Chapter 3
Forms of
Ownership
of Small
Business
McGraw-Hill/Irwin
©2009 The McGraw-Hill Companies, All Rights Reserved
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3-1
Chapter
Forms Of
Business Ownership
Primary Legal Forms
Advantages & Disadvantages
Of Each Form
Other Legal Forms
McGraw-Hill/Irwin
©2009 The McGraw-Hill Companies, All Rights Reserved
3
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3-2
Right Legal Form:
Business Factors To Consider
Future Size
Nature
Desired Control
Legal Vulnerability
Tax Implications
Expected Profit (Loss)
Re-investment
Personal Cash Needs
PhotoLink/Getty Images
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3-3
McGraw-Hill/Irwin
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Relative
Positions Of Legal Forms
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3-4
Legal Form By Industry
Proprietorship
Partnership
Corporation
80%
70%
60%
50%
40%
30%
20%
10%
0%
Services
Trade
Construction
Finance/Ins. &
Real Estate
Manufacturing
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3-5
Legal Form
By Industry’s Receipts
Proprietorship
Partnership
Corporation
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Services
Trade
Construction
Finance/Ins. &
Real Estate
Manufacturing
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3-6
Proprietorship
Advantages/Disadvantages
Insert
Figure 3.2
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3-7
Partial List Of Federal
Tax Forms: Sole Proprietorship
Form 1040: Individual Income Tax
Return
Schedule C: Business Profit (Loss)
Schedule SE: Self-Employment Tax
Form 1040EZ: Estimated Tax For
Individuals
Form 4562: Depreciation & Amortization
Form 8829: Expenses For Business Use
Of Your Home
Employment Tax Forms
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3-8
Schedule C
Front
Back
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3-9
Partnership
Advantages/Disadvantages
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3-10
Operation of
General Partnership
Uniform Partnership Act
Partners Responsible
For Other Partners’
Actions
Liability:
 Personal Property At Risk
 All Debts Of Firm
Resolve Disputes
Among Partners(?)
S. Wanke/PhotoLink/Getty Images
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3-11
Types Of Partnerships
General
Partner
General
Partner
Partners Liable For
Each Others’ Actions
General
Partner
Manage With
Unlimited Liability
General
Partner
Limited
Partner
Limited
Partner
Limited
Partner
Liability = Capital
Contribution
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3-12
Partnership:
Legal/Tax Documents
Articles of Co-Partnership
Tax Forms
o Form 1065 K-1: Partner’s Share
Of
Income, Credit, Deductions
o Form 4562: Depreciation
o Form 1040: Individual Income Tax Return
o Schedule E: Supplemental Income & Loss
o Schedule SE: Self-Employment Tax
o Form 1040-ES: Estimated Tax For Individual
o Employment Tax Forms
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3-13
Form 1065 K-1 (Pages 1 & 2)
Front
Back
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3-14
Form 1065 K-1 (Pages 3 & 4)
Front
Back
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3-15
Corporation
Advantages/Disadvantages
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3-16
Form 1120A
Front
Back
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3-17
Form 1120 (Pages 1 & 2)
Front
Back
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3-18
Form 1120 (Page 3 & 4)
Front
Back
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3-19
Formation Of Corporation
Articles Of IncorporationFiled With State
Corporate CharterComes From State
Buy-Sell AgreementInclude In Articles Of
Incorporation
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3-20
Corporate Governance
Stockholders
Elects
Board Of
Directors
Appoints
Corporate
Officers
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3-21
S Corporation
Exempt From Multiple
Taxation
Less Than 100 Stockholders
One Stock Class- Common
No Corporations Or
Partnerships Can Be
Stockholders
Stockholders = U.S. Citizens
Or Permanent Residents
Early 1990s Lost Appeal
Because Of Tax Law Change
TAXES *
Royalty-Free/CORBIS
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3-22
Partial List Of Federal
Tax Forms: S Corporation
Form 1120S: Income Tax Return For S
Corporation
Form 1120S K-1: Shareholder’s
Share Of Income, Credit,
Deductions
Form 4625: Depreciation
Employment Tax Forms
Form 1040: Individual Tax Return
Schedule E: Supplemental Income
(Loss)
Schedule SE: Self-Employment Tax
From 1040ES: Estimated Tax For
Individuals
Other Forms
Royalty-Free/CORBIS
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3-23
Form 1120S (Page 1 & 2)
Front
Back
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3-24
Form 1120S (Page 3)
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3-25
Limited
Liability Companies
Since 1977
Benefits:
Limited Liability
Taxed As Partnership
Emma Lee/Life File/Getty Images
Similar To S Corporation
Owners = Members
Lifespan- Determined At
Organization
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3-26
Other Legal
Forms Of Ownership
Limited Liability Partnership
o Protects Individual Partners
o Not Recognized By Every State
Family Limited Liability
Partnership
o Partners Related
o Agriculture/Family Farms
F. Schussler/PhotoLink/Getty Images
Professional Service Corporation
o Provides Licensed Professional Services
o Doctors, Lawyers, & Accountants
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3-27
Other Legal
Forms Of Ownership (cont’d)
Nonprofit Corporations
Civic, Charitable, Educational,
Religious
Tax Exempt
Cooperative
Independent Producers
Buys/Sells For Clients
Joint Venture
Fractional Ownership
Royalty-Free/CORBIS
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3-28
Checklist For
Legal Form Evaluation
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3-29