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© 2008 Cengage Learning All rights reserved.

  1. 1. What is an Enterprise?
  2. 2. Key Concepts <ul><li>The choice of a business’s legal entity affects how the business will be run, managed, and perceived in the world. </li></ul><ul><li>The three major legal forms for an enterprise are sole-proprietorship, partnership, and corporation. Other legal forms include limited liability companies, franchises, joint ventures, cooperatives, and not-for-profit organizations. </li></ul><ul><li>Each form has benefits and liabilities that can significantly affect how the enterprise is controlled and owned. </li></ul>
  3. 3. What Is an Enterprise? Sole Proprietorship Nonprofits Partnership Corporations Basic Legal Forms of Enterprise
  4. 4. What Is an Enterprise? <ul><li>Questions Related to Choosing the Legal Form of the Enterprise: </li></ul><ul><ul><li>Who will be in control of the enterprise? </li></ul></ul><ul><ul><li>How will enterprise benefits be shared/distributed? </li></ul></ul><ul><ul><li>Who is liable for the actions of the enterprise? </li></ul></ul><ul><ul><li>Who is responsible for taxes the enterprise must pay? </li></ul></ul><ul><ul><li>What are legal and administrative cost differences? </li></ul></ul><ul><ul><li>What is the desired lifespan of the business? </li></ul></ul><ul><ul><li>Is capital to be raised from outside investors? </li></ul></ul><ul><ul><li>How can owners transfer their investment to others? </li></ul></ul>
  5. 5. exhibit 4.1 Comparison of Forms of Business Organization Source: Internal Revenue Service, as reported in Table 725, U.S. Bureau of the Census, Statistical Abstract of the United States, 2006 , 125th ed. (Washington, DC: Government Printing Office, 2005), p. 503.
  6. 6. The Sole-Proprietorship: A Solo Act <ul><li>Sole-Proprietorship </li></ul><ul><ul><li>A business that is established, owned, operated, and often financed by one person. </li></ul></ul><ul><li>Why Go the Solo Route? </li></ul><ul><ul><li>It’s easy to start. </li></ul></ul><ul><ul><li>All benefits of the enterprise go to the owner. </li></ul></ul><ul><ul><li>Complete control of the business. </li></ul></ul><ul><ul><li>Fewer governmental regulations. </li></ul></ul><ul><ul><li>Taxed at the individual rate. </li></ul></ul><ul><ul><li>Easy to stop </li></ul></ul>
  7. 7. The Sole-Proprietorship: A Solo Act (cont’d) <ul><li>Drawbacks to Going It Alone </li></ul><ul><ul><li>Unlimited liability </li></ul></ul><ul><ul><li>Business losses are considered individual’s losses. </li></ul></ul>
  8. 8. Partnerships: Teaming Up <ul><li>Partnership </li></ul><ul><ul><li>An association of two or more persons who agree to operate a business together for profit. </li></ul></ul><ul><li>General Partnership </li></ul><ul><ul><li>All individuals share in the profits and the management responsibilities of the business, as well as any liabilities that the business might generate. </li></ul></ul><ul><li>Limited Partnership </li></ul><ul><ul><li>There are two types of partners: general partners, who share in profits, management responsibilities, and all liabilities; and limited partners, who do not share in the management of the business. </li></ul></ul>
  9. 9. Partnerships: Teaming Up <ul><li>Advantages of Sharing the Load </li></ul><ul><ul><li>Ease of formation. </li></ul></ul><ul><ul><li>Fewer government regulations. </li></ul></ul><ul><ul><li>Taxation of profits at the individual rate. </li></ul></ul><ul><li>Problems with Partnerships </li></ul><ul><ul><li>Unlimited liability for general partners. </li></ul></ul><ul><ul><li>Partnership conflicts. </li></ul></ul><ul><li>Limited Liability Partnerships (LLPs) </li></ul><ul><ul><li>Liability of each partner is limited to the actions of that partner. </li></ul></ul>
  10. 10. exhibit 4.2 Picking the Perfect Partner Here are some questions for potential partners to ask themselves and each other: <ul><li>What are you looking for in a partner? </li></ul><ul><li>What do you bring to a partnership? </li></ul><ul><li>Why are you willing to begin an enterprise with partners? What advantages do you see to such an arrangement? What disadvantages do you see to such an arrangement? </li></ul><ul><li>How will important decisions in the business be made? If one partner wants to invest the profits of the enterprise while the other partner wants to pay these profits to the partners as salaries, how will this conflict be resolved? </li></ul><ul><li>How will conflicts among the partners be resolved? Remember, in any enterprise, there must be someone who is ultimately in charge, and who can make the final decision for the business. Unresolved decisions in an enterprise will cause a business to flounder. </li></ul><ul><li>How can partners leave the enterprise, whether for personal reasons or due to conflicts that cannot be resolved? How will each partner’s share of the business be valued? If the partnership’s assets are tied up in inventory, plant and equipment, how will a partner who wants to leave be paid? </li></ul><ul><li>Finally, since many partnerships are begun between spouses or “significant others,” both partners should ask themselves whether they really want to be with this partner 24 hours a day, sharing not only the partnership of the enterprise, but the family partnership as well. </li></ul>
