ESSEN SSENTI TIAL ALS S OF E NTREPRENEURSHIP NTREPRENE URSHIP AND SMALL BUSINESS MANAGEMENT ● 6E Chapter 5: Forms of Business Organization
CHAPTER
Choosing a Form of Ownership
5
Forms of Business Ownership
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Ch, 5: Forms of Bu siness Ownership
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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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Major Forms of Ownership
Tax considerations Liability exposure Start-up and future capital requirements Control Managerial ability Business goals Management succession plans Cost of formation
Ch, 5: Forms of Bu siness Ownership
The best form of ownership depends on an entrepreneur’s particular situation.
Ch, 5: Forms of Business Ownership
Factors Affecting the Choice
There is no one “best” form of ownership.
Sole Proprietorship
Partnership
Corporation
S Corporation
Limited Liability Company
Joint Venture
Ch, 5: Forms of Business Ownership
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FIGURE 5.1 (A)
FIGURE 5.1 (B)
Forms of Business Ownership Ownership – Percentage of Business
Forms of Business Ownership Ownership Percentage of Sales
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Ch, 5: Forms of Business Ownership
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ESSENTIALS OF E NTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT ● 6E Chapter 5: Forms of Business Organization
Advantages of the Sole Proprietorship
Ch, 5: Forms of Bu siness Ownership
Simple to create
Least costly form to begin
Profit incentive
Total decision making authority
FIGURE 5.1 (C)
No special legal restrictions
Forms of Business Ownership Percentage of Sales
Easy to discontinue
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Ch, 5: Forms of Business Ownership
Disadvantages of the Sole Proprietorship
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Liability Features of the Basic Forms of Ownership
Unlimited personal liability
Sole Proprietorship Claims of Sole Proprietor’s Creditors
Sole Proprietor’s Personal Assets
Ch, 5: Forms of Bu siness Ownership
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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
Ch, 5: Forms of Bu siness Ownership
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Partnership
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An association of two or more people who co-own a business for the purpose of making a profit.
A l w a y s wise to create a partnership
agreement.
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The best partnerships are built on trust and respect.
Ch, 5: Forms of Business Ownership
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ESSENTIALS OF E NTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT ● 6E Chapter 5: Forms of Business Organization
Types of Partners
Advantages of the Partnership
Easy to establish
Complementary skills of partners
Division of profits
Larger pool of capital
Ability to attract limited 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.
Ch, 5: Forms of Bu siness Ownership
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Ch, 5: Forms of Business Ownership
Easy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners Minimal government regulation Flexibility Taxation
Ch, 5: Forms of Bu siness Ownership
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Claims of Partnership’s Creditors
Unlimited liability of at least one partner
Capital accumulation
Ch, 5: Forms of Bu siness Ownership
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Disadvantages of the Partnership
Partnership
Partnership’s Assets
Unlimited liability of at least one partner
Ch, 5: Forms of Business Ownership
Liability Features of the Basic Forms of Ownership
General Partner’s Personal Assets
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Disadvantages of the Partnership
Advantages of the Partnership
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General Partner’s Personal Assets
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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
Ch, 5: Forms of Business Ownership
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ESSENTIALS OF E NTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT ● 6E Chapter 5: Forms of Business Organization
Corporation
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.
Ch, 5: Forms of Bu siness Ownership
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A separate legal entity from its ow ners. Types of corporations: D o m e s t i c – 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 w hich it is incorporated. Alien – a corporation formed in another country but doing business in the United States.
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Corporation
Ch, 5: Forms of Business Ownership
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Advantages of the Corporation
Types of corporations: P u b l i c l y h e l d – a corporation that has
a large number of shareholders and whose stock usually is traded on one of the large stock exchanges. C l o s e l y h e l d – a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends.
Ch, 5: Forms of Bu siness Ownership
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Liability Features of the Basic Forms of Ownership
Ch, 5: Forms of Bu siness Ownership
Claims of Corporation’s Creditors
Corporation’s Assets
Ch, 5: Forms of Bu siness Ownership
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Advantages of the Corporation
Corporation
Shareholder’s Personal Assets
Limited liability of stockholders
Limited liability of stockholders
Ability to attract capital
Ability to continue indefinitely
Transferable ownership
Shareholder’s Personal Assets
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Ch, 5: Forms of Business Ownership
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ESSENTIALS OF E NTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT ● 6E Chapter 5: Forms of Business Organization
Disadvantages of the Corporation
S 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)
Ch, 5: Forms of Bu siness Ownership
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No different from any other corporation from a legal perspective. An S corporation is taxed like a partners hip, passing all of its profits (or losses) through to individual shareholders. To elect “S” status, all share holders must consent, and the corporation must file with the IRS within the first 75 days of its tax year.
Ch, 5: Forms of Business Ownership
S-Corporation
Claims of S-Corporation’s Creditors
S-Corporation’s Assets
Ch, 5: Forms of Bu siness Ownership
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Limited Liability Company (LLC)
Liability Features of the Basic Forms of Ownership
Shareholder’s Personal Assets
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Resembles an S Corporation but is n o t subject to the same restrictions. Two documents required:
Articles of organization
Operating agreement
Shareholder’s Personal Assets
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Ch, 5: Forms of Bu siness Ownership
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Limited Liability Company (LLC)
Liability Features of the Basic Forms of Ownership
An LLC cannot have more than t w o of these four corporate characteristics:
Limited Liability Company - LLC
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Claims of LLC’s Creditors
1. Limited liability 2. Continuity of life LLC’s Assets
3. Free transferability of interest 4. Centralized management
Ch, 5: Forms of Bu siness Ownership
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Member’s Personal Assets 5-29
Ch, 5: Forms of Business Ownership
Member’s Personal Assets
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ESSENTIALS OF E NTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT ● 6E Chapter 5: Forms of Business Organization
The Professional Corporation
The Joint Venture
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
Ch, 5: Forms of Bu siness Ownership
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Much like a partnership, but it:
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Is formed for a specific purpose
Has a beginning and an end
Ch, 5: Forms of Business Ownership
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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.
Ch, 5: Forms of Bu siness Ownership
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Ch, 5: Forms of Bu siness Ownership
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