Forms of Business Ownership - Introduction To Business - ثاني ثانوي

2.2 Forms of Business Ownership Link to digital lesson www.ien.edu.sa Learning Outcomes Once you have completed this lesson, you should be able to: 2.2.1 Describe the three major forms of business ownership. 2.2.2 Determine when each form of business ownership is most appropriate. 2.2.3 Recognize other specialized business ownership forms. Key Terms Proprietorship Partnership Corporation Partnership Agreement Articles of Incorporation Franchise Focus on REAL LIFE Bilal keyed in the ticker symbol SECO at his favorite financial website. He was checking the listing of the stock he owned-Saudi Electricity Company. Bilal's grandparents had given him five shares of stock in Saudi Electricity Company when he was born. He didn't get interested in it until recently when he learned more about the stock market. Now he knew he was an owner of the electrical power. The success of the company determined the value of his ownership. While the stock price had gone up and down, it was now at its highest point since he began following it. LO 2.2.1 BUSINESS OWNERSHIP FORMS Many people think they would like to own a business. The chance to be in control, make decisions, and invest money to make a profit is challenging and exciting. Thousands of people are business owners. The amount of control they have, how decisions are made, the sources of money for the business, and control over profits is not the same for every business owner. The form of ownership affects each of those aspects of the business. In general, there are three major forms of business ownership—proprietorship, partnership, and corporation plus several other specialized forms of ownership. Proprietorship A proprietorship is a business owned and run by just one person. In Saudi Arabia, a sole proprietorship is sometimes referred to as an establishment. In 2017, there were about one million establishments in the Kingdom (Source: General Authority for Statistics, 2017). The proprietorship is the easiest form of business to start and end. There are very few legal requirements regarding the business ownership or capital needs that must be met. Life-Span Plan Is owning a business something you might want to explore as you plan your future? What kind of businesses might you consider? What steps do you need to take now to make owning a business part of your life-span plan? What are the advantages and disadvantages of owning your own business? وزارة التعليم Ministry of Education 2024-1446 GE44.PATHWAYS.G02.ITB.SB.PP1.indb 65 2.2 Forms of Business Ownership | 65 08/05/2024 09:13

Most businesses are organized as proprietorships. However, in general, proprietorships have a very small percentage of business revenues. Many individuals favor the proprietorship form of ownership. It gives them sole control over all business decisions. The owner receives all profits made by the business. He or she can determine how those profits are used. The owner is also responsible for all debts of the business. If the business fails, the owner has almost no shelter from creditors. Any money and other assets owned by the proprietor, whether used in the business or not, can be claimed by creditors to pay the business debts. Partnership A partnership is a business owned and controlled by two or more people who have entered into an agreement. A partnership is very similar to a proprietorship in several ways. It is quite easy to start. The owners are both responsible for key business decisions and functions. The partners share both investments and profits based on the terms of the partnership agreement. Each partner is liable for all of the debts of the business should it fail. Corporation A corporation is a separate legal entity formed by documents filed with the concerned authorities. It could be owned by one or more shareholders and managed by a board of directors. Most corporations have several owners who invest in the business by purchasing shares of stock. Corporations are more difficult to form than either proprietorships or partnerships. They must also meet more legal requirements. Not all owners have direct involvement in decision making about business functions. They will not have access to profits unless the board of directors approves it. Corporations protect the liability of stockholders to only the amount of money they have invested. CHECKPOINT What are the differences between the three main forms of business ownership? LO 2.2.2 CHOOSING A FORM OF BUSINESS OWNERSHIP When a new business is started, the owner should carefully consider the form of ownership. While it is possible to change the form of ownership for an existing business, it is best to decide which form to use both for the long-term future of the business as well as for its first few years. Choosing a Proprietorship Most businesses begin as a proprietorship. They remain in that form as long as the sole owner operates the business. Often people choose to start a business because they prefer the freedom of working for themselves rather than for another person. They want to be in total control of the business. The 2021/2022 Global Entrepreneurship Monitor report states that in Saudi Arabia, over 90% of adults (aged 18-64) felt it was easy to start a business in the country. Many new business owners have limited knowledge of the forms of ownership and want to start their businesses in the simplest way. Some people form a business from a hobby or operate a business on a part-time basis. They may expand the business over a few years while spending little time thinking about other ways the business could be organized. In general, a proprietorship is easy. An individual can begin buying and selling as a business and they don't even need a business name. However, they may need to obtain required government licenses and permits. In most countries around the world, the proprietor will need to P66 Chapter 2 | Business Organization Ministry of Education 2024-1446

