is great with marketing whereas I'm more focused on the accounting, so together we make a good team that way. And it's been found that partnerships have a greater chance of survival, And lastly, similar to sole proprietorship, profits are taxed as personal income. There's also unlimited liability, which is quite a disadvantage so if one of us makes a mistake or one of us causes the business to struggle we both pay for it. We also divide all the profits, and there can sometimes be disagreements among partners. So far we haven't had anything too big, but we have had some disputes that we've ended up compromising on. And lastly, we haven't faced this either, but it can be very difficult to terminate the business because it often requires one partner buying out the other and it can cause some hard feelings. Great! Thanks Jamie and Bill, this is very helpful! Hi Ted! You've owned this health insurance company for about 20 years now, and I know you started as a partnership, but now you've turned it into a corporation. I'm wondering if you can tell me some of the advantages and disadvantages Ted: Sure Sally! One of the advantages is that with a corporation you have limited liability. As an owner I'm only responsible for losses up to the amount I invested. Fundraising becomes much easier as we're able to sell shares of stock to investors. We can raise much greater amounts of money. We also have a higher likelihood of obtaining a loan due to our size. Corporations are also considered to have perpetual life, as even if the owner passes away the business still continues on. Changing ownership can be pretty easy because all you need to do is to sell the stock to someone else so they become the majority shareholder. Since we're so large we found that we're able to attract top talent, which can greatly affect the outcomes of our business and our success. There is also a distinct separation between owners and managers. The owners and stock holders elect a board of directors who in turn hires the officers of the corporation to oversee different policies and issues that the business faces. Sally: Great, how about disadvantages? Ted: Well initial cost is quite high when we decided to make a corporation. It required extensive paperwork, accountants, lawyers; we also need to be very transparent with how the business is doing and relay that information to the shareholders. We're taxed twice; and what this means is that the corporation pays tax on income before it can distribute any of its dividends and then the shareholders also pay tax on the dividends they receive. We also must file two tax returns: an individual one and also the corporate tax return. And you might notice that I said size was an advantage, but it can also be a disadvantage. For example, a lot of companies when they get to a certain size, can become inflexible and it can be difficult to implement change. So it's always something you always need to be aware of. It can also be difficult to terminate the business once it gets quite large. Corporations can also face conflict between the shareholders and the board of directors as they may disagree on business practice. Sally: Great! Thank you for your time. Sally: Okay, so today I learned so much more about sole proprietorships, partnerships, and corporations and the advantages and disadvantages of each and the good news is I think I have settled on what type of business ownership I would like move forward with when I open my bakery. I decided on a sole proprietorship; I plan to start it out small and then continue its growth and who knows, maybe one day it will become a corporation or even a franchise. Thanks for watching! Created using PowToon

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Duration: 5 minutes and 2 seconds
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Language: English
License: Dotsub - Standard License
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Views: 31
Posted by: christineward on Jan 11, 2016

Forms of Business Ownership

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