Choosing a Form of Ownership Chapter 3 Forms
- Slides: 35
Choosing a Form of Ownership Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 1
Choosing a Form of Ownership There is no one “best” form of ownership n The best form of ownership depends on an entrepreneur’s particular situation n The key to choosing a form of ownership is understanding how each form’s characteristics affect an entrepreneur’s specific business and personal circumstances n Copyright 2009 Pearson Education, Inc. Publishing as Prentice Copyright © 2009 © Pearson Education, Inc. Publishing as Prentice Hall 2
Factors to Consider Tax considerations n Liability exposure n Start-up capital requirements n Control n Managerial ability n Business goals n Management succession plans n Cost of formation n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 3
Forms of Ownership Sole Proprietorship n Partnership n Corporation n S Corporation n Limited Liability Company n Joint Venture n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Data Source: Statistics of Income Bulletin, Internal Revenue Service, © October, 2006 5
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Data Source: Statistics of Income Bulletin, Internal Revenue Service, © October, 2006 6
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall Data Source: Statistics of Income Bulletin, Internal Revenue Service, © October, 2006 7
Advantages of the Sole Proprietorship Simple to create n Least costly form to begin n Profit incentive n Total decision-making authority n No special legal restrictions n Easy to discontinue n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 8
Disadvantages of the Sole Proprietorship n Unlimited personal liability Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 9
Liability Features of the Basic Forms of Ownership Sole Proprietorship Claims of Sole Proprietor’s Creditors Sole Proprietor’s Personal Assets Copyright 2009 Pearson Education, Inc. Publishing as Prentice Copyright © 2009 © Pearson Education, Inc. Publishing as Prentice Hall 10
Disadvantages of the Sole Proprietorship Unlimited personal liability n Limited access to capital n Limited skills and abilities n Feelings of isolation n Lack of continuity n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 11
Partnership An association of two or more people who co-own a business for the purpose of making a profit n Take the time to create a written partnership agreement! n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 12
Advantages of the Partnership Easy to establish n Complementary skills of partners n Division of profits n Larger pool of capital n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 13
Advantages of the Partnership Ability to attract limited partners n Minimal government regulation n Flexibility n Taxation n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14
Disadvantages of the Partnership n Unlimited liability of at least one partner Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15
Types of Partners n General partners Take an active role in managing a business Ø Have unlimited liability for the partnership’s debts Ø Every partnership must have at least one general partner Ø n Limited partners Cannot participate in the day-to-day management of a company Ø Have limited liability for the partnership’s debts Ø Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 16
Liability Features of the Basic Forms of Ownership Partnership Claims of Partnership’s Creditors General Partnership’s Assets Partner’s Personal Assets Copyright 2009 Pearson Education, Inc. Publishing as Prentice Copyright © 2009 © Pearson Education, Inc. Publishing as Prentice Hall General Partner’s Personal Assets 17
Disadvantages of the Partnership Unlimited liability of at least one partner n Capital accumulation n Difficulty in disposing of partnership interest n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 18
Disadvantages of the Partnership Lack of continuity n Potential for personality and authority conflicts n Partners bound by the law of agency n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 19
Limited Partnership A partnership composed of at least one general partner and one or more limited partners n The general partner in a limited partnership is treated exactly as in a general partnership n The limited partner has limited liability and is treated as an investor in the business n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 20
Liability Features of the Basic Forms of Ownership Limited Partnership Claims of Partnership’s Creditors r e i r Bar Partnership’s Assets General Partner’s Personal Assets Limited Partner’s Personal Assets Copyright 2009 Pearson Education, Inc. Publishing as Prentice Copyright © 2009 © Pearson Education, Inc. Publishing as Prentice Hall 21
The Corporation A separate legal entity from its owners n Types of corporations: n Ø Domestic - a corporation doing business in the state in which it is incorporated Ø Foreign - a corporation chartered in one state and doing business in another state Ø Alien - a corporation formed in another country but doing business in the United States Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 22
The Corporation n Types of corporations: Ø Publicly held - a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges Ø Closely held - a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 23
Advantages of the Corporation n Limited liability of the stockholders Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 24
Liability Features of the Basic Forms of Ownership Corporation Claims of Corporation’s Creditors r e i r Barr ier Corporation’s Assets Shareholder’s Personal Assets Copyright 2009 Pearson Education, Inc. Publishing as Prentice Copyright © 2009 © Pearson Education, Inc. Publishing as Prentice Hall 25
Advantages of the Corporation Limited liability of stockholders n Ability to attract capital n Ability to continue indefinitely n Transferable ownership n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 26
Disadvantages of the Corporation Cost and time of incorporating n “Double taxation” n Potential for diminished managerial incentives n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 27
Disadvantages of the Corporation Legal requirements and regulatory “red tape” n Potential loss of control by founder(s) n Piercing the corporate veil n Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 28
S Corporation n No different from any other corporation from a legal perspective For tax purposes, however, an S corporation is taxed like a partnership, passing all of its profits (or losses) through to the individual shareholders To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 29
Liability Features of the Basic Forms of Ownership S-Corporation Claims of S-Corporation’s Creditors Barr ier r e i r Bar S-Corporation’s Assets Shareholder’s Personal Assets Copyright 2009 Pearson Education, Inc. Publishing as Prentice Copyright © 2009 © Pearson Education, Inc. Publishing as Prentice Hall 30
S Corporation n n n Must be a U. S. -based corporation No nonresident alien shareholders Only one class of common stock No more than 100 shareholders (increased from 75) No more than 20% of corporate income from passive investment sources Corporations and partnerships cannot be shareholders Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 31
Limited Liability Company (LLC) Resembles an S Corporation but is not subject to the same restrictions n Two documents: n Ø Articles of organization Ø Operating agreement Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 32
Limited Liability Company (LLC) n An LLC cannot have more than two of these four corporate characteristics: Ø Limited liability Ø Continuity of life Ø Free transferability of interest Ø Centralized management Chapter 3 Forms of Ownership Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 33
Liability Features of the Basic Forms of Ownership Limited Liability Company (LLC) Claims of LLC’s Creditors Barr ier LLC’s Assets Member’s Personal Assets r e i r Bar Member’s Personal Assets Copyright 2009 Pearson Education, Inc. Publishing as Prentice Copyright © 2009 © Pearson Education, Inc. Publishing as Prentice Hall 34
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