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Smaka pp1 comp

  1. 1. MBA1034 GOVERNANCE, LAW & ETHICS BUSINESS OWNERSHIP : SOLE PROPRIETOR, PARTNERSHIPS AND CORPORATIONS Smaka Mathibela, University of Johannesbug, BEd,Mba International Business(Bradford) Visiting Fellow, Birmingham City University Visiting Professor, Shenzhen University
  2. 2. Acknowledgements • This power point slide have been reproduced by SL Mathibela with several sources of this presentation which is available on the last slide of this presentation.
  3. 3. 1. Open Discussion • Rocco R. Vanasco, (1996),"Auditor independence: an international perspective", Managerial Auditing Journal, Vol. 11 No.: 9 pp. 4- 48
  4. 4. Chapter 5 Section 2: Forms of Business Ownership Entrepreneurship: Ideas in Action © Cengage Learning/South-Western
  5. 5. Evaluation Criteria • Tax consideration • Liability exposure • Start-up and future capital requirement • Control • Managerial ability • Business goals • Management succession plans • Cost of formation
  6. 6. 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.
  7. 7. Lesson 7.2 Choose a Legal Form of Business Objective: Students will be able to: • Discuss advantages and disadvantages of a sole proprietorship, partnership, and corporationS. Chapter 7 Slide 7
  8. 8. Overview • • • • • Introduction to business ownership Sole proprietorship Partnership Corporations Corporations and the SarbanesOxley Act • Other Forms of ownership
  9. 9. 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
  10. 10. • 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
  11. 11. Ideal Form of Ownership 1. Ease of Formation 2. Sufficient Finances 3. Limited Liability 4. Transferability of Interest 5. Efficient Management
  12. 12. 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
  13. 13. Choosing a Form of Ownership • There is no one “best” form of ownership. • The best form of ownership depends on an entrepreneur’s particular situation. • Key: Understanding the characteristics of each form of ownership and how well they match an entrepreneur’s business and personal circumstances.
  14. 14. Factors Affecting the Choice • Tax considerations • Liability exposure • Start-up and future capital requirements • Control • Managerial ability • Business goals • Management succession plans • Cost of formation
  15. 15. Major Forms of Ownership • Sole Proprietorship • Partnership • Corporation • S Corporation • Limited Liability Company • Joint Venture
  17. 17. Entrepreneurship • Entrepreneur: A person who forms and operates a new business either by himself or herself or with others • Sole proprietorship: A form of business in which the owner is actually the business – The business is not a separate legal entity – Sole proprietor: The owner of a sole proprietorship 14-17
  18. 18. Creation of a Sole Proprietorship • No federal or state government approval is required • D.b.a. (doing business as): A designation for a business that is operating under a trade name • Fictitious business name statement (certificate of trade name) – A document that is filed with the state that designates: • A trade name of a business • The name and address of the applicant • The address of the business
  19. 19. 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
  20. 20. Disadvantages of the Sole Proprietorship • Unlimited personal liability • Limited skills and capabilities • Feelings of isolation • Limited access to capital • Lack of continuity of the business 5 - 20
  21. 21. Personal Liability of a Sole Proprietor • Unlimited personal liability: The personal liability of a sole proprietor for the debts and obligations of a sole proprietorship • Taxation of a sole proprietorship – A sole proprietorship does not pay taxes at the business level – A sole proprietor has to file tax returns and pay taxes to state and federal governments
  22. 22. Exhibit 1 - Sole Proprietorship
  23. 23. 2.2 PARTNERSHIP
  24. 24. Partnership • An association of two or more people who co-own a business for the purpose of making a profit. • Always wise to create a partnership agreement. • The best partnerships are built on trust and respect.
  25. 25. Types of Partners • General partners – Take an active role in managing a business. – Have unlimited liability for the partnership’s debts. – Every partnership must have at least one general partner. • Limited partners – Cannot participate in the day-to-day management of a company. – Have limited liability for the partnership’s debts.
  26. 26. Advantages of the Partnership • • • • • • • • Easy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners Minimal government regulation Flexibility Taxation
  27. 27. Disadvantages of the Partnership • Unlimited liability of at least one partner • Capital accumulation • Difficulty in disposing of partnership interest without dissolving the partnership • Lack of continuity • Potential for personality and authority conflicts • Partners bound by law of agency
  28. 28. Limited Partnership • A partnership composed of at least one general partner and one or more limited partners. • A general partner in this partnership is treated exactly as in a general partnership. • A limited partner has limited liability and is treated as an investor in the business.
