FORMS OF BUSINESS ORGANIZATION FORMS OF BUSINESS ORGANIZATION

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FORMS OF BUSINESS ORGANIZATION

FORMS OF BUSINESS ORGANIZATION

FORMS OF BUSINESS ORGANIZATION Introduction and Understanding of Ñ Three Principal Forms of Business

FORMS OF BUSINESS ORGANIZATION Introduction and Understanding of Ñ Three Principal Forms of Business Organization Ñ Essential Attributes and Characteristics Ñ Analyzing Business Needs and Selecting Appropriate Business Form

Organizational Form: Questions to Ask How many “Owners” will there be today? In the

Organizational Form: Questions to Ask How many “Owners” will there be today? In the future? Costs to Form and Operate? Taxes: Will there be any Income to tax? All taxes come due eventually! Is Limiting Liability Important? What kinds of Liability: Contractual or Tort (Express and Implied Warranties)? Obtaining Future Financial Capital?

FORMS OF BUSINESS ORGANIZATION Organizational Forms determined by Ñ Owner’s Objectives: Liability, Profit Ñ

FORMS OF BUSINESS ORGANIZATION Organizational Forms determined by Ñ Owner’s Objectives: Liability, Profit Ñ Ñ Distribution, Taxation and Capital Structure Dealings with Outside World: Other Owners, Heirs, Employees, Customers and Future Owners of Business Legislative Goals: Special-Purpose

FORMS OF BUSINESS ORGANIZATION Three Organizational Forms developed by Business Owners Ñ Sole Proprietorship

FORMS OF BUSINESS ORGANIZATION Three Organizational Forms developed by Business Owners Ñ Sole Proprietorship Ñ General Partnership Ñ Corporation

FORMS OF BUSINESS ORGANIZATION DEFINITIONS Sole Proprietorship Any Business Owned and Operated by an

FORMS OF BUSINESS ORGANIZATION DEFINITIONS Sole Proprietorship Any Business Owned and Operated by an Individual General Partnership Corporation Legislatively Created and Two or More Persons Regulated Operating a Governance, Business for a Ownership and Profit Financial Structure

FORMS OF BUSINESS ORGANIZATION FORMATION Sole Proprietorship General Partnership Corporation Filing of Written or

FORMS OF BUSINESS ORGANIZATION FORMATION Sole Proprietorship General Partnership Corporation Filing of Written or No Formalities Articles of Oral or Legal Incorporation Agreement or Documentation; with May be Implied Secretary of Implied from Conduct or State and Conduct or Actions Payment of Actions Fees

FORMS OF BUSINESS ORGANIZATION GOVERNING DOCUMENTS Sole General Proprietorship None Required Partnership None Required;

FORMS OF BUSINESS ORGANIZATION GOVERNING DOCUMENTS Sole General Proprietorship None Required Partnership None Required; Most have Agreement specifying Rights, Duties and Obligations Corporation Articles of Incorporation create Corporation; Bylaws prescribe its Operation

Articles of Incorporation

Articles of Incorporation

FORMS OF BUSINESS ORGANIZATION NATURE OF OWNERSHIP Sole General Proprietorship Partnership For Contribution, Partner

FORMS OF BUSINESS ORGANIZATION NATURE OF OWNERSHIP Sole General Proprietorship Partnership For Contribution, Partner receives Wholly Owned Proportionate by Single Share of Individual Profits/Losses and Partnership Property Corporation ÑResidual Claim on Corporate Equity and Right to Vote for Directors and Essential Governance

FORMS OF BUSINESS ORGANIZATION LIABILITY Sole Proprietorshi p General Partnership Partners are Sole Jointly

FORMS OF BUSINESS ORGANIZATION LIABILITY Sole Proprietorshi p General Partnership Partners are Sole Jointly and Proprietor Severally Liable Personally for all Partnership Liable for All Obligations, in Debts and Contract and in Obligations Tort Corporation ÑShareholder’s Liability limited to Extent of Capital Contribution [Limited Liability]

FORMS OF BUSINESS ORGANIZATION TAXATION Sole Proprietorshi p General Partnership Not a Taxable Entity;

FORMS OF BUSINESS ORGANIZATION TAXATION Sole Proprietorshi p General Partnership Not a Taxable Entity; Income (Loss) passes through to Partnership not a Taxable Entity; Allocations of Income and Loss allowed within Partnership Corporation ÑCorporation taxed as Separate Entity and Dividends/Cap ital Gains also Taxed [Double

FORMS OF BUSINESS ORGANIZATION MANAGEMENT Sole Proprietorship General Partnership Corporation ÑManaged by Board of

FORMS OF BUSINESS ORGANIZATION MANAGEMENT Sole Proprietorship General Partnership Corporation ÑManaged by Board of Sole All Partners have Directors elected Proprietor has Equal Rights in by Shareholders; Complete Partnership’s Board may Management Delegate Control and Conduct Authority to Appointed

FORMS OF BUSINESS ORGANIZATION TRANSFER OWNERSHIP INTERESTS Sole General Proprietorship Sole Proprietorship not Transferable;

FORMS OF BUSINESS ORGANIZATION TRANSFER OWNERSHIP INTERESTS Sole General Proprietorship Sole Proprietorship not Transferable; Property and Products are Transferable Partnership Corporation Freely Limited Right Transferable of Transfer through Formal subject to (NYSE) and Consent by Informal all Partners (Private Equity) Capital Markets

FORMS OF BUSINESS ORGANIZATION WITHDRAWAL OF OWNER Sole Proprietorship General Partnership Corporation Partner Death

FORMS OF BUSINESS ORGANIZATION WITHDRAWAL OF OWNER Sole Proprietorship General Partnership Corporation Partner Death Terminates or Withdrawal Corporation Sole has Unlimited may Proprietorshi Terminate Life p Partnership

THE AGENCY PROBLEM of Principal and Agent Conflict Occurs when (1) Goals (2) Principal

THE AGENCY PROBLEM of Principal and Agent Conflict Occurs when (1) Goals (2) Principal cannot Verify what Agent is doing Corporate Shareholders (Principal) Ñ Investor: Maximum Returns (High-Risk/High-Return) Ñ Cannot operate Business Ñ Liability is Limited: Can Lose only Investment and Corporate Management (Agent) Ñ Manager: Stable Returns (Low-Risk/Low-Return) Ñ Can operate Business Ñ Unlimited Liability: Lose Job and Income

FIXES FOR AGENCY PROBLEM Align Manager’s Interests with Shareholders with Incentive-based Compensation (Bonuses) and

FIXES FOR AGENCY PROBLEM Align Manager’s Interests with Shareholders with Incentive-based Compensation (Bonuses) and Stock Options linked to Corporation’s Performance Improve Corporate Governance with Shareholder Activism: Change Rules for Nominating Directors For Small Businesses: Shareholders and

SPECIAL PURPOSE ENTITIES (SPE) Limited Partnership Limited Liability Corporation (LLC) Subchapter-S Corporation General Partner

SPECIAL PURPOSE ENTITIES (SPE) Limited Partnership Limited Liability Corporation (LLC) Subchapter-S Corporation General Partner Identical to (Manager with Hybrid with “Subchapter. Corporate Unlimited C” Corporation Liability) and except Limited Partner Protections and Income/Losses (Investors with Partnership Tax Pass Through Limited Treatment to Shareholders Liability)