Copyright © 2011 Pearson Education

CHAPTER CHAPTER 55

There is no one “best” form of ownership.

The best form of ownership depends on an entrepreneur’s particular situation.

Key: Understanding the characteristics of each form of ownership and how well they match an entrepreneur’s business and personal circumstances.

Ch, 5: Forms of Business Ownership 5 - 2

Tax considerations Liability exposure Start-up and future capital

requirements Control Managerial ability Business goals Management succession plans Cost of formation

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Sole Proprietorship Partnership Corporation S Corporation Limited Liability Company Joint Venture

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Ch, 5: Forms of Business Ownership 5 - 5

FIGURE 5.1 (A)

Forms of Business Ownership – Percentage of Business USA

Simple to create Least costly form to begin Profit incentive Total decision making authority No special legal restrictions Easy to discontinue

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5 - 7Ch, 5: Forms of Business Ownership

Unlimited personal liability Limited skills and capabilities Feelings of isolation Limited access to capital Lack of continuity of the business

An association of two or more people who co-own a business for the purpose of making a profit.

Always wise to create a partnership agreement.

The best partnerships are built on trust and respect.

Ch, 5: Forms of Business Ownership 5 - 8

Easy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners

5 - 9Ch, 5: Forms of Business

Ownership

General partners◦ Take an active role in managing a business.◦ Have unlimited liability for the partnership’s debts.◦ Every partnership must have at least one general

partner. Limited partners

◦ Cannot participate in the day-to-day management of a company.

◦ Have limited liability for the partnership’s debts.

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Easy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners Minimal government regulation Flexibility Taxation

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Ownership

5 - 12Ch, 5: Forms of Business Ownership

Unlimited liability of at least one partner Capital accumulation Difficulty in disposing of partnership

interest without dissolving the partnership

Lack of continuity Potential for personality and authority

conflicts Partners bound by law of agency

A partnership composed of at least one general partner and one or more limited partners.

A general partner in this partnership is treated exactly as in a general partnership.

A limited partner has limited liability and is treated as an investor in the business.

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A separate legal entity from its owners. Types of corporations:

◦ Domestic – a corporation doing business in the state in which it is incorporated.

◦ Foreign – a corporation doing business in a state other than the state in which it is incorporated.

◦ Alien – a corporation formed in another country but doing business in the United States.

Ch, 5: Forms of Business Ownership 5 - 14

Types of corporations: Publicly held – a corporation that has

a large number of shareholders and whose stock usually is traded on one of the large stock exchanges.

Closely held – a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends.

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5 - 16Ch, 5: Forms of Business Ownership

Limited liability of stockholders Ability to attract capital Ability to continue indefinitely Transferable ownership

Cost and time of incorporation process Double taxation Potential for diminished managerial

incentives Legal requirements and regulatory

“red tape” Potential loss of control by founder(s)

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No different from any other corporation from a legal perspective.

An S corporation is taxed like a partnership, passing all of its profits (or losses) through to individual shareholders.

To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year.

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Resembles an S Corporation but is not subject to the same restrictions.

Two documents required:

◦Articles of organization

◦Operating agreement

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An LLC cannot have more than two of these four corporate characteristics:

1. Limited liability

2. Continuity of life

3. Free transferability of interest

4. Centralized management

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5 - 21Ch, 5: Forms of Business Ownership

Designed for professions – lawyers, Designed for professions – lawyers, doctors, dentists, accountants and other doctors, dentists, accountants and other professionalsprofessionals

Created in the same manner as a Created in the same manner as a corporationcorporation

Identified by the abbreviations: Identified by the abbreviations: P.C. – Professional CorporationP.C. – Professional Corporation

P.A. – Professional AssociationP.A. – Professional Association

S.C. – Service CorporationS.C. – Service Corporation

Ch, 5: Forms of Business Ownership

Much like a partnership, but it:

Is formed for a specific purpose

Has a beginning and an end

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5 - 23Ch, 5: Forms of Business Ownership

The “right” choice of the form of ownership is unique to every entrepreneur and their business.

Each form has advantages and disadvantages.

The entrepreneur must be thoughtful and strategic about this important decision.