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1. Forms of Business Ownership CHAPTER 5

2. Watch Shark Tank Angel Investor 5 - 2 Ch, 5: Forms of Business Ownership

3. 5 - 3 Ch, 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.

4. 5 - 4 Ch, 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

5. 5 - 5 Ch, 5: Forms of Business Ownership Major Forms of Ownership Sole Proprietorship Partnership Corporation S Corporation Limited Liability Company Joint Venture

6. 5 - 6 Ch, 5: Forms of Business Ownership Major Forms of Ownership Sole Proprietorship A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of  business entity  that is owned and run by one individual and in which there is no legal distinction between the owner and the business.

7. Advantages It is easy to organize this business. Only small amounts of capital are needed to start and run a business. It permits a high degree of flexibility to the owner since he/she is the boss of the business establishment. Due to the owner's unlimited liability, some creditors are more willing to extend credit. The owner receives all the profit of the business. No risk of fraud by a partner. It is easier if you are a good leader. You are your own boss. 5 - 7 Ch, 5: Forms of Business Ownership

8. Disadvantages Has limited resources. Banks are reluctant to grant loans to proprietorship considering its small assets and high mortality rate. Unlimited liability for business debts. The single owner is responsible for paying all debts and damages of their business. If the firm fails, creditors may force the sale of the proprietor's personal property as well as their business property to satisfy their claim. When the owner dies, the continuation of the business is difficult, because a new owner must typically accept all liabilities of the business. 5 - 8 Ch, 5: Forms of Business Ownership

9. 5 - 9 Ch, 5: Forms of Business Ownership FIGURE 5.1 (A) Forms of Business Ownership – Percentage of Business

10. 5 - 10 Ch, 5: Forms of Business Ownership FIGURE 5.1 (B) Forms of Business Ownership - Percentage of Sales

11. 5 - 11 Ch, 5: Forms of Business Ownership 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

12. 5 - 12 Ch, 5: Forms of Business Ownership Disadvantages of the Sole Proprietorship Unlimited personal liability

13. 5 - 13 Ch, 5: Forms of Business Ownership Liability Features of the Basic Forms of Ownership Sole Proprietorship Claims of Sole Proprietor’s Creditors Sole Proprietor’s Personal Assets

14. 5 - 14 Ch, 5: Forms of Business Ownership 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

15. 5 - 15 Ch, 5: Forms of Business Ownership 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.

16. 5 - 16 Ch, 5: Forms of Business Ownership

17. 5 - 17 Ch, 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

18. 5 - 18 Ch, 5: Forms of Business Ownership

19. 5 - 19 Ch, 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.

20. 5 - 20 Ch, 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

21. 5 - 21 Ch, 5: Forms of Business Ownership Disadvantages of the Partnership Unlimited liability of at least one partner

22. 5 - 22 Ch, 5: Forms of Business Ownership Liability Features of the Basic Forms of Ownership Partnership Claims of Partnership’s Creditors Partnership’s Assets General Partner’s Personal Assets General Partner’s Personal Assets

23. 5 - 23 Ch, 5: Forms of Business Ownership Disadvantages of the Partnership 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 and authority conflicts Partners bound by law of agency

24. 5 - 24 Ch, 5: Forms of Business Ownership 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.

25. 5 - 25 Ch, 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.

26. 5 - 26 Ch, 5: Forms of Business Ownership 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.

27. 5 - 27 Ch, 5: Forms of Business Ownership Advantages of the Corporation Limited liability of stockholders

28. 5 - 28 Ch, 5: Forms of Business Ownership Liability Features of the Basic Forms of Ownership Corporation Claims of Corporation’s Creditors Corporation’s Assets Shareholder’s Personal Assets Shareholder’s Personal Assets barrier barrier

29. 5 - 29 Ch, 5: Forms of Business Ownership Advantages of the Corporation Limited liability of stockholders Ability to attract capital Ability to continue indefinitely Transferable ownership

30. 5 - 30 Ch, 5: Forms of Business Ownership 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)

31. 5 - 31 Ch, 5: Forms of Business Ownership 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.

32. 5 - 32 Ch, 5: Forms of Business Ownership Liability Features of the Basic Forms of Ownership S-Corporation Claims of S-Corporation’s Creditors S-Corporation’s Assets Shareholder’s Personal Assets Shareholder’s Personal Assets barrier barrier

33. 5 - 33 Ch, 5: Forms of Business Ownership Limited Liability Company (LLC) Resembles an S Corporation but is not subject to the same restrictions. Two documents required: Articles of organization Operating agreement

34. 5 - 34 Ch, 5: Forms of Business Ownership Limited Liability Company (LLC) An LLC cannot have more than two of these four corporate characteristics: Limited liability Continuity of life Free transferability of interest Centralized management

35. 5 - 35 Ch, 5: Forms of Business Ownership Liability Features of the Basic Forms of Ownership Limited Liability Company - LLC Claims of LLC’s Creditors LLC’s Assets Member’s Personal Assets Member’s Personal Assets barrier barrier

36. 5 - 36 Ch, 5: Forms of Business Ownership 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