3-1 forms of ownership of small business primary legal forms primary legal forms advantages &...
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3-1
Forms Of OwnershipOf Small Business
Forms Of OwnershipOf Small Business
Primary Legal Forms
Advantages & Disadvantages Of Each Form
Other Legal Forms
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3-2McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Right Legal Form:Business Factors To Consider
Future SizeYour vision regarding the size of your business.
NatureNature of the business.
Desired ControlThe level of control you desire.
Legal VulnerabilityThe level of structure desired.
Tax ImplicationsTax implication of different ownership structure.
Expected Profit (Loss)Re-investmentPersonal Cash Needs
3-3McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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Definition:PROPRIETORSHIP
PARTNERSHIP
CORPORATION
Is a business formed and owned by a group
of people, called stockholders, given
special rights, privileges, and limited
liabilities by law.
Is a business that is owned by one
person
Is a business owned by two or more persons who have unlimited
liability for its debts and obligations.
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Proprietorship
• Secrecy• Unique tax advantages• Owner doesn’t have to
share profits• Relative freedom of
action and control• Easiest and simplest
form to organize, operate, and dissolve
Advantages• Limited capital• Difficulty in obtaining
credit• Inadequate
management and employee skills
• Unlimited liability for the firm’s debts
• Limited life because business and owner are legally the same
Disadvantages
3-5McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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Partnership
• Easy to form• Can use the ideas and plans
of more than one person• Specialized skills available
from individual partners• Can raise more capital since
good credit may be available
• Obtain financial resources from more than one person
Advantages• Limited life• Unlimited liability for debts
of the firm• Each partner is responsible
for the acts of every other partner
• Death of any of the partners terminates the partnership
• A partner cannot obtain bonding protection against the acts of the other partner(s)
Disadvantages
3-6McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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General Partnership Operations
Uniform Partnership ActPartners Responsible For Other Partners’ ActionsLiability:
Personal Property At RiskAll Debts Of Firm
Resolve Disputes Among Partners(?)
S. Wanke/PhotoLink/Getty Images
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Types Of Partnerships
Partners Liable For Each Others’ Actions
Manage With Unlimited Liability
Liability = Capital Contribution
3-8McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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Partnership:Legal/Tax Documents
• Articles of Co-Partnership• Tax Forms
– Form 1065 K-1: Partner’s Share Of Income, Credit, Deductions
– Form 4562: Depreciation– Form 1040: Individual Income Tax Return– Schedule E: Supplemental Income & Loss– Schedule SE: Self-Employment Tax– Form 1040-ES: Estimated Tax For Individual
3-9McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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Corporation
• Can have representative management
• Ease of raising large amounts of capital
• Legal entity separate and distinct from its owners as individuals
• Relatively permanent, since life of firm not affected by loss of any shareholder
• Owners’ liability for the firm’s debt limited to their investment in it.
Advantages• Impersonal• Owners have limited interest
in firm’s activities-except profits
• High incorporation fees and high taxes, especially double income taxation
• Burdensome procedures, reports, and statements required by governments
• Powers limited to those stated in charter-may be difficult to do business in another state
Disadvantages
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Formation Of Corporation
Articles Of Incorporation- Filed With State
Corporate Charter-Comes From State
Buy-Sell Agreement- Include In Articles Of Incorporation
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Corporate Governance
Stockholders
Board Of Directors
Corporate Officers
Elects
Appoints
3-12McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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Other LegalForms Of Ownership
• Limited Liability Partnership– Protects Individual Partners– Not Recognized By Every State
• Family Limited Liability Partnership– Partners Related– Agriculture/Family Farms
• Professional Service Corporation– Provides Licensed Professional Services– Doctors, Lawyers, & Accountants
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• Nonprofit Corporations• Civic, Charitable, Educational, Religious• Tax Exempt
• Cooperative• Independent Producers• Buys/Sells For Clients
• Joint Venture• Fractional Ownership
Other LegalForms Of Ownership (cont’d)