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  • Sir Richard Branson, created and applied the “Virgin” brand to music recording and distribution, airlines, telecommunications ventures, and in 2004, a space tourism venture. His first venture at age 16 was a magazine entitled, Student. Opportunity to discuss fact that all business start as entrepreneurships.

    1. 1. Form of Ownership
    2. 2. Introduction to Forms of Business and Formation of Partnerships I wanted to be an editor or a journalist. I wasn't really interested in being an entrepreneur, but I soon found I had to become an entrepreneur in order to keep my magazine going. Sir Richard Branson, Entrepreneur © 2010 The McGraw-Hill Companies, Inc. All rights reserved.
    3. 3. • Choice of Suitable form of ownership – A Crucial Decision • The form of ownership determines the • • • • • • Division of Profits Extent of liability Extent of Risk Division of Power Control of Owner Long term commitment, cannot be altered easiliy
    4. 4. Forms of Ownership 1) 2) 3) 4) 5) 6) Sole Proprietorship Joint Hindu Family Firm Partnership Firm Private Company Public Company Cooperative Society
    5. 5. Sole Proprietorship • A sole proprietorship has only one owner and is an extension of its owner • It is not a legal entity and cannot sue or be sued, so creditors/claimants sue the owner • Advantages: no formalities, taxes flow to owner, owner takes all profit and control • Disadvantage: owner bears all risk of loss 37 - 5
    6. 6. Advantages of the Sole Proprietorship • • • • • • Simple to create Least costly form to begin Profit incentive Total decision making authority No special legal restrictions Easy to discontinue
    7. 7. Disadvantages of the Sole Proprietorship  • • • • Unlimited personal liability Limited access to capital Limited skills and capabilities Feelings of isolation Lack of continuity
    8. 8. Questions????
    9. 9. Partnership • An association of two or more people who coown a business for the purpose of making a profit. • Take the time to create a written partnership agreement!
    10. 10. Advantages of the Partnership • • • • • • • • Easy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners Little government regulation Flexibility Taxation
    11. 11. Disadvantages of the Partnership • Unlimited liability of at least one partner
    12. 12. Non-Partners Not Liable to Third Parties • If a third person deals with two or more people who seem to be partners and is harmed, the third person may sue to recover damages from both of the apparent partners • RUPA Section 308(e): “persons who are not partners as to each other are not liable as partners to other persons.” 37 - 13
    13. 13. Questions????
    14. 14. The Corporation • A separate legal entity from its owners. • Types of corporations: – Domestic - a corporation doing business in the state in which it is incorporated. – Foreign - a corporation chartered in one state and doing business in another state. – Alien - a corporation formed in another country, but doing business in the United States.
    15. 15. Advantages of the Corporation • Limited liability of the stockholders
    16. 16. Disadvantages of the Corporation • Cost and time of incorporating • “Double taxation” • Potential for diminished managerial incentives • Legal requirements and regulatory “red tape” • Potential loss of control by founder(s)
    17. 17. Questions????
    18. 18. Limited Liability Company (LLC) • The LLC is a relatively new type of hybrid business structure that is now permissible in most states. • It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. • Formation is more complex and formal than that of a general partnership. • The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued, if desired, by a vote of the members at the time of expiration. • LLCs must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interests.
    19. 19. Limited Liability Company • A limited liability company (LLC) combines the nontax advantages of corporations with favorable tax treatment of partnerships • An LLC is owned by members, who may manage themselves or retain a manager to run the business • Members have limited liability for the obligations of the LLC 37 - 22
    20. 20. Questions????
