6 - 1 Copyright © 2016 Pearson Education, Inc. Forms of Business Ownership 6 Section 2: The Entrepreneurial Journey Begins
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6 - 1Copyright © 2016 Pearson Education, Inc.
Forms of Business
Ownership
6
Section 2: The Entrepreneurial Journey Begins
Explain the advantages and disadvantages of a sole proprietorship and a partnership.
Describe the similarities and differences of the C corporation and the S corporation.
Understand the characteristics of the limited liability company.
Explain the process of creating a legal entity for a business.Understand the advantages and disadvantages of buying an
existing business.Define the steps involved in the right way to buy a business.Understand how the negotiation process works and identify
the factors that affect it.
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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.
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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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Sole Proprietorship
General Partnership
Limited Partnership
Corporation
S Corporation
Limited Liability Company
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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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Unlimited personal liability
The company’s debts are the owner’s debts.
Limited skills and capabilities
Feelings of isolation
Limited access to capital
Lack of continuity of the business
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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: states in writing the terms under which the partners agree to operate the partnership and that protects each partner’s interests in the business.
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Three key elements of any partnership under RUPA:
1. Common ownership in a business.
2. Agreement on how the business’s profits and losses will be shared.
3. The right to participate in managing the operation of a partnership.
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Easy to establish
Complementary skills of partners
Division of profits
Larger pool of capital
Ability to attract limited partners
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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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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
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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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(continued from 6-14)
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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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.
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Corporation: a separate legal entity from its owners.
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.
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Identify the company as a corporation by using “Inc.” or “Corporation” in the business name.
File all reports and pay all necessary fees required by the state in a timely manner.
Hold annual meetings to elect officers and directors.
Keep minutes of every meeting (formal and informal) of the officers and directors.
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Be sure that the corporation’s board makes all major decisions.
Make it clear that the business is a corporation – officers should sign all documents in the corporation’s name.
Keep corporate assets and the personal assets of the owners separate.
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(continued)
Traditional form of incorporation.
Pays taxes at the corporate tax rate and stockholders also pay taxes on dividends they receive at their individual tax rates.
Double taxation: a disadvantage of the corporate form of ownership in which the corporation’s profits are taxed twice, once at the corporate rate and again at the individual rate on the portion of profits distributed to shareholders as dividends.
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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.
Follow 1/3, 1/3, 1/3 rule of thumb.
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Resembles an S Corporation but is not subject to the same restrictions.
Two documents required:
1. Articles of organization: creates an LLC by establishing its name and address, method of management, its duration, etc.
2. Operating agreement: establishes for an LLC the provisions governing the way it will conduct business.
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The average cost to create a legal business entity is about $1,000, but it can range from $500 to $5,000.Can use Web sites like MyCorporation and
BizFilings and incorporate for just $100.But, be careful! The cost of filing incorrectly can
be high.States have different regulations on forming
business entities.
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