Lesson Description
In this lesson, students will take the final step in writing their
business description by examining the different forms of business
structure and choosing the one that is appropriate for their business.
Concepts
Sole proprietorship
Partnership
Limited liability company
Corporation
Related Subject Areas
business
Objectives
Students will:
state the advantages and disadvantages of various business structures
determine a business structure for their businesses
complete their business descriptions
Materials
Visual 1, Good News, Bad News
Visual 2, Nip it in the Bud
Procedures
1. Explain that for
many, the production of art is a singular activity. This is
particularly true in the fine arts, media arts, and craft
arts. In this case, the artist is considered a sole proprietor.
However, in areas of public and performance art, artists often
collaborate.
These collaborations can be organized as for-profit companies
or not-for-profit companies, depending on the mission of the
collaborative.
For example, if the collaborative is formed for the purpose
of advocacy or activism, it is likely a not-for-profit. In this
class, the focus
will be on for-profit businesses.
2. Explain that there
are four general types of business organization: sole proprietorship,
partnership, limited liability company, and
corporation. Artists can be organized as any of these. The
type of organization the artist chooses will make a difference
in
how his
or her business pays taxes and keeps records.
3. Explain that the
sole proprietorship is a type of organization where an individual
or married couple operates their own business.
Display Visual 1, Good News, Bad News, and discuss
the advantages and disadvantages of organizing as a sole
proprietorship, as follows.
Good News
All decisions are the responsibility of the sole proprietor. If
the sole proprietor is inept, this could be bad news. However, entrepreneurs
tend to be independent, and artists tend to be independent. Put the
two together, and you have someone who wants to make his or her own
decisions and operate as his or her own boss.
Sole proprietorships
are cheap to organize. The business owner usually must register
the name of the business with the Secretary of State’s
office. This is called a “fictitious name” registration
because most businesses decide on a name that describes the nature
of the business or is appealing and unique. For example, a business
that is run by John Smith and operates under the name John Smith’s
Art does not have to register as a fictitious name; however, a business
that is run by John Smith and operates under the name Smith’s
Art or The Artsmith must register. Registering is an easy, do-it-yourself
process. No lawyer required.
It is relatively easy to file taxes. The artist, as a sole proprietor,
reports business income and expenses on a separate form and attaches
it to his or her personal income tax report. So, filing business
taxes is only as difficult as filing personal taxes.
Bad News
Sole proprietors face
unlimited liability. A person in business as a sole proprietorship
is personally liable for business decisions
or acts of negligence that result in a financial judgment against
him or her. This means that the person who is suing for damages
can get the assets of the business, such as the cash, equipment
and materials,
but can also get the personal assets owned by the sole proprietor,
such as his or her personal cash, car, and house. When people
choose to organize in a way other than as a sole proprietor,
this is the
reason.
4. Explain
that a partnership is two or more people forming a business.
They
must complete
a partnership agreement that defines the business’s
management and operation. There are different
types of partnership. In a general partnership,
two or
more people
are involved
in operating the business. In a limited partnership,
the limited partner is
not involved in the day-to-day business operations.
Usually, he or she
is the partner with the money.
5. Explain that collaboration
is common among artists. Such collaborations are not necessarily
formal partnership agreements. When working on
projects with other artists, it is important to precede the
work with a discussion covering potential conflicts. If two
or more artists
of forming a formal partnership, this is especially important
and foreseeable conflicts should be resolved and placed in
the partnership
agreement.
6. Display
Visual 2,
Nip it in the Bud. Address each issue as follows. Possible
areas of disagreement are shown in italics.
Who
will be responsible for various tasks? It’s one
thing to do the creative work but quite another to clean
tools, take
orders, pack and ship, and perform other menial tasks.
If one of the partners
proposes a project that generates little interest among the
other partners, can that partner proceed with
the idea on her own? A partner may be passionate about a project
and frustrated by the lack of support within the group. Should
the partner be allowed to proceed on her own time? How much time
must
each partner devote to group projects?
How are the costs
of doing business to be divided? How are the profits to be
shared? One partner may have the ability to provide greater
financial resources to the group. This partner could take a larger
share of the profits or could be excused from certain menial tasks.
The partners should make these decisions prior to entering into
a
project or partnership.
