copyright © 2011 pearson education, inc. publishing as prentice hall forms of business ownership...

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Forms of Forms of Business OwnershipBusiness Ownership

Forms of Forms of Business OwnershipBusiness Ownership

CHAPTER CHAPTER 55

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 5 - 2Ch, 5: Forms of Business Ownership

Choosing a Form of OwnershipChoosing a Form of Ownership

There is no one “best” form of ownership.There is no one “best” form of ownership. The best form of ownership depends on The best form of ownership depends on

an entrepreneur’s particular situation.an entrepreneur’s particular situation. Key: Understanding the characteristics of Key: Understanding the characteristics of

each form of ownership and how well they each form of ownership and how well they match an entrepreneur’s business and match an entrepreneur’s business and personal circumstances. personal circumstances.


Factors Affecting the ChoiceFactors Affecting the Choice Tax considerationsTax considerations Liability exposureLiability exposure Start-up and future capital requirementsStart-up and future capital requirements ControlControl Managerial abilityManagerial ability Business goalsBusiness goals Management succession plansManagement succession plans Cost of formationCost of formation


Major Forms of OwnershipMajor Forms of Ownership

Sole ProprietorshipSole Proprietorship PartnershipPartnership CorporationCorporation S CorporationS Corporation Limited Liability CompanyLimited Liability Company Joint VentureJoint Venture


FIGURE 5.1 (A)

Forms of Business Ownership – Percentage of Business


FIGURE 5.1 (B)

Forms of Business Ownership - Percentage of Sales


FIGURE 5.1 (C)

Forms of Business Ownership - Percentage of Sales


Advantages of the Advantages of the Sole ProprietorshipSole Proprietorship

Simple to createSimple to create Least costly form to beginLeast costly form to begin Profit incentiveProfit incentive Total decision making authorityTotal decision making authority No special legal restrictionsNo special legal restrictions Easy to discontinueEasy to discontinue


Disadvantages of the Disadvantages of the Sole ProprietorshipSole Proprietorship

Unlimited personal liabilityUnlimited personal liability


Liability Features of the Basic Liability Features of the Basic Forms of OwnershipForms of Ownership

Sole ProprietorshipSole Proprietorship

Claims of Sole Proprietor’s CreditorsClaims of Sole Proprietor’s CreditorsClaims of Sole Proprietor’s CreditorsClaims of Sole Proprietor’s Creditors

Sole Proprietor’s Personal Sole Proprietor’s Personal AssetsAssets

Sole Proprietor’s Personal Sole Proprietor’s Personal AssetsAssets


Disadvantages of the Disadvantages of the Sole ProprietorshipSole Proprietorship

Unlimited personal liabilityUnlimited personal liability Limited skills and capabilitiesLimited skills and capabilities Feelings of isolationFeelings of isolation Limited access to capitalLimited access to capital Lack of continuity of the businessLack of continuity of the business


PartnershipPartnership

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

AlwaysAlways wise to create a partnership wise to create a partnership agreement.agreement.

The best partnerships are The best partnerships are built on trust and respect. built on trust and respect.


Advantages of the PartnershipAdvantages of the Partnership

Easy to establishEasy to establish Complementary skills of partnersComplementary skills of partners Division of profitsDivision of profits Larger pool of capitalLarger pool of capital Ability to attract limited partnersAbility to attract limited partners


Types of PartnersTypes of Partners General partnersGeneral partners

Take an active role in managing a business.Take an active role in managing a business. Have unlimited liability for the partnership’s Have unlimited liability for the partnership’s

debts.debts. Every partnership must have at least one Every partnership must have at least one

general partner.general partner. Limited partnersLimited partners

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

Have limited liability for the partnership’s Have limited liability for the partnership’s debts. debts.


