BUSINESS OWNERSHIP :SOLE PROPRIETOR, PARTNERSHIPS AND

CORPORATIONS

Smaka Mathibela, University of Johannesbug, BEd,Mba

International Business(Bradford)

Visiting Fellow, Birmingham City UniversityVisiting Professor, Shenzhen University

MBA1034 GOVERNANCE, LAW & ETHICS

Acknowledgements

• This power point slide have been reproduced by SL Mathibela with several sources of this presentation which is available on the last slide of this presentation.

1. Open Discussion

• Rocco R. Vanasco, (1996),"Auditor independence: an international perspective", Managerial Auditing Journal, Vol. 11 No.: 9 pp. 4- 48

Entrepreneurship: Ideas in Action© Cengage Learning/South-Western

Chapter Chapter

Section 2: Forms of Business Ownership

5

Evaluation Criteria

• Tax consideration• Liability exposure• Start-up and future

capital requirement• Control• Managerial ability• Business goals• Management succession

plans• Cost of formation

Measures taken by Govt.1. Protective Measures

• Products reserved for exclusive production• Concessions in excise, sales tax• Govt. gives preference to products by SSI

2. Promotional Measures• Imported raw materials are provided at reasonable rates• Development of industrial estates to provide sheds to SSI• Extension of price preference to products by SSI• Preference given to SSI in land allocation• Technical assistance by Central Small Industries Orgn• Financial assistance by banks and public financial

institutes.

Chapter 7 Slide 7

Lesson 7.2

Choose a Legal Form of Business

Objective:

Students will be able to:• Discuss advantages and disadvantages of a sole

proprietorship, partnership, and corporationS.

Overview• Introduction to business ownership• Sole proprietorship• Partnership• Corporations• Corporations and the Sarbanes-

Oxley Act• Other Forms of ownership

Factors to Choice of Ownership

1. Nature of Business

2. Size and Area of Operations

3. Degree of Control Desired

4. Amount of Capital Required

5. Degree of Risk Involves

• Choice of Suitable form of ownership – A Crucial Decision

• The form of ownership determines the -• Division of Profits• Extent of liability• Extent of Risk• Division of Power• Control of Owner• Long term commitment, cannot be altered easiliy

Ideal Form of Ownership

1. Ease of Formation

2. Sufficient Finances

3. Limited Liability

4. Transferability of Interest

5. Efficient Management

Ideal Form of Ownership – Contd.

6. Continuity and Stability

7. Flexibility of Operations

8. Minimum Govt. Control

9. Retention of Business Secrets

10. Low Tax Burden

Choosing a Form of Ownership• 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.

Factors Affecting the Choice• Tax considerations• Liability exposure• Start-up and future capital

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

Major Forms of Ownership

• Sole Proprietorship• Partnership• Corporation• S Corporation• Limited Liability Company• Joint Venture

2.1 SOLE

PROPRIETORSHIP

Entrepreneurship

• Entrepreneur: A person who forms and operates a new business either by himself or herself or with others

• Sole proprietorship: A form of business in which the owner is actually the business– The business is not a separate legal entity– Sole proprietor: The owner of a sole

proprietorship

14-17

Creation of a Sole Proprietorship

• No federal or state government approval is required

• D.b.a. (doing business as): A designation for a business that is operating under a trade name

• Fictitious business name statement (certificate of trade name)– A document that is filed with the state that

designates:• A trade name of a business• The name and address of the applicant• The address of the business

Advantages of the Sole Proprietorship• Simple to create• Least costly form to begin• Profit incentive• Total decision making authority• No special legal restrictions• Easy to discontinue

5 - 20

Disadvantages of the Sole Proprietorship

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

business

Personal Liability of a Sole Proprietor• Unlimited personal liability: The

personal liability of a sole proprietor for the debts and obligations of a sole proprietorship

• Taxation of a sole proprietorship– A sole proprietorship does not pay taxes at

the business level– A sole proprietor has to file tax returns and

pay taxes to state and federal governments

Exhibit 1 - Sole Proprietorship

2.2 PARTNERSHIP

Partnership

• 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.

Types of Partners• 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.

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

Disadvantages of the Partnership• 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

Limited Partnership

• 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.

General Partnership• An association of two or more persons to

carry on as co-owners of a business for profit [UPA Section 6(1)]– General partners (partners): Persons liable

for the debts and obligations of a general partnership

• Uniform Partnership Act (UPA): A model act that codifies partnership law– Most states have adopted the UPA in whole

or in part

Formation of a General Partnership• To qualify as a general partnership

under the UPA a business must be–An association of two or more

persons–Carrying on a business–As co-owners–For profit

Name of a General Partnership

• A general partnership must file a fictitious business name statement with the appropriate government agency to operate under a trade name

• General partnership agreement–A written agreement that partners

sign to form a general partnership

Taxation of General Partnerships• Flow-through taxation

– The income and losses of partnership flow onto and have to be reported on the individual partners’ personal income tax returns

• Right to participate in management– Each partner has a right to participate in the

management of a partnership and has an equal vote on partnership matters• Unless otherwise agreed

Right to Share in Profits The right to share in the earnings from the

investment of capital Unless otherwise agreed

Right to an accounting Action for an accounting: A formal judicial

proceeding in which the court is authorised to Review the partnership and the partners’

transactions Award each partner his or her share of the

partnership assets

Contract Liability of General Partners

• General partners have unlimited personal liability for contracts of the partnership