account for income and expenses. They will need to register the name with the relevant government department. For example, in Saudi Arabia, a proprietorship has to be registered with the Ministry of Commerce. Work as a TEAM Businesses achieve goals through teamwork. Think of teammates you would like to work with. Compare the unique interests and skills of each member of your team. Identify possible businesses that could be formed as a partnership by combining the talents of two or more team members. For people who want total independence, do not want to be exposed to significant government regulation, want to be in control of all business decisions, and are willing to take on the entire risk of a business, the proprietorship offers an effective form of ownership. For a person who wants to expand the business, is willing to share control and decision-making in return for additional resources and reduced risk, and wants some protection for money invested, other forms of ownership are better. Choosing a Partnership A partnership is a bit more complex and formal than a proprietorship. In many countries, a partnership can be formed by the verbal agreement of two or more people. It is usually better to have a written partnership agreement. The partnership agreement is a written agreement among all owners. It details the rules and procedures that guide ownership and operations. It typically identifies the business name, the investments, and other contributions of each partner. The agreement shows how profits and losses will be divided among the partners. It defines the authority and responsibilities granted to each person and how the partnership can be dissolved. Most developed countries require that partnerships register a business name as well as the name of each person in the partnership. The advantage of a partnership is that two or more people can contribute to the investment needed to start a business and provide the expertise required to run it. At the same time, each partner is responsible for decisions made by all other partners. There is no protection for the personal assets of any partner. In many countries, including Saudi Arabia, all partners are fully responsible for the debts of the partnership. If the business fails, each person can lose much more than the amount of his/her original investment. If a partner chooses to leave the partnership or dies, the partnership normally can be dissolved. How might a partnership be more advantageous than a proprietorship? A partnership is a good ownership form for people who share an idea for a business. They want to cooperate in managing and investing in the business. It is the easiest form for people who work well together and want to share the risks and rewards of the business. It has the same liability of a proprietorship and presents problems if other people want to join the partnership or if it needs to be dissolved. وزارة التعليم Ministry of Education 2024-1446 2.2 Forms of Business Ownership | 67