  11. 11. Corporations: Structured for Growth <ul><li>Corporation </li></ul><ul><ul><li>A legal entity with an existence and life separate from its owners who are not personally liable for the entity’s debts. </li></ul></ul><ul><ul><ul><li>Chartered by the state in which it is formed. </li></ul></ul></ul><ul><ul><ul><li>Can own property, enter into contracts, sue and be sued, and engage in business operations under the terms of its charter. </li></ul></ul></ul><ul><li>Stockholders </li></ul><ul><ul><li>The owners of a corporation who hold shares of stock that provide certain rights; also known as shareholders. </li></ul></ul>
  12. 12. Corporations: Structured for Growth (cont’d) <ul><li>Board of Directors </li></ul><ul><ul><li>A group of people elected by the stockholders to act as fiduciary agents in handling the overall management of a corporation </li></ul></ul><ul><ul><ul><li>Setting corporate goals and policies </li></ul></ul></ul><ul><ul><ul><li>Hiring corporate officers </li></ul></ul></ul><ul><ul><ul><li>Overseeing the firm’s operations and finances. </li></ul></ul></ul><ul><li>Officers </li></ul><ul><ul><li>Top management hired by the board and responsible for achieving corporate goals and policies. </li></ul></ul><ul><ul><ul><li>The president and chief executive officer (CEO), vice-presidents, treasurer, and secretary. </li></ul></ul></ul>
  13. 13. Corporations: Structured for Growth (cont’d) <ul><li>The Incorporation Process </li></ul><ul><ul><li>Choosing the company’s name </li></ul></ul><ul><ul><li>Writing the articles of incorporation (also called a charter or certificate of incorporation) </li></ul></ul><ul><ul><li>Filing the articles of incorporation at the appropriate state office, usually the secretary of state’s office </li></ul></ul><ul><ul><li>Paying required fees and taxes </li></ul></ul><ul><ul><li>Holding an organizational meeting </li></ul></ul><ul><ul><li>Adopting bylaws, electing directors, and passing the first operating resolutions. </li></ul></ul>
  14. 14. exhibit 4.3 Articles of Incorporation A company’s articles of incorporation are prepared on a form authorized or supplied by the state of incorporation. Articles of incorporation usually include the following key items: <ul><li>Name of the corporation </li></ul><ul><li>The company’s purpose/type of business </li></ul><ul><li>Types of stock and number of shares of each type to issue </li></ul><ul><li>Life of the corporation (usually “perpetual,” meaning with no time limit) </li></ul><ul><li>Initial capital investment by stockholder </li></ul><ul><li>Methods for transferring share of stock </li></ul><ul><li>Address of the corporate office </li></ul><ul><li>Names and addresses of the first board of directors </li></ul><ul><li>Name and addresses of the incorporators </li></ul><ul><li>Other public information the incorporators wish to include </li></ul>
  15. 15. Corporations: Structured for Growth (cont’d) <ul><li>Types of Corporations </li></ul><ul><ul><li>C Corporation </li></ul></ul><ul><ul><ul><li>A conventional or basic corporate form of organization. </li></ul></ul></ul><ul><ul><li>S corporation </li></ul></ul><ul><ul><ul><li>A hybrid entity that is organized like a corporation, with stockholders, directors, and officers, but taxed like a partnership, with income and losses flowing through to the stockholders and taxed as their personal income. </li></ul></ul></ul>
  16. 16. Corporations: Structured for Growth (cont’d) <ul><li>Qualifications for an S Corporation: </li></ul><ul><ul><li>Be an eligible entity (a domestic corporation, a partnership, or a single-member or multiple-member limited liability company). </li></ul></ul><ul><ul><li>Have fewer than 100 shareholders. </li></ul></ul><ul><ul><li>Limit shareholders to individuals who are U.S. citizens or residents; no corporate shareholders are allowed. </li></ul></ul><ul><ul><li>Have only one class of stock. </li></ul></ul><ul><ul><li>Must allocate profits and losses to shareholders proportionate to each one’s interest in the business. </li></ul></ul><ul><ul><li>Use the calendar year as its fiscal year. </li></ul></ul>
  17. 17. Corporations: Structured for Growth (cont’d) <ul><li>The Corporate Advantage </li></ul><ul><ul><li>Shareholders are not liable for corporate debts. </li></ul></ul><ul><ul><li>Credibility and stability. </li></ul></ul><ul><ul><li>Tax advantages. </li></ul></ul><ul><ul><li>Perpetual life. </li></ul></ul><ul><ul><li>Greater access to capital. </li></ul></ul><ul><ul><li>Ease of ownership transfer. </li></ul></ul><ul><ul><li>Ability to be anonymous. </li></ul></ul><ul><ul><li>Management advantages. </li></ul></ul><ul><li>Drawbacks to Incorporating </li></ul><ul><ul><li>More difficult and costly to form. </li></ul></ul><ul><ul><li>More formalities and regulations. </li></ul></ul><ul><ul><li>Double taxation. </li></ul></ul>
