McGraw-Hill/Irwin
3-1
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter
Forms Of Ownership
Of Small Business
3
Primary Legal Forms
Advantages & Disadvantages
Of Each Form
Other Legal Forms
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
McGraw-Hill/Irwin
PhotoLink/Getty Images
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Relative Positions
Of Legal Forms
McGraw-Hill/Irwin
3-4
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Legal Form By Industry
Proprietorship
Partnership
Corporation
80%
70%
60%
50%
40%
30%
20%
10%
0%
Services
McGraw-Hill/Irwin
Trade
Construction
Finance/Ins. &
Real Estate
Manufacturing
3-5
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Legal Form
By Industry’s Receipts
Proprietorship
Partnership
Corporation
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Services
McGraw-Hill/Irwin
Trade
Construction
Finance/Ins. &
Real Estate
Manufacturing
3-6
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Advantages/Disadvantages
Of Proprietorship
Insert
Figure 3.2
McGraw-Hill/Irwin
3-7
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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 1040ES: Estimated Tax For
Individuals
Form 4562: Depreciation & Amortization
Form 8829: Expenses For Business Use
Of Your Home
Forms 941, W-2, W-3: Employment Tax
Forms
McGraw-Hill/Irwin
3-8
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Schedule C
Front
Back
McGraw-Hill/Irwin
3-9
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Advantages/Disadvantages
Of Partnership
McGraw-Hill/Irwin
3-10
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
General Partnership
Operations
Uniform Partnership Act
Partners Responsible For Other
Partners’ Actions
Liability:
Personal Property At Risk
All Debts Of Firm
Resolve Disputes Among
Partners(?)
McGraw-Hill/Irwin
S. Wanke/PhotoLink/Getty Images
3-11
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Types Of Partnerships
General
Partner
General
Partner
General
Partner
Partners Liable For
Each Others’ Actions
General
Partner
Limited
Partner
McGraw-Hill/Irwin
Limited
Partner
Manage With
Unlimited Liability
Limited
Partner
Liability = Capital
Contribution
3-12
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Partnership:
Legal/Tax Documents
Articles
of Co-Partnership
Tax Forms
1065 K-1: Partner’s Share
Of Income, Credit, Deductions
 Form 4562: Depreciation
 Form 1040: Individual Income Tax Return
 Schedule E: Supplemental Income & Loss
 Schedule SE: Self-Employment Tax
 Form 1040-ES: Estimated Tax For Individual
 Form
McGraw-Hill/Irwin
3-13
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Form 1065 K-1 (Pages 1 & 2)
Front
Back
McGraw-Hill/Irwin
3-14
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Form 1065 K-1 (Pages 3 & 4)
Front
Back
McGraw-Hill/Irwin
3-15
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Advantages/Disadvantages
Of Corporation
McGraw-Hill/Irwin
3-16
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Form 1120A
Front
Back
McGraw-Hill/Irwin
3-17
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Form 1120 (Pages 1 & 2)
Front
Back
McGraw-Hill/Irwin
3-18
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Form 1120 (Page 3 & 4)
Front
Back
McGraw-Hill/Irwin
3-19
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Formation Of Corporation
Articles Of IncorporationFiled With State
Corporate CharterComes From State
Buy-Sell Agreement- Include
In Articles Of Incorporation
McGraw-Hill/Irwin
3-20
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Corporate Governance
Stockholders
Elects
Board Of
Directors
Appoints
Corporate
Officers
McGraw-Hill/Irwin
3-21
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S Corporation
Exempt From Multiple Taxation
Less Than 75 Stockholders
TAXES
One Class Of Stock
No Corporations/Partnerships Can Be
Stockholders
Stockholders= U.S. Citizens
Or Permanent Residents
Early 1990s Lost Appeal Because Of
Tax Law Change
Royalty-Free/CORBIS
McGraw-Hill/Irwin
3-22
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
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
 Forms 941, W-2, W-3: Employment Tax Forms
 Form 1040: Individual Income Tax Return
 Schedule E: Supplemental Income(Loss)
 Schedule SE: Self-Employment Tax
 From 1040ES: Estimated Tax For Individuals
 Other Forms
Royalty-Free/CORBIS
McGraw-Hill/Irwin
3-23
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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
McGraw-Hill/Irwin
3-24
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Other Legal
Forms Of Ownership
Limited
Liability Partnership
 Protects
Individual Partners
 Not Recognized By Every State
Family
Limited Liability
Partnership
 Partners
Related
 Agriculture/Family Farms
Professional
F. Schussler/PhotoLink/Getty Images
Service Corporation
 Provides
Licensed Professional Services
 Doctors, Lawyers, & Accountants
McGraw-Hill/Irwin
3-25
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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
McGraw-Hill/Irwin
Royalty-Free/CORBIS
3-26
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Form 1120S (Page 1 & 2)
Front
Back
McGraw-Hill/Irwin
3-27
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Form 1120S (Page 3)
McGraw-Hill/Irwin
3-28
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Checklist For
Legal Form Evaluation
McGraw-Hill/Irwin
3-29
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