What business decisions
must be discussed before those decisions are made? Are partners
free to enter into contracts without consulting
the group? Some decisions are so trivial that requiring
joint agreements would be unproductive. However, some decisions,
if made improperly,
could harm the business and, in the case of a formal partnership,
could put all partners at risk of losing personal assets.
For example, deciding on which long distance service to use
may
be a decision
left to just one partner. However, if two partners sign contracts
that commit the partnership to labor-intensive projects,
one of those projects may not be completed on time. This
could
present the partnership
with legal problems.
7. Explain the advantages
and disadvantages of forming a business as a partnership.
Good News
Partnerships are easy
to organize. Partners simply send the Fictitious Name Registration
to the state Secretary of State’s Office
and complete a partnership agreement outlining the duties and
financial obligations of the partners.
It is relatively easy
to file taxes. Each partner’s share
of the company’s profit is reported on that partner’s
individual tax return.
Bad News
Sometimes partners
don’t get along. It’s impossible
to agree on everything, but sometimes the disagreements become
so pronounced or constant that the partnership must be dissolved.
This
could be particularly true of artists who may have creative differences.
When the partnership is dissolved, the business is dissolved,
until someone picks up the pieces and reorganizes the business.
Partners face unlimited liability. This is particularly bad with
partnerships because each partner is responsible for the activities
of the other partners. So, one partner may have to pay for the mistakes
of another partner.
8. Explain that a limited liability company is a new form of organization
that combines features of corporations, partnerships, and sole proprietorships.
9. Explain the advantages and disadvantages a limited liability
company.
Good News
Limited liability companies
offer (you guessed it) limited liability. This means that none
of the personal assets of the business owners
are at risk. There is an exception to this. If someone in business
engages in illegal behavior that causes damage to a customer,
supplier, or other entity, the offender’s personal assets
would be at risk.
The owners of a limited
liability company are taxed like sole proprietors. They pay according
to their level of income – just like the
rest of us.
Bad News
Limited liability companies are costly to form. Creating a limited
liability company generally requires the assistance of a lawyer.
10. Explain that corporations are very different from the other
types of business organizations. They are separate legal entities.
This means that corporations are separate from their owners. If the
owner of a sole proprietorship or one of the owners of a partnership
quits the business, the business is dissolved. However, if an owner,
called a shareholder, of a corporation quits by selling his or her
stock, the corporation goes on. Corporations can live forever.
11. Explain that there are advantages and disadvantages to forming
a corporation.
Good News
Corporations offer limited liability. If a corporation gets sued
or goes bankrupt, shareholders could lose all of their investment,
but they would not lose any personal assets.
Bad News
Corporations are costly to form. Anyone setting up a business as
a corporation had better get a lawyer. Articles of Incorporation
must be filed with a state government. Separate tax forms are submitted
to the Internal Revenue Service.
12. Explain that artists
are likely to be operating a sole proprietorship unless their product
has the potential to harm someone. For
example, the owner of a dance troupe must hire dancers. If
a dancer were
to be injured during a performance, the owner of the troupe
could likely be brought into a lawsuit. For this reason, the
owner of
the troupe might choose to be incorporated so that only
the assets of the business would be in jeopardy. An alternative
plan
would
be organize as a sole proprietorship and carry a large
liability insurance policy.
13. Instruct students to consider the following businesses to determine
a business structure that may be most appropriate. Students should
justify their answers.
- You operate a small
gallery where you show your own work and show the work of
others on consignment. (limited liability company or
corporation – there is a risk of damage to other’s
work)
- You have joined
with a fellow artist to create publicity materials for a
local band. (sole proprietorship – it would be wise
to work out potential problems in advance and in writing. This
is not
a long-term relationship so there is no need to enter into
a partnership agreement. There is little risk of liability
for harm to someone
or for breach of contract)
- You have joined
with a fellow artist to form a business offering computer-generated
graphic art. (partnership – this is a
long-term relationship. There is little risk of harm to others)
Closure
Instruct students to add a brief statement to the business description
defining their business structure. Ask students to explain their
choice.
Explain that they have completed the business description component
of their business plans. Ask if this examination of their businesses
have caused any of them to reconsider their five- or ten-year goal
statements.
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