copyright © 2014 pearson education, inc. publishing as prentice hall 5 - 1 ch, 5: forms of business...
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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 5 - 1Ch, 5: Forms of Business Ownership
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 5 - 2Ch, 5: Forms of Business Ownership
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.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 5 - 3Ch, 5: Forms of Business Ownership
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
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Major Forms of Ownership
Sole Proprietorship General Partnership Limited Partnership Corporation S Corporation Limited Liability Company Joint Venture
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Percentage of Business
5 - 5Ch, 5: Forms of Business Ownership
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Percentage of Sales
5 - 6Ch, 5: Forms of Business Ownership
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Percentage of Net Income
5 - 7Ch, 5: Forms of Business Ownership
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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
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Disadvantages of the Sole Proprietorship
Unlimited personal liability
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Liability Features of the Basic Forms of Ownership
Sole ProprietorshipSole Proprietorship
Claims of Sole Proprietor’s CreditorsClaims of Sole Proprietor’s CreditorsClaims of Sole Proprietor’s CreditorsClaims of Sole Proprietor’s Creditors
Sole Proprietor’s Personal Sole Proprietor’s Personal AssetsAssets
Sole Proprietor’s Personal Sole Proprietor’s Personal AssetsAssets
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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
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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.
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Advantages of the Partnership
Easy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 5 - 14Ch, 5: Forms of Business Ownership
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.
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Types of Partners
Two types of limited partners:
1.Silent partners – not active in a business but are generally known to be members of the partnership
2.Dormant partners – neither active nor generally known to be associated with the business
5 - 15Ch, 5: Forms of Business Ownership
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 5 - 16Ch, 5: Forms of Business Ownership
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
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Disadvantages of the Partnership
Unlimited liability of at least one partner
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 5 - 18Ch, 5: Forms of Business Ownership
Liability Features of the Basic Forms of Ownership
Partnership
Claims of Partnership’s CreditorsClaims of Partnership’s Creditors
Partnership’s AssetsPartnership’s AssetsGeneralPartner’sPersonalAssets
GeneralPartner’sPersonalAssets
GeneralPartner’sPersonalAssets
GeneralPartner’sPersonalAssets
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Disadvantages of the Partnership
Unlimited liability of at least one partner Capital accumulation Difficulty in disposing of partnership interest
without dissolving the partnership Potential for personality and authority conflicts Partners bound by law of agency
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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.
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Limited Liability Partnerships
All partners in a business are limited partners.Gives the advantage of limited liability for the debts of the partnership.Does not pay taxes – income is passed through to the limited partners who pay taxes on their share of the company’s income.
5 - 21Ch, 5: Forms of Business Ownership
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 5 - 22Ch, 5: Forms of Business Ownership
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.
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Corporation
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.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 5 - 24Ch, 5: Forms of Business Ownership
Advantages of the Corporation
Limited liability of stockholders
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Liability Features of the Basic Forms of Ownership
Corporation
Claims of Corporation’s CreditorsClaims of Corporation’s Creditors
Corporation’s AssetsCorporation’s Assets
Shareholder’sPersonal AssetsShareholder’s
Personal AssetsShareholder’s
Personal AssetsShareholder’s
Personal Assets
barrier barrier barrier
barrier
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Advantages of the Corporation
Limited liability of stockholders Ability to attract capital Ability to continue indefinitely Transferable ownership
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Disadvantages of the Corporation
Cost and time of incorporation process Double taxation
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Average Tax Rate by Form of Ownership
5 - 28Ch, 5: Forms of Business Ownership
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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)
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S Corporation No different from any other corporation from a
legal perspective. An S corporation is taxed like a partnership,
passing all of its profits (or losses) through to individual shareholders.
To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year.
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Advantages of an S Corporation
Retains all of the advantages of regular corporation:
►Continuity of existence
►Transferability of ownership
►Limited personal liability for owners
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Liability Features of the Basic Forms of Ownership
S-Corporation
Claims of S-Corporation’s CreditorsClaims of S-Corporation’s Creditors
S-Corporation’s AssetsS-Corporation’s Assets
Shareholder’sPersonal AssetsShareholder’s
Personal AssetsShareholder’s
Personal AssetsShareholder’s
Personal Assets
barrier barrier barrier
barrier
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Disadvantages of an S Corporation
Entrepreneurs considering both S and C status should review the impact of the decision on their companies.
S corporation status is usually beneficial to start-up companies anticipating net losses because founders can use the loss to offset other income, and lower their tax bill.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 5 - 34Ch, 5: Forms of Business Ownership
Limited Liability Company (LLC)
Resembles an S Corporation but is not subject to the same restrictions.
Two documents required:
1. Articles of organization
2. Operating agreement
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Liability Features of the Basic Forms of Ownership
Limited Liability Company - LLC
Claims of LLC’s CreditorsClaims of LLC’s Creditors
LLC’s AssetsLLC’s Assets
Member’sPersonal Assets
Member’sPersonal Assets
Member’sPersonal Assets
Member’sPersonal Assets
barrier barrier barrier
barrier
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The Professional Corporation
Designed for professions – lawyers, doctors, dentists, accountants and other professionals
Created in the same manner as a corporation Identified by the abbreviations:
► P.C. – Professional Corporation
► P.A. – Professional Association
► S.C. – Service Corporation
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice HallCh, 5: Forms of Business Ownership
The Joint Venture
Much like a partnership, but it:
► Is formed for a specific purpose
► Has a beginning and an end
5 - 37
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 5 - 38Ch, 5: Forms of Business Ownership
Conclusion
The “right” choice of the form of ownership is unique to every entrepreneur and their business.
Each form has advantages and disadvantages.
The entrepreneur must be thoughtful and strategic about this important decision.