Choosing a Corporation Most people think of corporations as very large businesses. Indeed, corporations are often a popular form of ownership for large businesses. Corporations are subject to many more laws and are more difficult to form than either proprietorships or partnerships. They offer a number of advantages to the owners as well. A corporation is treated as though it were an “individual" by governments. It must follow the laws of the country in which it is organized. To form a corporation, you must file articles of incorporation with the appropriate government office. The articles of incorporation is a written legal document that defines ownership and operating procedures and conditions for the business. Each country has specific information that must be included. Most countries usually provide a form for this purpose. The business must create corporate bylaws, or the operating procedures for the corporation. It must name a board of directors, the people who will make the major policy and financial decisions for the business. The corporation also issues shares of stock to investors and determines whether future stock shares will be distributed or sold. Examples of large corporations in Saudi Arabia include Saudi Aramco, Al Rajhi Bank, and SABIC. Even though a corporation is more difficult to form and is subject to more government rules, it offers several advantages to owners. The liability of any owner is limited to the amount of money invested. The amount of debt of the business does not matter. People can invest in the business and receive some of the profit without having to take part in the day-to-day management and operations. It is easy for a corporation to expand. Ownership can change with the sale of stock. Disadvantages of corporate ownership are that decision making is shared among managers, the board of directors, and shareholders. Many more records are required and more laws regulate operations than for other forms of ownership. In many countries, because corporations are treated as individuals by governments, they must pay corporate taxes on profits earned. However, in Saudi Arabia, income tax is applied only to foreign investment companies operating in the Kingdom, or to foreign partners in the case of partnership companies. LO 2.2.3 OTHER FORMS OF OWNERSHIP CHECKPOINT Which form of business ownership is the most complex and difficult to form? Most businesses are organized as one of the three common forms just discussed. However, there are other choices of ownership. Some are specialized forms of partnerships and corporations. Others are totally unique forms. Specialized Partnerships and Corporations In a general partnership, all partners take part in ownership and operation of the business. A limited liability partnership identifies some investors who cannot lose more than the amount of their investment. This type of partnership is difficult and costly to establish. A joint venture is a unique business organized by two or more other businesses to operate for a limited time and for a specific project. It is a type of partnership. For example, in 2017, Dussur and GE signed a joint venture agreement for gas turbine manufacturing worth approximately SAR 1 billion. This type of agreement highlights the contributions Saudi companies are making towards realizing Saudi Vision 2030 (source: official website of Dussur). A nonprofit (or not-for-profit) corporation is a group of people who join to do some activity that benefits the public. Whereas most corporations are formed with the goal of making a profit P68 Chapter 2 | Business Organization Ministry of Education 2024-1446

for the owners or investors, nonprofit corporations are not. This type of company exists for educational or charitable purposes and the money it earns must be retained by the organization. Nonprofits work in areas such as education, health care, charity, or the arts, for example, the King Salman Humanitarian Aid and Relief Center, and Mawaddah Women's Charity Association. Unlike for-profit corporations, nonprofit corporations are free from corporate income taxes. They can raise funds by receiving grants and donations from individuals and businesses. As with other corporations, they must organize as a corporation. The government must approve their purpose and operations. Cooperatives and Franchises Sometimes a group of people forms a cooperative to provide goods and services that they all need. A cooperative is owned by members, serves their needs, and is managed in their interest. Members form a consumer cooperative so that they can purchase goods and services more cheaply as a group than they could individually. A business cooperative forms to market the products produced by members or to purchase products needed by the members. Large numbers of small businesses will have greater bargaining power than the individual businesses. way. A franchise is a written contract granting permission to operate a business to sell products and services in a set The company that owns the product or service and grants the rights to another business is known as the franchiser. The company or person purchasing the rights to run the business is the franchisee. A franchise is a way to expand a business using the investments of others while maintaining control over the name, product quality, and operating procedures. The franchisee maintains day-to-day operations and What forms of corporate business are most common in your community? receives the profits of the business. It pays a fee and percentage of the profits to the franchiser in return for operating assistance. A popular and successful franchise in Saudi Arabia is Subway. Shahia Food Limited Company operates around 400 Dunkin' Donuts outlets in Saudi Arabia. CHECKPOINT What are the other specialized forms of business ownership? وزارة التعليم Ministry of Education 2024-1446 2.2 Forms of Business Ownership | 69

2.2 ASSESSMENT Key Concepts Determine the best answer. 1. The form of ownership that gives one person sole control over all business decisions is the a. proprietorship b. partnership c. corporation d. franchise 2. True or False. All investors in a general partnership have full liability for the debts of the business. 3. The people who make the major policy and financial decisions in a corporation are the a. investors b. board of directors c. managers d. owners 4. A special form of business organization that combines advantages of a corporation and a partnership is a a. franchise b. nonprofit corporation c. cooperative d. limited liability partnership Make Academic Connections 5. Communication Two friends who want to open a store to sell the work of local artists ask you to explain the advantages and disadvantages of the three common forms of business ownership. Write a memo outlining the advantages and disadvantages. Include a list of questions that might help your friends make a decision. 70 Chapter 2 | Business Organization Ministry of Education 2024-1446

