ch 03 - forms of business ownership ok

8/12/2019 Ch 03 - Forms of Business Ownership Ok

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Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Forms of

Business Ownership

CHAPTER3


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3.2. 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

3 - 3Ch, 3: Forms of Business Ownership


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3.3. Major Forms of Ownership

Sole Proprietorship

Partnership

Corporation

S Corporation

Limited Liability Company

Joint Venture



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FIGURE 5.1 (B)

Forms of Business

Ownership -

Percentage of Sales



7/26Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall77

3.4. Sole Proprietorships

Sole ProprietorshipA business that is owned and operated by one

person. The enterprise has no existence apart

from its owner.

To establish a sole proprietorship, a person

merely needs to obtain whatever local and

state licenses are necessary to begin

operations.


8/26Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

3.4.1. Advantages and Disadvantages

of the Sole Proprietorship

Advantages Simple to create

Least costly form to

begin

Profit incentive

Total decision

making authority

No special legalrestrictions

Easy to discontinue

Disadvantages

Unlimited personal

liability

Limited skills andcapabilities

Feeling of isolation

Limited access to

capital

Lack of continuity




OwnershipRequirements

One owner

Tax Treatment

Income andlosses pass

throughto

owner and are

taxed atpersonal rates

Liability

Unlimited

personal

liability




3.5. Partnership

An association of two or more peoplewho co-own a business for the purpose

of making a profit.

Alwayswise to create a partnershipagreement.

The best partnerships are

built on trust and respect.




3.5.1. Types of Partners

General partners

Take an active role in managing a business.

Have unlimited liability for the partnershipsdebts.

Every partnership must have at least onegeneral partner.

Limited partners

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

Have limited liability for the partnershipsdebts.




3.5.2. Limited Partnership A partnership composed of at least one

general partner and one or more limitedpartners.

A general partner in this partnership is

treated exactly as in a generalpartnership.

A limited partner has limitedliability and is treated as aninvestor in the business.




3.5.3. Advantages & Disadvantages

of the Partnership

Advantages

Easy to establish

Complementary skills of

partners Division of profits

Larger pool of capital

Ability to attract limited

partners

Minimal governmentregulation

Flexibility

Taxation

Disadvantages

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 andauthority conflicts

Partners bound by law of

agency




Ownership

Requirements

Two or more owners

Tax Treatment

Income and lossespass throughto

partners and are taxed

at personal rates;

flexibility in profit-lossallocations to partners

Liability

Unlimited

personal liability;

Personal assets

of partners are atrisk

Advantages

Ease of formation Pooled talent

Pooled resources

Somewhat easier access to

financing

Some tax benefits

Drawbacks

Unlimited personal liability

Divided authority and decisions

Potential for conflict

Continuity of transfer of

ownership




OwnershipRequirements

Two or moreowners

Tax Treatment

Income and losses pass

throughto partners and

are taxed at personal

rates; flexibility in profit-

loss allocations to

partners

Liability

Limited, although

one partner must

retain unlimited

liability

Advantages

Good way to acquirecapital from limited

partners

Drawbacks

Cost and complexity of

forming can be high Limited partners cannot

participate in management of

business without losing

liability protection 3 - 15Ch, 3: Forms of Business Ownership



3.6. The Corporation A separate legal entity from its owners.

Types of corporations: Domestica corporation doing business in the country in

which it is incorporated.

Foreigna corporation doing business in a country other

than the country in which it is incorporated. Aliena corporation formed in another country but doing

business in the Cambodia.

Types of corporations: Publicly helda corporation that has a large number of

shareholders and whose stock usually is traded on one

of the large stock exchanges.

Closely helda corporation in which shares are

controlled by a relatively small number of people, often

family members, relatives, or friends. 3 - 16Ch, 3: Forms of Business Ownership



3.6.1. Advantages & Disadvantages

of the Corporation


Advantages

Limited liability of

stockholders

Ability to attractcapital

Ability to continue

indefinitely Transferable

ownership

Disadvantages Cost and time of

incorporation process

Double taxation Potential for diminished

managerial incentives

Legal requirements andregulatory red tape

Potential loss of control

by founder(s)



3.7. Limited Liability Company (LLC)

Resembles an S Corporation but is notsubject

to the same restrictions.

Two documents required:

Articles of organization

Operating agreement An LLC cannot have more than two of these

four corporate characteristics:

1. Limited liability

2. Continuity of life3. Free transferability of interest

4. Centralized management




Advantages

Greater flexibility

Not constrained byregulations on C and S

corporations

Taxed as partnership, not

as corporation

Drawbacks

Cost of switching from one

form to this can be high Need legal and financial

advice in forming operating

agreement


Ownership Requirements

Unlimited number ofmembers; flexiblemembershiparrangements for votingrights and income

Tax Treatment

Income and losses

pass throughto

partners and are taxed

at personal rates;

flexibility in profit-loss

allocations to partners

Liability

Limited



3.8. Public Limited Company

A PLC is a form of a limited company thatmeets the following requirements:

company may have 2 to 30 shareholders

may not offer its shares or other securities to thepublic generally, but may offer them to

shareholders, family members and managers.

may have one or more restrictions on the

transfer of each class of its shares.

A company treated as a private limited company

from the date of registration.




3.9. The Professional Corporation

Designed for professionslawyers,doctors, dentists, accountants and other

professionals

Created in the same manner as acorporation

Identified by the abbreviations:

P.C.Professional Corporation P.A.Professional Association

S.C.Service Corporation



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3.10. The Joint Venture

Much like a partnership, but it:

Is formed for a specific purpose

Has a beginning and an end


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Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall723

3.11. Legal Challenges for

the Entrepreneurial Venture

Growth and

Continuity of the

Venture

Legal

Concepts

Inception of the

Venture

The Ongoing

Venture


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I. Inception of an

Entrepreneurial Venture A. Laws governing intellectual

property 1. Patents

2. Copyrights

3. Trademarks B. Forms of business

organization 1. Sole proprietorship

2. Partnership

3. Corporation

4. Franchise

C. Tax considerations

D. Capital formation

E. Liability questions

3.11.1. Major Legal Concepts and

Entrepreneurial Ventures II. Ongoing Venture:

Business Development

and Transactions

A. Personnel Law

1. Hiring and firing

policies 2. Equal Employment

Opportunity Commission

3. Collective bargaining

B. Contract Law

1. Legal contracts 2. Sales contracts

3. Leases


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3.11. Major Legal Concepts and

Entrepreneurial Ventures III. Growth and Continuity of an Entrepreneurial Venture

A. Tax considerations

1. Federal, state, and local

2. Payroll

3. Incentives

B. Governmental regulations 1. Zoning (property)

2. Administrative agencies (regulatory)

3. Consumer law

C. Continuity of ownership rights

1. Property laws and ownership

2. Wills, trusts, and ownership

3. Bankruptcy


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3.11.2. Articles of Incorporation

Elements to Include:

Company name

Business purpose

Names and addresses of incorporators

Names and addresses of initial officers and directors Address of corporations home office

Capital required at time of incorporation

Capital stock to be authorized

Corporate bylaws

Corporations time horizon

Other pertinent miscellaneous information

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ch 03 - forms of business ownership ok

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