chap03 choosing a form of ownership

8/9/2019 Chap03 Choosing a Form of Ownership

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Chapter 3: Forms of Ownership 1Copyright 2003 Prentice Hall Publishing Company

Choosing a Form of

Ownership


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There is no one best form of ownership.There is no one best form of ownership.

The best form of ownership depends on anThe best form of ownership depends on an

entrepreneurs particular situation.entrepreneurs particular situation. The key to choosing a form of ownershipThe key to choosing a form of ownership

is understanding how each formsis understanding how each formscharacteristics affect an entrepreneurscharacteristics affect an entrepreneurs

specific business and personalspecific business and personalcircumstances.circumstances.

Choosing a Form ofChoosing a Form of

OwnershipOwnership


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Factors to ConsiderFactors to Consider

Tax considerationsTax considerations

Liability exposureLiability exposure

StartStart--up capital requirementsup capital requirements

ControlControl

Managerial abilityManagerial ability

Business goalsBusiness goals Management succession plansManagement succession plans

Cost of formationCost of formation


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Forms of OwnershipForms of Ownership

Sole ProprietorshipSole Proprietorship

PartnershipPartnership

CorporationCorporation

S CorporationS Corporation

Limited Liability CompanyLimited Liability Company

Joint VentureJoint Venture


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Forms of Ownership

Percent of Businesses

Corporation

20.1%

Partnership

7.7%

Sole P roprietorship

72.2%


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Forms of Ownership

Percent of Sales

Corporation

87.1%

Partnership

8.1%

Sole Proprietorship

4.8%


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Forms ofOwnership

Percent ofIncome

Corporation

69%

Partnership15%

Sole Proprietorship

16%


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Advantages of the SoleAdvantages of the Sole

ProprietorshipProprietorship

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


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Disadvantages of the SoleDisadvantages of the Sole


Unlimited personal liabilityUnlimited personal liability


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Liability Features of the Basic Forms of OwnershipLiability Features of the Basic Forms of Ownership

Sole ProprietorshipSole Proprietorship

Claims of Sole Proprietors Creditors

Sole Proprietors PersonalAssets


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Disadvantages of the SoleDisadvantages of the Sole


Limited access to capitalLimited access to capital

Limited skills and capabilitiesLimited skills and capabilities

Feelings of isolationFeelings of isolation

Lack of continuityLack of continuity

Unlimited personal liabilityUnlimited personal liability


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An association of two or more people whoAn association of two or more people who

coco--own a business for the purpose ofown a business for the purpose of

making a profit.making a profit.

Take the time to create a writtenTake the time to create a written

partnership agreement!partnership agreement!


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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

Little government regulationLittle government regulation

FlexibilityFlexibility

TaxationTaxation


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Disadvantages of the PartnershipDisadvantages of the Partnership

Unlimited liability of at least one partnerUnlimited liability of at least one partner


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Claims of Partnerships Creditors

PartnershipsAssetsGeneral

Partners

Personal

Assets

General

Partners

Personal

Assets


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Disadvantages of the PartnershipDisadvantages of the Partnership

Capital accumulationCapital accumulation

Difficulty in disposing of partnershipDifficulty in disposing of partnership

interestinterest

Lack of continuityLack of continuity

Potential for personality and authorityPotential for personality and authority

conflictsconflicts

Partners bound by the law of agencyPartners bound by the law of agency

Unlimited liability of at least one partnerUnlimited liability of at least one partner


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Limited PartnershipLimited Partnership

A partnership composed of at least oneA partnership composed of at least onegeneral partner and one or more limitedgeneral partner and one or more limited

partners.partners. The general partner in this partnership isThe general partner in this partnership is

treated exactly as in a general partnership.treated exactly as in a general partnership.

The limited partner has limited liabilityThe limited partner has limited liability

and is treated as an investor in theand is treated as an investor in thebusiness.business.


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Limited PartnershipLimited PartnershipClaims of Partnerships Creditors

PartnershipsAssets

General

PartnersPersonal

Assets

Limited

PartnersPersonal

Assets


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The CorporationThe Corporation

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 in thea corporation doing business in the

state in which it is incorporated.state in which it is incorporated.

ForeignForeign -- a corporation chartered in one statea corporation chartered in one stateand doing business in another state.and doing business in another state.

AlienAlien -- a corporation formed in anothera corporation formed in another

country, but doing business in the Unitedcountry, but doing business in the UnitedStates.States.


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The CorporationThe Corporation

Types of corporations:Types of corporations:

Publicly heldPublicly held-- a corporation that has a largea corporation that has a largenumber of shareholders and whose stocknumber of shareholders and whose stockusually is traded on one of the large stockusually is traded on one of the large stockexchanges.exchanges.

Closely heldClosely held-- a corporation whose shares are ina corporation whose shares are inthe control of a relatively small number ofthe control of a relatively small number ofpeople, often family members, relatives, orpeople, often family members, relatives, or

friends.friends.


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Advantages of theAdvantages of the


Limited liability of the stockholdersLimited liability of the stockholders


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CorporationCorporationClaims of Corporations Creditors

CorporationsAssets

ShareholdersPersonalAssets



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Advantages of theAdvantages of the


Ability to attract capitalAbility to attract capital

Ability to continue indefinitelyAbility to continue indefinitely

Transferable ownershipTransferable ownership

Limited liability of stockholdersLimited liability of stockholders


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Disadvantages of the CorporationDisadvantages of the Corporation

Cost and time of incorporatingCost and time of incorporating

Double taxationDouble taxation

Potential for diminished managerialPotential for diminished managerialincentivesincentives

Legal requirements and regulatory redLegal requirements and regulatory red

tapetape

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


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S CorporationS Corporation

No different from any other corporationNo different from any other corporationfrom a legal perspective.from a legal perspective.

For tax purposes, however, an SFor tax purposes, however, an S

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

To elect S status, all shareholders mustTo elect S status, all shareholders must

consent, and the corporation must fileconsent, and the corporation must filewith the IRS within the first 75 days of itswith the IRS within the first 75 days of itstax year.tax year.


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S-CorporationS-CorporationClaims of S-Corporations Creditors

S-CorporationsAssets




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

Resembles an S Corporation but isResembles an S Corporation but is

notnotsubject to the same restrictions.subject to the same restrictions.

Two documents required:Two documents required:

thethe articlesoforganizationarticlesoforganization

thethe operatingagreementoperatingagreement


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

An LLC cannot have more thanAn LLC cannot have more than twotwo ofof

these four corporate characteristics:these four corporate characteristics:

Limited liabilityLimited liabilityContinuity of lifeContinuity of life

Free transferability of interestFree transferability of interest

Centralized managementCentralized management


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Limited Liability Company (LLC)Limited Liability Company (LLC)Claims of LLCs Creditors

LLCsAssets

MembersPersonalAssets

MembersPersonalAssets

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