  29. 29. General Partnership • An association of two or more persons to carry on as co-owners of a business for profit [UPA Section 6(1)] – General partners (partners): Persons liable for the debts and obligations of a general partnership • Uniform Partnership Act (UPA): A model act that codifies partnership law – Most states have adopted the UPA in whole or in part
  30. 30. Formation of a General Partnership • To qualify as a general partnership under the UPA a business must be –An association of two or more persons –Carrying on a business –As co-owners –For profit
  31. 31. Name of a General Partnership • A general partnership must file a fictitious business name statement with the appropriate government agency to operate under a trade name • General partnership agreement –A written agreement that partners sign to form a general partnership
  32. 32. Taxation of General Partnerships • Flow-through taxation – The income and losses of partnership flow onto and have to be reported on the individual partners’ personal income tax returns • Right to participate in management – Each partner has a right to participate in the management of a partnership and has an equal vote on partnership matters • Unless otherwise agreed
  33. 33. Right to Share in Profits  The right to share in the earnings from the investment of capital   Unless otherwise agreed Right to an accounting  Action for an accounting: A formal judicial proceeding in which the court is authorised to  Review the partnership and the partners’ transactions  Award each partner his or her share of the partnership assets
  34. 34. Contract Liability of General Partners • General partners have unlimited personal liability for contracts of the partnership • Under the UPA – General partners have joint liability for the contracts and debts of the partnership – Joint liability: Liability of partners for contracts and debts of the partnership • A plaintiff must name the partnership and all of the partners as defendants in a lawsuit
  35. 35. Uniform Limited Partnership Act • Contains a uniform set of provisions for the formation, operation, and dissolution of limited partnerships • Revised Uniform Limited Partnership Act (RULPA) –Provides a more modern, comprehensive law for the formation, operation, and dissolution of limited partnerships
  36. 36. Formation of a Limited Partnership • Certificate of limited partnership: A document that two or more persons must execute and sign that makes a limited partnership legal and binding – Under RULPA, two or more persons must execute and sign the certificate – The certificate of limited partnership must be filed with • The secretary of state of the appropriate state • The county recorder in the county or counties in which the limited partnership carries on business, if required by state law
  37. 37. Limited Partnership Agreement • A document that sets forth: –The rights and duties of general and limited partners –The terms and conditions regarding the operation, termination, and dissolution of a partnership, and so on
  38. 38. Liability of General and Limited Partners • Unlimited liability of general partners – The unlimited personal liability of general partners of a limited partnership for the debts and obligations of the general partnership • Limited liability of limited partners – The limited liability of limited partners of a limited partnership only up to their capital contributions to the limited partnership – Limited partners are not personally liable for the debts and obligations of the limited partnership
  39. 39. 2.3 CORPORATION
  40. 40. 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 doing business in a state other than the state in which it is incorporated. – Alien – a corporation formed in another country but doing business in the United States.
  41. 41. Corporations Certificate of Incorporation Name Statement of purpose Time horizon Names and addresses of incorporators Place of business Capital stock authorization’ Capital required at time of incorporation Provisions for preemptive rights Restrictions on transfering shares Names and addresses of officers By-laws
  42. 42. An S Corporation A corporation that retains the legal characteristics of a regular C corporation but has the advantage of being taxed as a partnership if it meets certain criteria: Domestic US corporation No nonresident alien stockholder One class of common stock Limit shareholders No more than 100 shareholders Less than 25% of gross revenues passive
  43. 43. S Corporation • Highly profitable service companies with large number of shareholders for whom profits are compensation or retirement benefits • Fast-growing companies that must retain earnings to finance growth • Corporations in which the loss of benefits exceed tax savings • Corporations with sizable net operating losses
  44. 44. S Corporation Advantages All of advantages of a regular C corporation Single taxation Avoids tax on appreciation of asset sold Pay SSS for employees Different lines of businesses as subsidiaries, simpler tax filing
  45. 45. Corporation CONT… Types of corporations: • Publicly held – a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges. • Closely held – a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends.
  46. 46. Advantages of the Corporation • Limited liability of stockholders • Ability to attract capital • Ability to continue indefinitely • Transferable ownership
  47. 47. Disadvantages of the Corporation • Cost and time of incorporation process • Double taxation • Potential for diminished managerial incentives • Legal requirements and regulatory “red tape” • Potential loss of control by founder(s)
  48. 48. S Corporation Liquidating Pay all taxes and debts Obtain written approval of shareholders to dissolve company File statement of intent to dissolve with secretary of state Distribute all remaining assets
  49. 49. Shareholders OF Corp… • Straight voting: A system in which each shareholder votes the number of shares he or she owns on candidates for each of the positions open • Cumulative voting: A system in which a shareholder can accumulate all of his or her votes and vote them all for one candidate or split them among several candidates
  50. 50. Shareholders Dividends • Dividend: A distribution of profits of the corporation to shareholders • Piercing the corporate veil: A doctrine that says if a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation’s debts and obligations
  51. 51. Franchise Agreement in corporation • An agreement that a franchisor and franchisee enter into that sets forth the terms and conditions of a franchise • Liability of franchisors and franchisees – The franchisor deals with the franchisee as an independent contractor • Franchisees are liable on their own contracts and are liable for their own torts • Franchisors are liable for their own contracts and torts
  52. 52. Advantages of Incorporation • Personal liability is limited to the amount of money each shareholder invested in the company. • Personal assets of shareholders are protected. • Corporations can raise money by selling stock. Chapter 7 Slide 52
  53. 53. Exhibit 7 - License
  54. 54. Core Readings of licensing • Baron, David P.(2013) Business and its environment, 7th Edition, Pearson, Ch.14 • Cheeseman, Henry R.(2013) Business law, 8th Edition, Prentice Hall. Ch.14-16 • Barringer, Bruce R. & Ireland, R. Duane, 2011 Entrepreneurship – Successfully launching new ventures 4th edition, Pearson.
  55. 55. QUESTIONS?
  57. 57. ADDITIONAL REFERENCE Rocco R. Vanasco, (1996),"Auditor independence: an international perspective", Managerial Auditing Journal, Vol. 11 No.: 9 pp. 4- 48