• Under the UPA– General partners have joint liability for the

contracts and debts of the partnership– Joint liability: Liability of partners for contracts

and debts of the partnership• A plaintiff must name the partnership and all of the

partners as defendants in a lawsuit

Uniform Limited Partnership Act• Contains a uniform set of provisions

for the formation, operation, and dissolution of limited partnerships

• Revised Uniform Limited Partnership Act (RULPA)–Provides a more modern,

comprehensive law for the formation, operation, and dissolution of limited partnerships

Formation of a Limited Partnership

• Certificate of limited partnership: A document that two or more persons must execute and sign that makes a limited partnership legal and binding– Under RULPA, two or more persons must execute

and sign the certificate– The certificate of limited partnership must be filed

with• The secretary of state of the appropriate state• The county recorder in the county or counties in which

the limited partnership carries on business, if required by state law

Limited Partnership Agreement

• A document that sets forth:–The rights and duties of

general and limited partners–The terms and conditions

regarding the operation, termination, and dissolution of a partnership, and so on

Liability of General and Limited Partners

• Unlimited liability of general partners– The unlimited personal liability of general partners

of a limited partnership for the debts and obligations of the general partnership

• Limited liability of limited partners– The limited liability of limited partners of a limited

partnership only up to their capital contributions to the limited partnership

– Limited partners are not personally liable for the debts and obligations of the limited partnership

2.3CORPORATION

Corporation• 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.

CorporationsCertificate of IncorporationNameStatement of purposeTime horizonNames and addresses of incorporatorsPlace of businessCapital stock authorization’Capital required at time of incorporationProvisions for preemptive rightsRestrictions on transfering sharesNames and addresses of officersBy-laws

An S Corporation

A corporation that retains the legal characteristics of a regular C corporation but has the advantage of being taxed as a partnership if it meets certain criteria:

Domestic US corporation No nonresident alien stockholder One class of common stock Limit shareholders No more than 100 shareholders Less than 25% of gross revenues passive

S Corporation• Highly profitable service companies with large

number of shareholders for whom profits are compensation or retirement benefits

• Fast-growing companies that must retain earnings to finance growth

• Corporations in which the loss of benefits exceed tax savings

• Corporations with sizable net operating losses

S Corporation

AdvantagesAll of advantages of a regular C corporationSingle taxationAvoids tax on appreciation of asset soldPay SSS for employeesDifferent lines of businesses as subsidiaries,

simpler tax filing

Corporation CONT…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.

Advantages of the Corporation

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

Disadvantages of the Corporation

• 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)

S Corporation

LiquidatingPay all taxes and debtsObtain written approval of shareholders to

dissolve companyFile statement of intent to dissolve with secretary

of stateDistribute all remaining assets

Shareholders OF Corp…• Straight voting: A system in which each

shareholder votes the number of shares he or she owns on candidates for each of the positions open

• Cumulative voting: A system in which a shareholder can accumulate all of his or her votes and vote them all for one candidate or split them among several candidates

Shareholders Dividends

• Dividend: A distribution of profits of the corporation to shareholders

• Piercing the corporate veil: A doctrine that says if a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation’s debts and obligations

Franchise Agreement in corporation

• An agreement that a franchisor and franchisee enter into that sets forth the terms and conditions of a franchise

• Liability of franchisors and franchisees– The franchisor deals with the franchisee as an

independent contractor• Franchisees are liable on their own contracts and

are liable for their own torts• Franchisors are liable for their own contracts and

torts

Chapter 7 Slide 52

Advantages of Incorporation

• Personal liability is limited to the amount of money each shareholder invested in the company.

• Personal assets of shareholders are protected.

• Corporations can raise money by selling stock.

Exhibit 7 - License

Core Readings of licensing• Baron, David P.(2013) Business and its environment, 7th

Edition, Pearson, Ch.14• Cheeseman, Henry R.(2013) Business law, 8th Edition,

Prentice Hall. Ch.14-16• Barringer, Bruce R. & Ireland, R. Duane, 2011

Entrepreneurship – Successfully launching new ventures 4th edition, Pearson.

QUESTIONS?

REFERENCE LIST

http://www.slideshare.net/ttsotetsi/savedfiles?s_title=3-legal-forms-of-business&user_login=mmoore5\

http://www.slideshare.net/dillyn/forms-of-business-ownership-for-grade-10-learners?qid=e6993b32-7229-4d00-bc19-b730365d8fe1&v=qf1&b=&from_search=3

http://www.slideshare.net/amanpreetbhamra/form-of-ownership?qid=e6993b32-7229-4d00-bc19-b730365d8fe1&v=qf1&b=&from_search=12

http://www.slideshare.net/amanpreetbhamra/form-of-ownership?qid=e6993b32-7229-4d00-bc19-b730365d8fe1&v=qf1&b=&from_search=12

http://www.slideshare.net/stephenongch/mba1034-cg-law-ethics-week-11-business-ownership-2013?qid=7d69831d-8ec7-424b-995d-aef34d3097f5&v=qf1&b=&from_search=9

ADDITIONAL REFERENCE

Rocco R. Vanasco, (1996),"Auditor independence: an international perspective", Managerial Auditing Journal, Vol. 11 No.: 9 pp. 4- 48