Forms of Business
Ownership
It’s just paper. All I own is a pickup
truck and a little Walmart stock.
………………………………..Sam Walton
Evaluation Criteria








Tax consideration
Liability exposure
Start-up and future
capital
requirement
Control
Managerial ability
Business goals
Management
succession plans
Cost of formation
Sole Proprietorship
A business owned and managed by one
individual; the business and the owner
are one and the same in the eyes of
the law
Sole Proprietorship
Advantages
 Simple to create
 Least costly form
 Profit incentive
 Total decisionmaking
 No special legal
restrictions
 Easy to discontinue
Sole Proprietorship
Disadvantages
 Unlimited personal
liability
 Limited skills and
abilities
 Feelings of isolation
 Limited access to
capital
 Lack of continuity of
business
Partnership
An association of
two or more
people who coown a business
for the purpose of
making a profit
A partnership agreement or the Uniform Partnership Act
Partnership
Advantages
 Easy to establish
 Complementary skills
 Division of profits
 Larger pool of capital
 Ability to attract
limited partners
 Little governmental
regulation
 Flexibility
 Taxation
Partnership
Disadvantages
 Unlimited liability
of at least one
 Difficulty in
disposing of
interest
 Lack of continuity
 Potential for
personality and
authority conflicts
 Partners bound by
law of agency
Special Partnerships



Limited partnership-composed of at least
one general partner and at least one
limited partner
Limited liability partnership-a special type
of limited partnership, in which all
partners are limited partners
Master limited partnership-a partnership
whose shares are traded on stock
exchanges, just like corporations
Corporations
A separate legal entity apart from its
owners which receives the right to
exist from the state in which in which
it is incorporated





Domestic
Foreign
Alien
Publicly held
Closely held
Corporations
Certificate of Incorporation
 Name
 Statement of purpose
 Time horizon
 Names and addresses of incorporators
 Place of business
 Capital stock authorization’
 Capital required at time of incorporation
 Provisions for preemptive rights
 Restrictions on transfering shares
 Names and addresses of officers
 By-laws
Corporations
Advantages
 Limited liability of
stockholders
 Ability to attract
capital
 Ability to continue
indefinitely
 Transferable
ownership
Corporations
Disadvantages
 Cost and time in
incorporating
 Double taxation
 Potential for
diminished
incentives
 Legal requirements
and red tape
 Potential loss of
control
An S Corporation
A corporation that retains the legal
characteristics of a regular C
corporation but has the advantage of
being taxed as a partnership if it
meets certain criteria:
Domestic US corporation
No nonresident alien stockholder
One class of common stock
Limit shareholders
No more than 100 shareholders
Less than 25% of gross revenues passive
S Corporation
Advantages
 All of advantages of a regular C
corporation
 Single taxation
 Avoids tax on appreciation of asset sold
 Pay SSS for employees
 Different lines of businesses as
subsidiaries, simpler tax filing
S Corporation




Highly profitable service companies with
large number of shareholders for whom
profits are compensation or retirement
benefits
Fast-growing companies that must retain
earnings to finance growth
Corporations in which the loss of benefits
exceed tax savings
Corporations with sizable net operating
losses
S Corporation
Liquidating
 Pay all taxes and debts
 Obtain written approval of
shareholders to dissolve company
 File statement of intent to dissolve
with secretary of state
 Distribute all remaining assets
Limited Liability Company
A relatively new form of ownership that, like an S
corporation, is a cross between a partnership
and a corporation; it is not subject to many of
the restrictions imposed on S corporations; only
2 of the following:
Limited liability
Continuity of life
Free transferability of interest
Centralized management
Limited Liability Corporation


Articles of organization-name and
address, method of management,
duration, names and addresses of
each organizer
Operating agreement-no more than 2
of: limited liability, continuity of life,
free transferability of interest,
centralized management
Limited Liability Corporation







Limited personal liability
No limit on number of shareholders
No ban on nonresident alien
No restriction on a member’s ability to manage
the company
Avoids double taxation
Flexibility to divide income as owners see fit
Not subject to self-employment tax except for
managing member
 Professional
Corporationlawyers, accountants, doctors,
dentists, etc.
 Joint Venture-partnership
formed for a specific purpose