Advantages of the PartnershipAdvantages of the Partnership Easy to establishEasy to establish Complementary skills of partnersComplementary skills of partners Division of profitsDivision of profits Larger pool of capitalLarger pool of capital Ability to attract limited partnersAbility to attract limited partners Minimal government regulationMinimal government regulation FlexibilityFlexibility TaxationTaxation


Disadvantages of the Disadvantages of the PartnershipPartnership

Unlimited liability of at least one Unlimited liability of at least one partnerpartner



PartnershipPartnership

Claims of Partnership’s CreditorsClaims of Partnership’s CreditorsClaims of Partnership’s CreditorsClaims of Partnership’s Creditors

Partnership’s AssetsPartnership’s AssetsPartnership’s AssetsPartnership’s AssetsGeneralGeneralPartner’sPartner’sPersonalPersonalAssetsAssets

GeneralGeneralPartner’sPartner’sPersonalPersonalAssetsAssets




Disadvantages of the Disadvantages of the PartnershipPartnership

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

interest without dissolving the partnershipinterest without dissolving the partnership Lack of continuityLack of continuity Potential for personality and authority Potential for personality and authority

conflictsconflicts Partners bound by law of agencyPartners bound by law of agency


Limited PartnershipLimited Partnership

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

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

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


CorporationCorporation

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

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

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

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


CorporationCorporation

Types of corporations:Types of corporations: Publicly held Publicly held – a corporation that has – a corporation that has

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

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


Advantages of the CorporationAdvantages of the Corporation

Limited liability of stockholdersLimited liability of stockholders



Corporation

Claims of Corporation’s CreditorsClaims of Corporation’s Creditors

Corporation’s AssetsCorporation’s Assets

Shareholder’sPersonal AssetsShareholder’s

Personal AssetsShareholder’s


Personal Assets

barrier barrier barrier

barrier


Advantages of the CorporationAdvantages of the Corporation

Limited liability of stockholdersLimited liability of stockholders Ability to attract capitalAbility to attract capital Ability to continue indefinitelyAbility to continue indefinitely Transferable ownershipTransferable ownership


Disadvantages of the Disadvantages of the CorporationCorporation

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

incentivesincentives Legal requirements and regulatory “red Legal requirements and regulatory “red

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


S CorporationS Corporation No different from any other corporation No different from any other corporation

from a legal perspective.from a legal perspective. An S corporation is taxed like a An S corporation is taxed like a

partnership, passing all of its profits (or partnership, passing all of its profits (or losses) through to individual shareholders.losses) through to individual shareholders.

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



S-Corporation

Claims of S-Corporation’s CreditorsClaims of S-Corporation’s Creditors

S-Corporation’s AssetsS-Corporation’s Assets

Shareholder’sPersonal AssetsShareholder’s



Personal Assets


barrier


Limited Liability Company Limited Liability Company (LLC)(LLC)

Resembles an S Corporation but is Resembles an S Corporation but is notnot subject to the same restrictions. subject to the same restrictions.

Two documents required: Two documents required: Articles of organizationArticles of organization Operating agreementOperating agreement


Limited Liability Company Limited Liability Company (LLC)(LLC)

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

1.1. Limited liabilityLimited liability

2.2. Continuity of lifeContinuity of life

3.3. Free transferability of interestFree transferability of interest

4.4. Centralized managementCentralized management



Limited Liability Company - LLCLimited Liability Company - LLC

Claims of LLC’s CreditorsClaims of LLC’s Creditors

LLC’s AssetsLLC’s Assets

Member’sPersonal Assets





barrier


The Professional CorporationThe Professional Corporation

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

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice HallCh, 5: Forms of Business Ownership

The Joint VentureThe Joint Venture

Much like a partnership, but it: Much like a partnership, but it:

Is formed for a specific purposeIs formed for a specific purpose

Has a beginning and an endHas a beginning and an end

5 - 32


ConclusionConclusion

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

Each form has advantages and Each form has advantages and disadvantages.disadvantages.

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


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copyright © 2011 pearson education, inc. publishing as prentice hall forms of business ownership...

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