Chapter Three Legal Forms of Business Ownership Forms Of ...
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    Chapter Three Legal Forms of Business Ownership Forms Of ... Chapter Three Legal Forms of Business Ownership Forms Of ... Document Transcript

    • Chapter Three Legal Forms of Business Ownership Forms Of Business Ownership 1. Sole Proprietorship 2. Partnership 3. Corporation _________________ 4. Cooperative Relative Position of U.S. Proprietorships, Partnerships, and Corporations Comparison of Proprietorships, Partnerships, and Corporations in Selected Percentage of firms in the industry Industry Pro Part Corp Services 73% 7% 2% Trade 70% 4% 26% Construction 80% 3% 17% Finance 47% 29% 24% Manufacturing 54% 14% 32% Comparison of Proprietorships, Partnerships, and Corporations in Selected Percentage of industry’s business receipts Industry Pro Part Corp Services 67% 5% 28% Trade 6% 3% 91% Construction 16% 4% 8% Finance 3% 7% 90% Manufacturing >1% 3% 97% Sole Proprietorship A business owned and operated by one person Most common form of business Simplest to establish, operate and terminate Only laws or regulations are those affecting firms in a particular industry Sole Proprietorship - Negatives Owner is responsible for all losses incurred by the business, even if liabilities exceed the value of the firm Capital is limited Lack of stability and continuity Difficult to attract qualified people Partnership 1. General Partnership 2. Limited Partnership General Partnership A business owned and operated by two or more persons who have unlimited liability for the businesses debts and obligations
    • Partnership Articles of copartnership should be drawn up during the perpetrating period to show rights, duties, and responsibilities of each partner “Get it in writing” General Partnership Involves more than one person in the operation and management of the business File IRS Form 1065 and get a state charter No limit to the number of partners that may participate in the business Except if securities are sold Partners live in different states General Partnership All earnings of the business are passed to the partners Each partner can act on behalf of the partnership on business matters Rights, obligations and duties of a partner in a business are governed by the laws in the state where the partnership reside Limited Partnership In a limited partnership one or more general partners conduct the business, while one or more limited partners contribute capital but do not participate in management and are not held liable for debts of the general partner Partnership agreement must be in writing and the partnership must abide by the rules and laws of the state and federal regulations Limited partners have the potential for a large profit but their losses are limited to their investment GENERAL PARTNERSHIP each partner actually participates as an equal in managing the business each partner is liable for the acts of other partners Weighing the Advantages and Disadvantages of a Partnership Corporations A corporation is a business formed and owned by a group of people, called stock holders, given special rights, privileges, and limited liabilities by law C corporations S corporations C corporations A regular corporation that provides the protection of limited liability for shareholders, but its earnings are taxed as both the corporate and shareholder levels Advantages Of Incorporation Limited liability to the owners Stability and continuity
    • Easy to attract qualified personal Facilitates raising capital Disadvantages Of Incorporation Profits are taxed twice Laws and regulations and lots of additional record keeping Costly and difficult to form and dissolve Separation of ownership from management How to form a Corporation Articles of Incorporation: Which are the instrument by which a corporation is formed under the corporation laws of a given state A Corporate charter: Which states what the business can do and provides other organizational and financial information How a Corporation is governed Stockholders own the Company Elect the Board Of Directors Board Of Directors 1. Protects the interest of the stock holders. 2. Determine policies and votes on the important decisions 3. Appoints Officers Officers. 1. Report to the board of directors 2. Oversee day to day management 3. Hire and direct employees S corporations The S corporation is a special type of corporation that is exempt from multiple taxation and excessive paperwork Other Forms of Business The LIMITED-LIABILITY CORPORATION (LLC) combines the advantages of the corporation, such as liability protection, with the benefits of a partnership, such as tax advantages. Checklist for Evaluating Legal Forms of Organization Under what legal form of organization is the firm now operating? What are the major risks to which the firm is subjected? Does the legal form of organization give the proper protection against these risks? Does the firm supplement its legal form of protection with public liability insurance? Is unlimited liability a serious potential problem? Has the present form limited financial needs in any way? Checklist for Evaluating Legal Forms of Organization What is the relative incidence of the firm's major risks?
    • Are there tax advantages available by changing the legal form of organization? Have you considered the management advantages of alternative legal forms? Are you aware of the features of a Subchapter S corporation? Would they be beneficial? Is the company using all the advantages of the present legal form of organization? Provisions for S Corporation Be a domestic US corporation Have no more than 75 shareholders, (150 including spouses) Only individuals, estates, trusts and banks Issue only one class of stock Only 80% of it’s income from foreign sources More Provisions for S Corp. Only 20% of it’s income from passive sources Stockholders must all elect to be an S corporation when the corporation is formed Stockholders can change to C status Disadvantages of S Corporation Difficult to retain earnings for growth. Difficult to obtain debt capital because the equity base is small. Earnings are taxed at individuals personal rate which may be higher than corporate rate. Cooperatives A business owned by and operated for the benefit of patrons using its services Trust Established for a specific time period or until certain designated events occur Trust receives specific assets from the persons establishing it Trust administered by a trustee or board of trustees to hold and distribute assets for the benefit of others Limited-Liability Company Advantages of a corporation Liability protection Benefits of a partnership Tax advantages Distributes profits and losses directly to owners who must report them on their personal income tax returns Joint Venture Form of temporary partnership Two or more firms join together in a single endeavor to make a profit Very popular in global operations Especially in China, Russia, and Vietnam Countries trying to attract Western capital, but require foreign companies to have a domestic partner