Forms of Business Forms of Business OwnershipOwnership

IntroductionIntroduction

Sole ProprietorshipSole Proprietorship ““a business owned by one person who is a business owned by one person who is

subject to claims of creditors”subject to claims of creditors” Advantages: 1) ease of formationAdvantages: 1) ease of formation

2) retention of profits2) retention of profits 3) tax advantages3) tax advantages 4) control of decisions4) control of decisions 5) flexibility5) flexibility 6) fewer gov’t. regulations6) fewer gov’t. regulations 7) pride of ownership7) pride of ownership

Sole Proprietorship (cont’d)Sole Proprietorship (cont’d) Disadvantages: 1) unlimited liabilityDisadvantages: 1) unlimited liability

2) limited capital2) limited capital3) unstable business 3) unstable business

life/lack of life/lack of continuitycontinuity

4) limited operating/4) limited operating/ mgt. skillsmgt. skills 5) hiring employees5) hiring employees

PartnershipPartnership ““the voluntary association of two or the voluntary association of two or

more people who have combined more people who have combined their resources to carry on as co-their resources to carry on as co-owners of a lawful enterprise for their owners of a lawful enterprise for their joint profit”joint profit”

Advantages of PartnershipAdvantages of Partnership 1) ease of formation1) ease of formation 2) complementary skills2) complementary skills 3) access to capital3) access to capital 4) tax advantages4) tax advantages 5) retention of profits5) retention of profits 6) group decision making6) group decision making 7) minimal governmental control7) minimal governmental control

Disadvantages of PartnershipDisadvantages of Partnership 1) unlimited liability1) unlimited liability 2) uncertain duration2) uncertain duration 3) conflict3) conflict 4) dissolution4) dissolution

Types of PartnershipTypes of Partnership 1) active/general partner1) active/general partner 2) secret partner2) secret partner 3) silent partner3) silent partner 4) dormant partner4) dormant partner 5) limited partner5) limited partner

Selecting a PartnerSelecting a Partner ““Don’t go into business with a friend Don’t go into business with a friend

because you will likely lose that because you will likely lose that friend”friend”

Characteristics of a “good” partnerCharacteristics of a “good” partner

Partnership AgreementsPartnership Agreements advisable even if the partners are advisable even if the partners are

friendsfriends can delineate the responsibilities of can delineate the responsibilities of

each partner and protect everyone each partner and protect everyone with an interest in the businesswith an interest in the business

Uniform Partnership ActUniform Partnership Act Articles of PartnershipArticles of Partnership

Articles of PartnershipArticles of Partnership should address the following:should address the following: 1) legal name of the partnership1) legal name of the partnership 2) nature of the business2) nature of the business 3) duration of the partnership3) duration of the partnership 4) contributions4) contributions 5) sales, loans and leases5) sales, loans and leases 6) withdrawals and salaries6) withdrawals and salaries 7) responsibility and authority7) responsibility and authority 8) dissolution8) dissolution 9) arbitration9) arbitration

CorporationCorporation ““an artificial being, invisible, an artificial being, invisible,

intangible, and existing only in intangible, and existing only in contemplation of law; an entity that contemplation of law; an entity that is something that has a distinct is something that has a distinct existence separate and apart from existence separate and apart from the existence of its individual the existence of its individual members”members”

Corporation (cont’d)Corporation (cont’d) composed of:composed of:

shareholders/shareholders/stockholdersstockholders

directorsdirectors

officersofficers

Advantages of CorporationsAdvantages of Corporations 1) limited liability1) limited liability 2) transfer of ownership2) transfer of ownership 3) stability/perpetual life3) stability/perpetual life 4) acquisition of capital4) acquisition of capital 5) skilled managers5) skilled managers 6) stockholders as customers6) stockholders as customers

Disadvantages of CorporationsDisadvantages of Corporations 1) taxes1) taxes 2) rigidity2) rigidity 3) shared ownership3) shared ownership 4) regulations4) regulations

Types of CorporationsTypes of Corporations 1) domestic1) domestic 2) foreign2) foreign 3) alien3) alien 4) publicly held/open4) publicly held/open 5) closely held/closed5) closely held/closed

““S” CorporationsS” Corporations provided for in subchapter S of the provided for in subchapter S of the

tax codetax code created especially for small businesscreated especially for small business taxed like partnerships taxed like partnerships

““S” Corporations (cont’d)S” Corporations (cont’d) Advantages:Advantages: 1) lower “current” income tax1) lower “current” income tax 2) exemption from the corporate 2) exemption from the corporate

alternative minimum taxalternative minimum tax 3) flexibility in using different 3) flexibility in using different

accounting methodsaccounting methods

““S” Corporations (cont’d)S” Corporations (cont’d) Disadvantages:Disadvantages: 1) multistate “S” corporations1) multistate “S” corporations 2) banks may be reluctant to lend to 2) banks may be reluctant to lend to

“S” corporations that distribute “S” corporations that distribute all all their earningstheir earnings

3) rigid restrictions 3) rigid restrictions

Restrictions of “S” Corporations:Restrictions of “S” Corporations:1) limit of 75 stockholders1) limit of 75 stockholders2) stockholders must be individuals, estates, or 2) stockholders must be individuals, estates, or

certain trustscertain trusts3) no corporations, partnerships, or nonresident 3) no corporations, partnerships, or nonresident

aliens can be stockholdersaliens can be stockholders3) only one class of outstanding stock3) only one class of outstanding stock4) the firm must be a domestic corporation4) the firm must be a domestic corporation5) certain states do not permit “S” corp. 5) certain states do not permit “S” corp. StatusStatus6) all stockholders must agree to the decision for 6) all stockholders must agree to the decision for

form an S-corporationform an S-corporation7) company cannot be an ineligible corporation 7) company cannot be an ineligible corporation

