Forms of Business Ownership

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Forms of Business
Ownership
Introduction
Sole Proprietorship
“a business owned by one person who is
subject to claims of creditors”
 Advantages: 1) ease of formation
2) retention of profits
3) tax advantages
4) control of decisions
5) flexibility
6) fewer gov’t. regulations
7) pride of ownership

Sole Proprietorship (cont’d)
 Disadvantages:
1) unlimited liability
2) limited capital
3) unstable business
life/lack of
continuity
4) limited operating/
mgt. skills
5) hiring employees
Partnership
 “the
voluntary association of two or
more people who have combined
their resources to carry on as coowners of a lawful enterprise for
their joint profit”
Advantages of Partnership
 1)
 2)
 3)
 4)
 5)
 6)
 7)
ease of formation
complementary skills
access to capital
tax advantages
retention of profits
group decision making
minimal governmental control
Disadvantages of Partnership
 1)
unlimited liability
 2) uncertain duration
 3) conflict
 4) dissolution
Types of Partnership
 1)
 2)
 3)
 4)
 5)
active/general partner
secret partner
silent partner
dormant partner
limited partner
Selecting a Partner
 “Don’t
go into business with a friend
because you will likely lose that
friend”
 Characteristics
of a “good” partner
Partnership Agreements
 advisable
even if the partners are
friends
 can delineate the responsibilities of
each partner and protect everyone
with an interest in the business
 Uniform Partnership Act
 Articles of Partnership
Articles of Partnership
should address the following:
 1) legal name of the partnership
 2) nature of the business
 3) duration of the partnership
 4) contributions
 5) sales, loans and leases
 6) withdrawals and salaries
 7) responsibility and authority
 8) dissolution
 9) arbitration

Corporation
 “an
artificial being, invisible,
intangible, and existing only in
contemplation of law; an entity that
is something that has a distinct
existence separate and apart from
the existence of its individual
members”
Corporation (cont’d)
 composed
of:
shareholders/stockholders
directors
officers
Advantages of Corporations
 1)
 2)
 3)
 4)
 5)
 6)
limited liability
transfer of ownership
stability/perpetual life
acquisition of capital
skilled managers
stockholders as customers
Disadvantages of Corporations
 1)
taxes
 2) rigidity
 3) shared ownership
 4) regulations
Types of Corporations
 1)
 2)
 3)
 4)
 5)
domestic
foreign
alien
publicly held/open
closely held/closed
“S” Corporations
 provided
for in subchapter S of the
tax code
 created especially for small business
 taxed like partnerships
“S” Corporations (cont’d)
 Advantages:
 1)
lower “current” income tax
 2) exemption from the corporate
alternative minimum tax
 3) flexibility in using different
accounting methods
“S” Corporations (cont’d)
 Disadvantages:
 1)
multistate “S” corporations
 2) banks may be reluctant to lend to
“S” corporations that distribute all
their earnings
 3) rigid restrictions
Restrictions of “S” Corporations:
1) limit of 75 stockholders
2) stockholders must be individuals, estates, or
certain trusts
3) no corporations, partnerships, or nonresident
aliens can be stockholders
3) only one class of outstanding stock
4) the firm must be a domestic corporation
5) certain states do not permit “S” corp. Status
6) all stockholders must agree to the decision for
form an S-corporation
7) company cannot be an ineligible corporation
Incorporating a Small Business
 legal
counsel is recommended
 most
states have specific standards
 Articles
of Incorporation
Articles of Incorporation
 At
a minimum must include:
– Corporate name
– Location of the company
– Purpose of the company
– Duration
– Names and addresses of incorporators
– Amount and type of stock to be issued
– Capital required at time of incorporation
Articles of Incorporation (cont’d)
– Provisions for stockholders preemptive
rights
– Names and addresses of initial directors
and officers
– Provisions for regulation of the affairs of
the company
– Right to amend, alter, or repeal
corporate provisions
– Bylaws
Limited Liability Company
 “combines
aspects of partnerships
with the limited liability of a
corporation”
 new form of business ownership
 approved in all states
 owners are known as members
Limited Liability Company (cont’d)
 Advantages:
 1)
corporate-like limited liability and
asset protection
 2) flexibility of partnership
 3) no significant requirements
 4) tax status of partnership
Joint Venture
 “an
agreement between two or more
groups to form a business entity in
order to achieve a specific goal or to
operate for a specific period of time”
(Pride, Hughes, Kapoor 2005)
- acts like a general partnership, but
is clearly for a limited period of time
or a single project
Small Business
“
a business which is independently
owned and operated and is not
dominant in its field of operations”
 1)
quantitative criteria
 2)
qualitative criteria
Quantitative Criteria
 number
 dollar
of employees
sales volume
Qualitative Criteria
 Actively
managed by its owner(s)
 Highly personalized
 Largely local in its area of operations
 Largely dependent on internal
sources of capital to finance its
growth
 The business is not a major force
(dominant) in the particular industry
Small Business Adm. (SBA)
Guidelines
 Manufacturing:
maximum of 500 –
1500 employees
 Wholesaling: maximum of 100
employees
 Retailing: yearly sales/receipts from
$6million - $24.5 million
 Mining: maximum of 500 employees
SBA Guidelines (cont’d)
 General
Construction: average
annual receipts from $12 million$28.5 million
 Special Trade Construction: annual
sales up to $12 million
 Agriculture: maximum annual
receipts of $.75 million - $5 million
 Services: maximum annual receipts
ranging from $6 million - $29 million
Small Business Sector
 Since
1995, the number of small
businesses in the United States has
increased 49%
 Over 70% of new businesses can be
expected to fail within their first 5
years…..the primary reason is
mismanagement
Small Business Industries
 Distribution
Industries: concerned
with the movement of goods from
producers to consumers (33%)
 Service Industries: (48%)
– 75% nonfinancial services
– 8% financial services
 Production
Industries: (19%)
Characteristics of Small Business
Owners
Motivated to achieve
 Calculated risk takers
 Self-confident
 Orderly
 Willing to work long hours
 Healthy
 Committed
 Antistatus
 Superior conceptual ability
 Optimistic

Reasons Why Small Businesses
Fail
 1)
capital: money-related problems
 2)
management: lack the skill to
manage money, time, personnel,
and inventory
 3)
planning: overexpansion
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