  18. 18. Specialized Organizational Forms <ul><li>Limited Liability Company (LLC) </li></ul><ul><ul><li>A hybrid organization that offers the same liability protection as a corporation but may be taxed as either a partnership or a corporation. </li></ul></ul><ul><ul><ul><li>Does not issue stock. </li></ul></ul></ul><ul><ul><ul><li>Profits and losses taxed as personal income. </li></ul></ul></ul><ul><ul><ul><li>Has no required structure. </li></ul></ul></ul><ul><ul><ul><li>Income can be distributed as it chooses. </li></ul></ul></ul><ul><ul><ul><li>Can have unrestricted number of shareholders </li></ul></ul></ul><ul><ul><li>Professional corporation (PC) </li></ul></ul><ul><ul><li>Profession limited liability company (PLLC) </li></ul></ul>
  19. 19. Specialized Organizational Forms (cont’d) <ul><li>Franchising </li></ul><ul><ul><li>A contractual arrangement where a parent business (the franchisor) provides an investor (the franchisee) with the rights to sell products or services in exchange for fees and/or royalty payments. </li></ul></ul><ul><li>Franchise License Agreement </li></ul><ul><ul><li>The principal legal document that defines the terms of the relationship between the franchisor and franchisee, including the license to use the franchisor’s brand for a specified time period, payment terms, and operating restrictions. </li></ul></ul>
  20. 20. Specialized Organizational Forms (cont’d) <ul><li>Franchisor </li></ul><ul><ul><li>Parent company that owns and controls the rights to offer the franchise’s product concept to the franchisee. </li></ul></ul><ul><li>Franchisee </li></ul><ul><ul><li>The individual or company that owns one or more franchises and sells goods or services in accordance with the terms set by the franchisor. </li></ul></ul>
  21. 21. Specialized Organizational Forms (cont’d) <ul><li>Why Buy a Franchise? </li></ul><ul><ul><li>Proven product with nationally recognized name. </li></ul></ul><ul><ul><li>Marketing support. </li></ul></ul><ul><ul><li>Standardized operating concept and procedures. </li></ul></ul><ul><ul><li>Management training and assistance. </li></ul></ul><ul><ul><li>Financial assistance. </li></ul></ul><ul><ul><li>Expansion opportunities. </li></ul></ul><ul><li>Disadvantages of a Franchisee </li></ul><ul><ul><li>Loss of control and operating flexibility. </li></ul></ul><ul><ul><li>High start-up and ongoing costs. </li></ul></ul><ul><ul><li>Success tied to the larger franchise organization. </li></ul></ul>
  22. 22. Specialized Organizational Forms (cont’d) <ul><li>Joint Venture </li></ul><ul><ul><li>An alliance between two or more companies to pursue a specific project for a specified time period. </li></ul></ul><ul><li>Reasons for Forming a Joint Venture </li></ul><ul><ul><li>Access to new markets, products, or technology </li></ul></ul><ul><ul><li>Take on larger projects —s hared risks and assets </li></ul></ul>
  23. 23. Specialized Organizational Forms (cont’d) <ul><li>Cooperative </li></ul><ul><ul><li>Legal entities typically formed by people with similar interests, such as customers or suppliers, to reduce costs and gain economic power. </li></ul></ul><ul><ul><ul><li>Has limited liability </li></ul></ul></ul><ul><ul><ul><li>Has an unlimited life span </li></ul></ul></ul><ul><ul><ul><li>Has an elected board of directors, and an administrative staff </li></ul></ul></ul><ul><ul><ul><li>Profits are distributed to member-owners in proportion to their contributions. </li></ul></ul></ul><ul><li>Types of Cooperatives </li></ul><ul><ul><li>Seller, or producer-owned cooperatives </li></ul></ul><ul><ul><li>Buyer cooperatives </li></ul></ul><ul><ul><li>Worker-owned </li></ul></ul>
  24. 24. Not-for-Profit Organizations <ul><li>Not-for-Profit Organization </li></ul><ul><ul><li>An organization that is exempt from most state and federal income taxes and has a purpose that that will benefit others. </li></ul></ul><ul><li>Not-for-Profit Advantages </li></ul><ul><ul><li>Can receive contributions, gifts, donations that are tax-deductible to the giver. </li></ul></ul><ul><ul><li>Can receive money and grants from other not-for-profits and governmental sources. </li></ul></ul><ul><ul><li>Are exempt from federal and state taxes. </li></ul></ul><ul><ul><li>Have same limited liability as corporations. </li></ul></ul><ul><ul><li>Other financial benefits </li></ul></ul>
  25. 25. Not-for-Profit Organizations (cont’d) <ul><li>Not-for-Profit Disadvantages </li></ul><ul><ul><li>No contributions to political campaigns. </li></ul></ul><ul><ul><li>Limitations on lobbying activities. </li></ul></ul><ul><ul><li>No distributions of profits. </li></ul></ul><ul><ul><li>Must pay taxes on “unrelated activities.” </li></ul></ul><ul><ul><li>Prohibition on earning substantial profits from unrelated activities. </li></ul></ul><ul><ul><li>Assets must be distributed to another non-profit if dissolved. </li></ul></ul>