chapter 5

Chapter 5Selecting a Form of Business Ownership

Selecting a Form of Business Ownership

Learning Objectives

Selecting a Form ofBusiness

Ownership

Existing Firms Sole Proprietor

Risk & Return Partnership

Corporation


Selecting a Form

Sole ProprietorPartnershipCorporationRisk & ReturnExisting Firms

Insert Chart from page 159


• Unlimited liability ( 无限责任） ------the responsibility of business

owners for all the debts of the business.

• Limited liability ( 有限责任） ----- the responsibility of a business

owners for losses only up to the amount they invest.


• A person invested $20,000 to a business. One year later, due to unsuccessful management, the debts amount to $30,000.

• If he declares bankruptcy, how much does he need to pay?


Sole Proprietorship


6%P

rofit

70% o

f allB

usin

essesSingle Owner


Sole Proprietorships （个体工商户）


Disadvantages

- Losses

- Unlimited Liability

- Limited Funds

- Limited Skills

Advantages

- Earnings

- Easy Organization

- Control

- Low Taxes


Partnership （合伙企业）


General Partnership

Limited Partnership

General Partners

Limited Partners


Partnerships( 合伙企业）


Disadvantages

- Shared Control

- Unlimited Liability

- Shared Profits

Advantages

- Additional Funds

- Shared Losses

- Specialization


Corporations （公司）



Corporation ( 公司）

The difference between corporation and company

1. Corporation (American English) company (British English)2. Corporation only mean incorporated

organization; while company can mean both incorporated and unincorporated organization.


公司法

Company Law (British English)

Corporate Law (American English)

Corporation Law ( 比较少见，但也有）


Legal entity （法人）

A corporation is a legal entity, which is an artificial being that exists only in the eyes of the law.

It can be owned by one person or many persons.

all the owners have limited liabilities.

How Owners Affect ManagementHow Owners Affect Management


Stockholder Returns


Stock PriceDividends

Publicly Held

Privately Held


Corporations


Disadvantages

- High Expense

- Financial Disclosure

- Agency Problems

- High Taxes

Advantages

- Limited Liability

- Access to Funds

- Ownership Transfer

Capital Gains


Double Taxation


Types of Corporations

Regular ‘C’

S Corporation

Limited Liability Companies


S-Corporations


Limited Liability

Personal Tax


Conditions for Establishing S-Corporation

• 1. Have no more than 75 (or 150, including spouses) shareholders.

• 2. have shareholders that are individuals or estates and are citizens or permanent residents of the US.

• 3. have only one class of outstanding stock.

• 4. not have more than 25% of income derived from passive sources (rents, royalties, interest, etc.).


Limited Liability Company LLC


Limited Liability

Partnership Benefits


LLC

• A limited liability company is similar to S corporation but without the special eligibility requirements.


Advantages of LLC

• 1. Limited liability• 2. choice of taxation• 3. flexible ownership rules• 4. flexible distribution of

profit and losses• 5. operating flexibility


Disadvantages of LLC

• 1. no stock• 2. limited life span (no more

than 30 years in some state)• 3. fewer incentives• 4. LLC members must pay

self-employment taxes on profit. S- corporations pay self-employment tax on salary.


公司

• In China there are two kind of 公司 (corporation/company)

• 有限责任公司 (Limited liability company)• (private/closed corporation)• 股份公司 ( Joint stock limited company)• (public/open corporation)


两种公司的区别

• Difference in starting• Difference in the number of

shareholders• Difference in holding 出资证明和股票• Difference in share transferring• Difference in publicity of the legal

documents• Difference in profit distribution


一人公司和个人独资企业的区别

• Limited liability• Pay both enterprise

income tax and personal income tax

• Registration capital no less then 100,000 RMB

• Unlimited liability• Pay personal

income tax• No restriction of

registration capital


Comparing Business Forms


Can Change

No Magic Answer

www.sbaonline.sba.gov


Equity


Firm “A”Partnership

Firm “B”Corporation

After-tax earnings

$15 million $15 million

Owner’s Equity

$100 million $300 million

Return on Equity

15% 5%


Owning an Existing Business


Family Business

Existing Business

Franchise


Franchise


Disadvantages

- Sharing Profits

- Less Control

Advantages

- Proven Style

- Name Recognition

- Financial Support

Chain Style

Distributorship

Cost of Fast-Food Franchise

Company Initial Fee Royalty

Burger King $50,000 8.5%McDonald’s $45,000 8%

Wendy’s $25,000 8%Domino’s None 8.5%Subway $10,000 11.5%

Krispy Kreme $40,000 5.5%

chapter 5

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