    21. 21. Ideal Form of Ownership 1. Ease of Formation 2. Sufficient Finances 3. Limited Liability 4. Transferability of Interest 5. Efficient Management
    22. 22. Ideal Form of Ownership – Contd. 6. Continuity and Stability 7. Flexibility of Operations 8. Minimum Govt. Control 9. Retention of Business Secrets 10. Low Tax Burden
    23. 23. Factors to Choice of Ownership 1. Nature of Business 2. Size and Area of Operations 3. Degree of Control Desired 4. Amount of Capital Required 5. Degree of Risk Involves
    24. 24. Factors to Choice of Ownership – Contd.. 6. Division of Surplus 7. Duration of Business 8. Government regulation and control 9. Managerial Requirements
    25. 25. Role of Small Business – Indian Economy Perspective 1) 2) 3) 4) 5) 6) 7) 8) Generation of Employment Balanced Regional Development Optimization of Capital Mobilization of Local Resources Exchange Earnings Development of Entrepreneurship Egalitarian Society Social Advantage
    26. 26. Problems 1) 2) 3) 4) 5) 6) Shortage of Materials and Power Lack of Adequate Finance Outdated Technology Inadequate Marketing Facilities Weak Orgn Management Lack of Trained Personnel
    27. 27. Measures taken by Govt. 1. Protective Measures • • • Products reserved for exclusive production Concessions in excise, sales tax Govt. gives preference to products by SSI 2. Promotional Measures • • • • • • Imported raw materials are provided at reasonable rates Development of industrial estates to provide sheds to SSI Extension of price preference to products by SSI Preference given to SSI in land allocation Technical assistance by Central Small Industries Orgn Financial assistance by banks and public financial institutes.
    28. 28. Questions????
    29. 29. Factors to Consider • • • • • • • • Tax considerations Liability exposure Start-up capital requirements Control Managerial ability Business goals Management succession plans Cost of formation
    30. 30. Learning Objectives • • • • • Choosing a form of business Creation of partnership Purported partners Partnership capital and property Partnership interests 37 - 34
    31. 31. Overview • Choosing a form of business is important because the business owner’s liability and control of the business vary greatly among the many forms of business Which form you choose depends on where you want to go 37 - 35
    32. 32. Business Forms Worldwide • Though details vary widely, business forms similar to U.S. forms exist worldwide – Example: Commercial Companies Law of the United Arab Emirates provides for the LLC form, but limits shareholder number to 50 • No such limitation exists for LLCs in the U.S. 37 - 36
    33. 33. Southex Exhibitions v. Rhode Island Builders Assoc. • Facts: – 1974: RIBA and show producer SEM entered a 5-year contract; RIBA agreed to sponsor and endorse only SEM shows with net show profits shared 55% to SEM and 45% to RIBA – During negotiations, SEM and RIBA discussed agreement’s use of the term “partners” and SEM’s president claimed “no ownership” – 1994: Southex acquired SEM’s interest in the agreement and RIBA contracted with another show producer 37 - 37
    34. 34. Southex Exhibitions v. Rhode Island Builders Assoc. • Procedural History and Legal Reasoning: – Southex sued RIBA to enjoin the 2000 home show claiming the 1974 agreement established a partnership and RIBA breached fiduciary duties by wrongful dissolution – Trial court found for RIBA and Southex appealed – Appellate court reviewed partnership law basics and noted first that the 1974 agreement simply titled “Agreement” rather than “Partnership Agreement” 37 - 38
    35. 35. Southex Exhibitions v. Rhode Island Builders Assoc. • Legal Reasoning and Holding: – Agreement was for a limited term and plaintiff Southex entered contracts with third parties “in its own name, rather than in the name of the putative partnership.” – Court concluded partnership did not exist and affirmed the judgment for RIBA 37 - 39
    36. 36. Thought Questions • Do you want to start a business? If you wanted to start a business (snowboards, for example), would you choose partnership as the form of business? 37 - 40
    37. 37. Test Your Knowledge • True=A, False = B – The Revised Uniform Partnership Act (RUPA) is a model partnership statute. – Partnership is an “association of two or more persons to carry on as co-owners a business for profit.” – Partnership capital belongs to the individual partners in equal shares. 37 - 41
    38. 38. Test Your Knowledge • Multiple Choice – The partnership interest includes a partner’s: (a) Management and other rights participation (b) Share of profits and losses and right to receive partnership distributions (c) Ownership interest in partnership capital (d) both A and B (e) none of the above 37 - 42
    39. 39. Things to consider • Your vision regarding the size and nature of your business. • The level of control you wish to have. • The level of structure you are willing to deal with. • The business' vulnerability to lawsuits. • Tax implications of the different ownership structures. • Expected profit (or loss) of the business. • Whether or not you need to reinvest earnings into the business. • Your need for access to cash out of the business for yourself.
    40. 40. Reference • • • • • 34-cg-law-ethics-week-11-business-ownership2013