Forms of Business Ownership Sole proprietorship Partnership Corporation

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Forms of Business Ownership • Sole proprietorship • Partnership • Corporation 5 -1

Forms of Business Ownership • Sole proprietorship • Partnership • Corporation 5 -1

Comparing Forms of Business Ownership 5 -2

Comparing Forms of Business Ownership 5 -2

Comparing Forms of Business Ownership 5 -3

Comparing Forms of Business Ownership 5 -3

Sole Proprietorship Businesses owned and operated by one individual; the most common form of

Sole Proprietorship Businesses owned and operated by one individual; the most common form of business organization in the United States • 15 -20 million in the U. S. • 80% of all businesses • Men 2 x more likely than women to start own business ✴ Restaurants ✴ Hair salons ✴ Flower shops ✴ Dog kennels ✴ Independent grocery stores 5 -4

Sole Proprietorship Advantages Disadvantages • Ease and cost of formation • Unlimited liability •

Sole Proprietorship Advantages Disadvantages • Ease and cost of formation • Unlimited liability • Secrecy • Limited sources of funds • Distribution and use of profits • Limited skills • Flexibility and control of the • Lack of continuity business • Government regulation • Taxation • Lack of Qualified Employees • Taxation 5 -5

Partnership A form of business organization defined by the Uniform Partnership Act as “an

Partnership A form of business organization defined by the Uniform Partnership Act as “an association of two or more persons who carry on as co-owners of a business for profit” • General partnership • Limited partnership Articles of Partnership • Legal documents that set forth the basic agreement between partners 5 -6

Two Types of Partnerships General Partnership • A partnership that involves a complete sharing

Two Types of Partnerships General Partnership • A partnership that involves a complete sharing in both the management and the liability of the business Limited Partnership • A business organization that has at least one general partner, who assumes unlimited liability, and at least one limited partner whose liability is limited to his or her investment in the business 5 -7

Articles of Partnership 1. Name, purpose, location 2. Duration of the agreement 3. Authority

Articles of Partnership 1. Name, purpose, location 2. Duration of the agreement 3. Authority and responsibility of each partner 4. Character of partners (i. e. , general or limited, active or silent) 5. Amount of contribution from each partner 6. Division of profits or losses 7. Salaries of each partner 5 -8

Articles of Partnership (continued) 8. How much each partner is allowed to withdraw 9.

Articles of Partnership (continued) 8. How much each partner is allowed to withdraw 9. Death of partner 10. Sale of partnership interest 11. Arbitration of disputes 12. Required and prohibited actions 13. Absence and disability 14. Restrictive covenants 15. Buying and selling agreements 5 -9

Partnership Advantages Disadvantages • Ease of organization • Unlimited liability • Capital & credit

Partnership Advantages Disadvantages • Ease of organization • Unlimited liability • Capital & credit • Business responsibility • Knowledge & skills • Life of the partnership • Decision making • Distribution of profits • Regulatory controls • Limited sources of funds • Taxation of partnerships 5 -10

Keys to Success in Partnership • Keep profit sharing and ownership at 50 -50

Keys to Success in Partnership • Keep profit sharing and ownership at 50 -50 (not in my book) • Partners should have different & complementary skill sets • Honest is critical • Maintain face-to-face communications • Transparency – sharing information • Awareness of funding constraints and limited resources • To be successful, you need experience • Family is priority; limit associated problems • Do not become too infatuated with “the idea” think implementation • Couple optimism with realism in sales and growth expectations 5 -11

Corporations • Legal entities created by the state whose assets and liabilities are separate

Corporations • Legal entities created by the state whose assets and liabilities are separate from its owners • Typically owned by shareholders/stockholders • A corporation is created (incorporated) under the laws of the state in which it incorporates • The individuals creating the corporation are called incorporators 5 -12

Articles of Incorporation Legal documents filed with basic information about the business with the

Articles of Incorporation Legal documents filed with basic information about the business with the appropriate state office (often the secretary of state) • Common elements: • Name & address of corporation • Objectives of the corporation • Classes of stock (common, preferred, voting, nonvoting) • Number of shares of each class of stock • Financial capital required at time of incorporation 5 -13

Articles of Incorporation (continued) • Provisions for transferring shares of stock • Regulation of

Articles of Incorporation (continued) • Provisions for transferring shares of stock • Regulation of internal corporate affairs • Address of business office • Names and addresses of the initial board of directors • Names and addresses of the incorporators 5 -14

Types of Corporations Private corporation • A corporation owned by just one or a

Types of Corporations Private corporation • A corporation owned by just one or a few people who are closely involved in managing the business Public corporation • A corporation whose stock anyone may buy, sell, or trade Initial Public Offering • A private corporation who wishes to go “public” to raise additional capital and expand. The IPO is selling a corporation’s stock on public markets for the first time 5 -15

Types of Corporations (continued) Quasi-public corporation • Corporation owned and operated by the federal,

Types of Corporations (continued) Quasi-public corporation • Corporation owned and operated by the federal, state, or local government • NASA, U. S. Postal Service Non-profit corporation • Focuses on providing a service rather than earning a profit but are not owned by a government entity • The American Red Cross, The Conservation Fund 5 -16

Elements of a Corporation Board of directors: A group of individuals elected by the

Elements of a Corporation Board of directors: A group of individuals elected by the stockholders to oversee the general operation of the corporation who set the corporation’s long-range objectives. Inside Directors • Individuals who serve on a board and are employed by the corporation (usually executives of the corporation) Outside Directors • Individuals who serve on a board who are not directly affiliated with the corporation (usually executives of other corporations) 5 -17

Stock Ownership Preferred stock • A special type of stock whose owners, though not

Stock Ownership Preferred stock • A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do. Common Stock • Stock whose owners have voting rights in the corporation, yet do not receive preferential treatment regarding dividends. 5 -18

Corporations Advantages Disadvantages • Limited liability • Double taxation • Transfer of ownership •

Corporations Advantages Disadvantages • Limited liability • Double taxation • Transfer of ownership • Forming a corporation • Perpetual life • Disclosure of information • External sources of funds • Employee-owner • Expansion potential separation 5 -19

Other Types of Business Ownership Joint Venture • A partnership established for a specific

Other Types of Business Ownership Joint Venture • A partnership established for a specific project or for a limited time S-Corporation (S-Corp) • Corporation taxed as though it were a partnership with restrictions on shareholders. Very popular with entrepreneurs 5 -20

Other Types of Business Ownership (continued) Limited Liability Company (LLC) • Form of ownership

Other Types of Business Ownership (continued) Limited Liability Company (LLC) • Form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members Cooperative (Co-Op) • An organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization 5 -21

Trends in Business Ownership Merger • The combination of two companies (usually corporations) to

Trends in Business Ownership Merger • The combination of two companies (usually corporations) to form a new company Acquisition • The purchase of one company by another, usually by buying its stock and/or assuming its debt. Leveraged buyout (LBO) • A purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one) using the assets of the purchased company to guarantee repayment of the loan. 5 -22

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