Chapter 3

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Chapter 3

  1. 1. Chapter 3 Forms of Small Business Ownership 1
  2. 2. Chapter Outline <ul><li>Selecting the Right Legal Form. </li></ul><ul><li>Why Form a Proprietorship? </li></ul><ul><li>Why Form a Partnership? </li></ul><ul><li>Why Form a Corporation? </li></ul><ul><li>Other Forms of Business. </li></ul><ul><li>How to Evaluate Legal Forms of Organization </li></ul><ul><li>What You Should Have Learned. </li></ul>2
  3. 3. Relative Position of U.S. Proprietorships, Partnerships, & Corporations Figure 3-1 A. Proprietorships are the most numerous. B. Corporations produce the most revenue. C. Proprietorships appear more profitable. Distribution by total number Distribution by revenues Distribution by profits Proprietorships Corporations Partnerships 3
  4. 4. Comparison of Proprietorships, Partnerships, & Corporations in Selected Industries <ul><li>Industry </li></ul><ul><li>Services 82% 3% 15% </li></ul><ul><li>Trade 70% 4% 26% </li></ul><ul><li>Construction 77% 3% 20% </li></ul><ul><li>Finance 43% 32% 25% </li></ul><ul><li>Manufacturing 57% 5% 38% </li></ul><ul><li>Percentage of firms in the industry </li></ul>Table 3-1 Proprietorships Partnerships Corporation continued 4
  5. 5. Comparison of Proprietorships, Partnerships, & Corporations in Selected Industries (cont’d) <ul><li>Industry </li></ul><ul><li>Services 14% 14% 72% </li></ul><ul><li>Trade 5% 6% 89% </li></ul><ul><li>Construction 12% 6% 82% </li></ul><ul><li>Finance 2% 10% 88% </li></ul><ul><li>Manufacturing >1% 4% 96% </li></ul><ul><li>Percentage of industry’s business receipts </li></ul>Proprietorships Partnerships Corporation Table 3-1 5
  6. 6. Weighing Proprietorship Advantages & Disadvantages Figure 3-2 6
  7. 7. Weighing the Advantages & Disadvantages of a Partnership Text Figure 3-3 7
  8. 8. Types of Partnerships # 8 <ul><li>GENERAL PARTNERSHIP: </li></ul><ul><li>Each partner  actually participates as equal in managing Bus. </li></ul><ul><li>Each partner  liable for acts of other partners </li></ul><ul><li>LIMITED PARTNERSHIP: </li></ul><ul><li>One or more general partners conduct the business </li></ul><ul><li>One or more limited partners contribute capital, don’t participate </li></ul><ul><li>in Mgmt., but are liable for debts of general partners </li></ul>
  9. 9. Weighing Advantages & Disadvantages of a Corporation Text Figure 3-4 9
  10. 10. Other Forms of Business <ul><li>LIMITED-LIABILITY CORPORATION (LLC) : Combines </li></ul><ul><li>advantages of Corp  such as liability protection, w/ </li></ul><ul><li>benefits of partnership, such as tax advantages. </li></ul><ul><li>COOPERATIVE : Business owned by & operated for the </li></ul><ul><li>benefit of patrons using its services. </li></ul><ul><li>JOINT VENTURE : Form of temporary partnership whereby </li></ul><ul><li>2-or-more firms join in single endeavor to make profit. </li></ul>10
  11. 11. Checklist  Evaluating Legal Organizational Forms <ul><li>Under what legal Org. form is firm now operating? </li></ul><ul><li>What are the major risks to which firm is subjected? </li></ul><ul><li>Does the legal Org. form give proper protection against these </li></ul><ul><li>risks? </li></ul><ul><li>Does firm supplement its legal form of protection with public liability insurance? </li></ul><ul><li>Is unlimited liability a serious potential problem? </li></ul><ul><li>Has the present form limited financial needs in any way? </li></ul>Text Figure 3-5 continued # 11
  12. 12. Checklist  Evaluating Legal Forms of Organization <ul><li>What’s the relative incidence of firm's major risks? </li></ul><ul><li>Are there tax advantages available by changing Org’s legal </li></ul><ul><li>form? </li></ul><ul><li>Have you considered Mgmt advantages of alternative legal </li></ul><ul><li>forms? </li></ul><ul><li>Are you aware of Subchapter S Corp. features? Would they </li></ul><ul><li>be beneficial? </li></ul><ul><li>Is firm using all advantages of present legal Org form? </li></ul>Figure 3-5 # 12

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