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PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie Cook
After studying this chapter, you should be able to:
1. Describe the characteristics and value of a strong management team.
2. Explain the common legal forms of organization used by small businesses.
3. Identify factors to consider in choosing among the primary legal forms of organization.
4. Describe the unique features and restrictions of specialized organizational forms such as limited partnerships, S corporations, and limited liability companies.
Sole Proprietorship (cont’d)Sole Proprietorship (cont’d)Sole Proprietorship (cont’d)Sole Proprietorship (cont’d)
• Disadvantages–Bears all business risk.–Is subject to all claims of creditors.–Has unlimited personal liability for business–Receives no tax free benefits as an employee–Death/incapacity of owner terminates business–Is limited to the proprietor’s personal capital.–is taxed on business income as personal income.
The Partnership OptionThe Partnership OptionThe Partnership OptionThe Partnership Option
• Partnership–A legal entity formed by two or more co-owners to
carry on a business for profit.
• Partner Qualifications–Required: of legal age to contract–Desired: Honest, healthy, capable, and compatible
• Questions about Partnership Formation–What is our business concept?–How are we going to structure ownership?–Why do we need each other?–How do our lifestyles differ?
Corporate Charter: Articles of IncorporationCorporate Charter: Articles of IncorporationCorporate Charter: Articles of IncorporationCorporate Charter: Articles of Incorporation
• Name of company• Formal statement of
formation• Type of Business• Location• Duration• Classes and
preferences of stock• Number and par value
of authorized shares
• Voting privileges for each class of stock
• Names of incorporators and directors
• Capital stockholders• Statement of limited
liability for stockholders• Statement of directors’
Comparison of Legal Forms of OrganizationComparison of Legal Forms of OrganizationComparison of Legal Forms of OrganizationComparison of Legal Forms of Organization
Sole proprietorship
General partnership
Corporation
Form oforganizationpreferred
Minimum requirements;generally no registrationor filing fee
Minimum requirements; generally no registration orfiling fee; written partnershipagreement not legally requiredbut strongly suggested
Most expensive and greatestrequirements; filing fees; compliance with state regulations for corporations
Proprietorship orgeneral partnership
Unlimited liability
Unlimited liability
Liability limited to investmentin company
Corporation
Limited to proprietor’spersonal capital
Limited to partner’sability and desire tocontribute capital
Usually the most attractive form forraising capital
Rights and Legal Status of StockholdersRights and Legal Status of StockholdersRights and Legal Status of StockholdersRights and Legal Status of Stockholders
• Stock Certificate–A document specifying the number of shares of
stock owned by a shareholder
• Pre-emptive Right–The right of stockholders to buy new shares of
stock before they are offered to the public.
• Legal Status–Ownership provides control over the firm.–Ownership limits liability to investment in the firm.–Ownership can be transferred without affecting
Choosing an Organizational FormChoosing an Organizational FormChoosing an Organizational FormChoosing an Organizational Form
• Factors that affect the choice of the firm’s structure:–Initial organizational costs and requirements–Limited versus unlimited liability for the owners–Continuity of business–Transferability of ownership–Management control–Attractiveness for raising equity capital–Income taxes
Specialized Forms of Organization (cont’d)Specialized Forms of Organization (cont’d)Specialized Forms of Organization (cont’d)Specialized Forms of Organization (cont’d)
• S Corporation–Eligibility Requirements
No more than 75 stockholdersAll stockholders must be individualsOnly one class of stock outstandingMust be a domestic corporationMust operate on a calendar year basisNo nonresident alien stockholders
–BenefitsLiability limited to investment in corporationDividends avoid double taxation (corporate and
Specialized Forms of Organization (cont’d)Specialized Forms of Organization (cont’d)Specialized Forms of Organization (cont’d)Specialized Forms of Organization (cont’d)
• Limited Liability Company–A corporation in which stockholders have limited
liability but pay personal income taxes on the business profits.
Federal Income Taxes and Organizational Form:Federal Income Taxes and Organizational Form:How Businesses Are TaxedHow Businesses Are Taxed
Federal Income Taxes and Organizational Form:Federal Income Taxes and Organizational Form:How Businesses Are TaxedHow Businesses Are Taxed
CorporationExample of taxes due from the profits of a corporation. Any profits of the corporation that are distributed to the stockholders are taxed again as personal income.
Range of Taxable Income Tax Rate
$0 to $50,000 15%
$50,001 to $75,000 25%
$75,001 to $100,000 34%
$100,001 to $335,000 39%
Income x Tax Rate= TaxesFirst $50,000 15% $7,500Next $25,000 25% $6,250Next $25,000 34% $8,500Remaining $50,000 39% $19,500Total $150,000 $41,750