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3-1 Forms Of Ownership Of Small Business Primary Legal Forms Advantages & Disadvantages Of Each Form Other Legal Forms Chapter 3

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Page 1: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

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Forms Of OwnershipOf Small Business

Forms Of OwnershipOf Small Business

Primary Legal Forms

Advantages & Disadvantages Of Each Form

Other Legal Forms

Ch

apte

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3

Page 2: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

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

Page 3: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

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.

Page 4: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

3-4McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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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

Page 5: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

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

Page 6: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

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

Page 7: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

3-7McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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Types Of Partnerships

Partners Liable For Each Others’ Actions

Manage With Unlimited Liability

Liability = Capital Contribution

Page 8: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

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

Page 9: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

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

Page 10: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

3-10McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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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

Page 11: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

3-11McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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Corporate Governance

Stockholders

Board Of Directors

Corporate Officers

Elects

Appoints

Page 12: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

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

Page 13: 3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of

3-13McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

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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)