6. Research Go online to find information on a franchise opportunity related to a current career interest. Prepare a table that describes the franchise, the products or services, the investment requirements, and the benefits of becoming a franchisee. 7. Read Find a news article about cooperatives or a specific cooperative. Read the article and write a reaction. Respond as if you were posting an online comment for other readers to see. Prepare a properly formatted citation for the article. Possible sources include printed and online versions of newspapers or magazines. You should also consider independent online sources that produce original content. وزارة التعليم Ministry of Education 2024-1446 2.2 Forms of Business Ownership | 71

Closing Price (SAR) LIFE/WORK SKILLS CRITICAL THINKING AND PROBLEM SOLVING Knowing how to understand financial stock data is an important life skill. People who own stock or are interested in buying stock must be able to evaluate those stocks. Historically, stock data was found in stock tables available in most daily newspapers. Websites are now the primary sources of stock data. Websites can track the daily performance of the stocks and provide historical trends. For example, the Saudi stock exchange is called Tadawul, and the Tadawul All Share Index (TASI) monitors how companies listed in Tadawul perform. This information is available on www.saudiexchange.sa. To determine how well a company is performing, investors must track more than just the stock price over time. Investors need to decide whether to maintain their investment, buy additional stock, or sell and move their money to another investment. To make these decisions, investors will look at the following stock data. Symbol (SYM) is the company symbol or abbreviation that identifies the firm issuing the stock. The symbol is an abbreviation for a longer company name. For example, the symbol for Southern Province Cement Co. is SPCC. In this example, the symbol is XMPL. Dividends are the amount of money approved by the board of directors of the company to be paid to stockholders. Dividends may be indicated as DIV in a table or D on a chart. Dividends are another way that stockholders earn a return on their investment in addition to gains in the value of the stock. High growth stocks may pay low dividends. Utility stocks may not have high growth, but they often pay steady dividends. Yield (YLD) is the current rate of return on all capital invested in the company. This allows easier comparison of the performance of companies with different stock Example Company (XMPL) 140 100 1288672 0 Open 83.50 Low 82.65 Volume 281,546 Close 85.31 High 85.31 August 26, 2021 26-Feb-21 26-Mar-21 26-Apr-21 • 26-May-21 26-Jun-21 26-Jul-21 26-Aug-21 26-Sep-21 26-Oct-21 26-Nov-21 D 2000 1800 1600 1400 1200 1000 5 Day Change: -3.2 800 26-Dec-21 26-Jan-22 P72 Chapter 2 | Business Organization Ministry of Education 2024-1446 26-Feb-22 600 400 200 0 Volume (000) prices. The yield is calculated by dividing the total annual dividends by the stock price. Dividends Price SAR 5.82 SAR 127.00 = 4.58% yield Price to Earnings (PE) Ratio is the comparison of the price per share to the earnings per share. It shows how much an investor is willing to pay for SAR 1 of current earnings by one share of stock. The ratio is calculated by dividing the price by the earnings per share (EPS). In the example, XMPL stock is selling for more than 10 times the current earnings. = Price SAR 127.00 EPS SAR 12.06 = 10.53 PE Many websites allow for stock charting. These charts can provide daily or historical data. Many charts can show historic data by placing a cursor over the stock price line. In this example, the cursor is over August 26, 2021. The display may show the HI-LO data representing the highest and lowest prices of all trades made during the time period such as daily HI-LO or 52 week HI-LO. Some charts will feature daily bars showing highs and lows. Charts can show opening (O) and the last price at which a trade was made during the trading day or clos ing (C) price. In the XMPL example, SAR 85.31 is the closing price. Percent Change is the percent difference between the current closing price and a previous closing price. The stock price five days ago was SAR 127.97 and today's closing price is SAR 124, the percent change listed shows a negative 3.2%. Volume shows the volume of shares traded at the date in the chart. Volume gives information on the change in demand for the company's shares. In the example, 281,546 shares of XMPL were traded. Think Critically 1. What information from the stock data do you think is most important for a stock owner to watch on a regular basis? What is the least important? 2. How does stock data help in comparing the performance of two stocks with very different prices?