Incorporating a Small BusinessIncorporating a Small Business legal counsel is recommendedlegal counsel is recommended

most states have specific standardsmost states have specific standards

Articles of IncorporationArticles of Incorporation

Articles of IncorporationArticles of Incorporation At a minimum must include:At a minimum must include:

– Corporate nameCorporate name– Location of the companyLocation of the company– Purpose of the companyPurpose of the company– DurationDuration– Names and addresses of incorporatorsNames and addresses of incorporators– Amount and type of stock to be issuedAmount and type of stock to be issued– Capital required at time of incorporationCapital required at time of incorporation

Articles of Incorporation (cont’d)Articles of Incorporation (cont’d)

– Provisions for stockholders preemptive Provisions for stockholders preemptive rightsrights

– Names and addresses of initial directors Names and addresses of initial directors and officersand officers

– Provisions for regulation of the affairs of Provisions for regulation of the affairs of the companythe company

– Right to amend, alter, or repeal Right to amend, alter, or repeal corporate provisionscorporate provisions

– BylawsBylaws

Limited Liability CompanyLimited Liability Company ““combines aspects of partnerships combines aspects of partnerships

with the limited liability of a with the limited liability of a corporation”corporation”

new form of business ownership new form of business ownership approved in all statesapproved in all states owners are known as membersowners are known as members

Limited Liability Company (cont’d)Limited Liability Company (cont’d)

Advantages:Advantages: 1) corporate-like limited liability and 1) corporate-like limited liability and

asset protectionasset protection 2) flexibility of partnership2) flexibility of partnership 3) no significant requirements3) no significant requirements 4) tax status of partnership4) tax status of partnership

Joint VentureJoint Venture ““an agreement between two or more an agreement between two or more

groups to form a business entity in groups to form a business entity in order to achieve a specific goal or to order to achieve a specific goal or to operate for a specific period of time”operate for a specific period of time”

(Pride, Hughes, Kapoor 2005)(Pride, Hughes, Kapoor 2005)- acts like a general partnership, but - acts like a general partnership, but is clearly for a limited period of time is clearly for a limited period of time or a single projector a single project

Small BusinessSmall Business “ “ a business which is independently a business which is independently

owned and operated and is not owned and operated and is not dominant in its field of operations”dominant in its field of operations”

1) quantitative criteria1) quantitative criteria

2) qualitative criteria2) qualitative criteria

Quantitative CriteriaQuantitative Criteria number of employeesnumber of employees

dollar sales volumedollar sales volume

Qualitative CriteriaQualitative Criteria Actively managed by its owner(s)Actively managed by its owner(s) Highly personalizedHighly personalized Largely local in its area of operationsLargely local in its area of operations Largely dependent on internal Largely dependent on internal

sources of capital to finance its sources of capital to finance its growthgrowth

The business is not a major force The business is not a major force (dominant) in the particular industry(dominant) in the particular industry

Small Business Adm. (SBA) Small Business Adm. (SBA) GuidelinesGuidelines

Manufacturing: maximum of 500 – Manufacturing: maximum of 500 – 1500 employees1500 employees

Wholesaling: maximum of 100 Wholesaling: maximum of 100 employeesemployees

Retailing: yearly sales/receipts from Retailing: yearly sales/receipts from $6million - $24.5 million$6million - $24.5 million

Mining: maximum of 500 employeesMining: maximum of 500 employees

SBA Guidelines (cont’d)SBA Guidelines (cont’d) General Construction: average General Construction: average

annual receipts from $12 million- annual receipts from $12 million- $28.5 million$28.5 million

Special Trade Construction: annual Special Trade Construction: annual sales up to $12 millionsales up to $12 million

Agriculture: maximum annual Agriculture: maximum annual receipts of $.75 million - $5 millionreceipts of $.75 million - $5 million

Services: maximum annual receipts Services: maximum annual receipts ranging from $6 million - $29 millionranging from $6 million - $29 million

Small Business SectorSmall Business Sector Since 1995, the number of small Since 1995, the number of small

businesses in the United States has businesses in the United States has increased 49%increased 49%

Over 70% of new businesses can be Over 70% of new businesses can be expected to fail within their first 5 expected to fail within their first 5 years…..the primary reason is years…..the primary reason is mismanagementmismanagement

Small Business IndustriesSmall Business Industries Distribution Industries: concerned Distribution Industries: concerned

with the movement of goods from with the movement of goods from producers to consumers (33%)producers to consumers (33%)

Service Industries: (48%)Service Industries: (48%)– 75% nonfinancial services75% nonfinancial services– 8% financial services8% financial services

Production Industries: (19%)Production Industries: (19%)

Characteristics of Small Business Characteristics of Small Business OwnersOwners

Motivated to achieveMotivated to achieve Calculated risk takersCalculated risk takers Self-confidentSelf-confident OrderlyOrderly Willing to work long hoursWilling to work long hours HealthyHealthy CommittedCommitted AntistatusAntistatus Superior conceptual abilitySuperior conceptual ability OptimisticOptimistic

Reasons Why Small Businesses Reasons Why Small Businesses FailFail

1) capital: money-related problems1) capital: money-related problems

2) management: lack the skill to 2) management: lack the skill to manage money, time, personnel, manage money, time, personnel, and inventoryand inventory

3) planning: overexpansion3) planning: overexpansion