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Copyright Atomic Dog Publishing, 2006
 

Copyright Atomic Dog Publishing, 2006

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    Copyright Atomic Dog Publishing, 2006 Copyright Atomic Dog Publishing, 2006 Presentation Transcript

    • Chapter 8 Business Legal Forms
    • 8-1 Introduction
      • Capital, revenue and cost are deeply intertwined — actions taken to modify one component usually have an effect on the other two.
      • Launching a new venture normally requires an infusion of capital during the early stages.
        • Before capital can be raised, the venture must establish a legal form that will enable it to solicit and raise debt or equity capital.
        • All entrepreneurs must decide what type of legal form they should use as the structural basis of their company.
    • 8-2 Sole Proprietorship
      • Oldest, common form of private business ownership in the United States — owned and managed by one individual.
        • The person may receive help from others in operating the business but is the only owner.
        • In the eyes of the law, the sole proprietor is the company.
        • The sole proprietor owns a small service or retail operation and is usually an active manager.
        • The owner provides the capital needed to start and operate the business — personal savings or borrowed money.
        • Managerial ability accounts for the success or failure of the business.
    • 8-2a Advantages of a Sole Proprietorship
      • Advantages of a sole proprietorship include:
        • Ease of starting
        • Control
        • Sole participation in profits and losses
        • Use of owner’s abilities
        • Tax breaks
        • Secrecy
        • Ease of dissolving
    • 8-2b Disadvantages of a Sole Proprietorship
      • Disadvantages of a sole proprietorship include:
        • Unlimited liability
        • Difficulty in raising capital
        • Limitations in managerial ability
        • Lack of stability
        • Demands on time
        • Difficulty in hiring and keeping highly motivated employees
    • 8-3 Partnership
      • Partnership law in the United States has been derived from the Uniform Partnership Act (UPA).
        • The more recent Revised Uniform Partnership Act (RUPA) was approved in 1994 — in line with modern business practices and trends; retaining many of the valuable provisions in the original act.
        • It was amended in 1997 to provide limited liability for partners in a limited liability partnership.
      • Section 6 Uniform Partnership Act defines partnership as “an association of two or more persons to carry on as co-owners of a business for profit.”
    • 8-3 Partnership (cont.)
        • Partnership can be based on a written contract or a voluntary and legal oral agreement.
        • Partnership is similar in many respects to a sole proprietorship.
        • Co-owners share everything, including the risk, hard work, assets, and profits.
    • 8-3a Partnership Types
      • There are three major partnership types:
        • General partnership: A business with at least one general partner who has unlimited liability for the debts of the business.
          • They have the authority to act as an owner.
          • They can engage the partnership in binding agreements.
          • The partnership is responsible for all actions of each owner.
        • Limited partnership: Has at least one general partner and one or more limited partners.
          • Limited partnerships are usually found in service industries or in professional firms such as real estate and dentistry.
          • They are also used extensively to enable various international arrangements.
    • 8-3a Partnership Types (cont.)
        • Joint venture: A special type of partnership established to carry out a special project or to operate for a specific time period.
          • A joint venture in the United States or abroad is less than the ordinary partnership; continues as a business.
          • There is some confusion among the courts as to whether a joint venture is a partnership.
          • Working in a joint venture with an international partner can make it easier to enter foreign markets.
    • 8-3b Advantages of a Partnership
      • Advantages of a partnership include:
        • Greater access to capital
        • Combined managerial skills
        • Ease of starting
        • Clear legal status
        • Tax advantages
    • 8-3c Disadvantages of a Partnership
      • Disadvantages of a partnership include:
        • Unlimited liability
        • Potential disagreements
        • Investment withdrawal difficulty
        • Limited capital availability
        • Instability
    • 8-4 Limited Liability Company
      • The limited liability company (LLC) is a relatively new legal form that has now been adopted in all fifty states.
        • The LLC limits the liability exposure of all investors to the amount of their investment.
          • Anyone can participate in the management and still have limited liability protection.
        • To form a limited liability company (LLC), business owners must file formal articles of organization with their state's LLC filing office and comply with other state filing requirements.
          • LLC can have an unlimited number of investors, known as members.
          • It is also required to prepare an operating agreement.
    • 8-4a Advantages of a Limited Liability Company
      • Advantages of a limited liability company include:
        • Limited liability
        • Pass-through taxation
        • Investors can manage
        • Unlimited membership
        • Ease of organizing
    • 8-4b Disadvantages of a Limited Liability Company
      • The disadvantages of an LLC are due primarily to its relatively recent adoption by state legislatures.
        • Many people still don’t understand it well, and courts have only begun to form a record of common law.
      • Other disadvantages include:
        • Difficulty raising money
        • No continuity of life
        • Limited transferability
    • 8-5 Corporation
      • Corporation: Artificial legal entity typically chartered by a state is formed to operate a business.
        • The corporation is completely separate from its owners
        • Has its own life
        • Is liable for its own debts
        • Must pay its own taxes
      • Two types of corporations exist:
        • C-corporation — more commonly known.
          • It is the legal structure for many of the largest companies in the world.
          • A C-corporation files and pays corporate income taxes directly.
    • 8-5 Corporation (cont.)
          • If the entrepreneur plans to retain profits to finance growth, repay debt, or make other capital expenditures then a C-corporation form makes sense.
          • C-corporations can take advantage of corporate income tax rates.
          • The C-corporation status has the ability to provide greater flexibility in terms of planning and controlling federal income taxes.
          • C-corporations also can deduct the cost of certain fringe benefit packages.
          • The C-corporation is taxed twice on its profits — double taxation.
          • C-corporation has advantages for fund-raising because it is the only business form that is allowed to sell both common and preferred stock.
    • 8-5 Corporation (cont.)
      • The Omnibus Budget Reconciliation Act of 1983 — S-corporation — uses noncorporate tax rates at the request of the shareholders.
        • To qualify as an S-corporation, a business must meet the following requirements:
          • It must be incorporated within the United States.
          • It can only sell shares of common stock.
          • All shareholders must be residents of the United States.
          • Shareholders must be natural persons, estates, or trusts.
          • No shareholder can be a partnership or a corporation.
          • Some states limit the number of shareholders.
          • No more than 20 percent of its income can come from passive activities.
    • 8-5 Corporation (cont.)
        • S-corporation has advantages and disadvantages.
          • Primary advantage — The shareholders’ tax brackets can result in tax savings.
          • Primary disadvantage — The tax law governing the S-corporation is very complex.
      • Corporations can change legal form from S-corporation status to C-corporation status fairly easily, but there are costs involved.
    • 8-5a Advantages of a Corporation
      • Advantages of a corporation include:
        • Limited liability
        • Skilled management team
        • Transfer of ownership
        • Greater capital base
        • Stability
        • Legal-entity status
    • 8-5b Disadvantages of a Corporation
      • Disadvantages of a corporation include:
        • Difficulty and expense of starting
        • Lack of control
        • Multiple taxation and fees
        • Lack of secrecy
        • Lack of personal interest
        • Credit limitations
    • 8-6 Nonprofit Corporation
      • Many organizations are nonprofit corporations — not profit-seeking enterprises.
        • This includes universities and other schools, charities, churches, volunteer organizations, credit unions, country clubs, government organizations, cooperatives, and a number of other organizations.
      • Nonprofits have to make a profit in order to continue to operate.
        • However they are prohibited by law from distributing earnings (paying dividends) to owners.
        • Donations, dues, and the sale of goods or services provide the funds to pay employees and finance operations.