forms of ownership

1. Form of Ownership

2. Introduction to Forms of Business
and Formation of Partnerships
I wanted to be an editor or a journalist.
I wasn't really interested in being an
entrepreneur, but I soon found I had to
become an entrepreneur in order to
keep my magazine going.
Sir Richard Branson, Entrepreneur
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

3. • 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

4. Forms of Ownership
1) Sole Proprietorship
2) Joint Hindu Family Firm
3) Partnership Firm
4) Private Company
5) Public Company
6) Cooperative Society

5. • A sole proprietorship has only one owner and is
an extension of its owner
• It is not a legal entity and cannot sue or be sued,
so creditors/claimants sue the owner
• Advantages: no formalities, taxes flow to owner,
owner takes all profit and control
• Disadvantage: owner bears all risk of loss
Sole Proprietorship
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6. 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

7. Disadvantages of the Sole Proprietorship
• Limited access to capital
• Limited skills and capabilities
• Feelings of isolation
• Lack of continuity
 Unlimited personal liability

9. Questions????

10. Partnership
• An association of two or more people who co-
own a business for the purpose of making a
profit.
• Take the time to create a written partnership
agreement!

11. Advantages of the Partnership
• Easy to establish
• Complementary skills of partners
• Division of profits
• Larger pool of capital
• Ability to attract limited partners
• Little government regulation
• Flexibility
• Taxation

12. Disadvantages of the Partnership
• Unlimited liability of at least one partner

13. • If a third person deals with two or more people
who seem to be partners and is harmed, the
third person may sue to recover damages from
both of the apparent partners
• RUPA Section 308(e): “persons who are not
partners as to each other are not liable as
partners to other persons.”
Non-Partners Not Liable
to Third Parties
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15. Questions????

16. The 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 chartered in one state and
doing business in another state.
– Alien - a corporation formed in another country,
but doing business in the United States.

17. Advantages of the
Corporation
• Limited liability of the stockholders

18. Disadvantages of the Corporation
• Cost and time of incorporating
• “Double taxation”
• Potential for diminished managerial
incentives
• Legal requirements and regulatory “red
tape”
• Potential loss of control by founder(s)

20. Questions????

21. Limited Liability Company (LLC)
• The LLC is a relatively new type of hybrid business structure that is now permissible in most states.
• It is designed to provide the limited liability features of a corporation and the tax efficiencies and
operational flexibility of a partnership.
• Formation is more complex and formal than that of a general partnership.
• The owners are members, and the duration of the LLC is usually determined when the organization papers
are filed. The time limit can be continued, if desired, by a vote of the members at the time of expiration.
• LLCs must not have more than two of the four characteristics that define corporations: Limited liability to
the extent of assets, continuity of life, centralization of management, and free transferability of ownership
interests.

22. • A limited liability company (LLC) combines the
nontax advantages of corporations with
favorable tax treatment of partnerships
• An LLC is owned by members, who may manage
themselves or retain a manager to run the
business
• Members have limited liability for the obligations
of the LLC
Limited Liability Company
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24. Questions????

25. Ideal Form of Ownership
1. Ease of Formation
2. Sufficient Finances
3. Limited Liability
4. Transferability of Interest
5. Efficient Management

26. 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

27. 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

28. Factors to Choice of Ownership –
Contd..
6. Division of Surplus
7. Duration of Business
8. Government regulation and control
9. Managerial Requirements

29. Role of Small Business –
Indian Economy Perspective
1) Generation of Employment
2) Balanced Regional Development
3) Optimization of Capital
4) Mobilization of Local Resources
5) Exchange Earnings
6) Development of Entrepreneurship
7) Egalitarian Society
8) Social Advantage

30. Problems
1) Shortage of Materials and Power
2) Lack of Adequate Finance
3) Outdated Technology
4) Inadequate Marketing Facilities
5) Weak Orgn
Management
6) Lack of Trained Personnel

31. 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.

32. Questions????

33. Factors to Consider
• Tax considerations
• Liability exposure
• Start-up capital requirements
• Control
• Managerial ability
• Business goals
• Management succession plans
• Cost of formation

34. Learning Objectives
• Choosing a form of business
• Creation of partnership
• Purported partners
• Partnership capital and property
• Partnership interests
37 - 34

35. • Choosing a form of business is important
because the business owner’s liability and
control of the business vary greatly among the
many forms of business
Overview
37 - 35
Which form you
choose depends on
where you want to
go

36. • Though details vary widely, business forms similar
to U.S. forms exist worldwide
– Example: Commercial Companies Law of the
United Arab Emirates provides for the LLC form,
but limits shareholder number to 50
• No such limitation exists for LLCs in the U.S.
Business Forms Worldwide
37 - 36

37. Southex Exhibitions v.
Rhode Island Builders Assoc.
• Facts:
– 1974: RIBA and show producer SEM entered a 5-year
contract; RIBA agreed to sponsor and endorse only
SEM shows with net show profits shared 55% to SEM
and 45% to RIBA
– During negotiations, SEM and RIBA discussed
agreement’s use of the term “partners” and SEM’s
president claimed “no ownership”
– 1994: Southex acquired SEM’s interest in the
agreement and RIBA contracted with another show
producer
37 - 37

38. Southex Exhibitions v.
Rhode Island Builders Assoc.
• Procedural History and Legal Reasoning:
– Southex sued RIBA to enjoin the 2000 home show
claiming the 1974 agreement established a partnership
and RIBA breached fiduciary duties by wrongful
dissolution
– Trial court found for RIBA and Southex appealed
– Appellate court reviewed partnership law basics and
noted first that the 1974 agreement simply titled
“Agreement” rather than “Partnership Agreement”
37 - 38

39. Southex Exhibitions v.
Rhode Island Builders Assoc.
• Legal Reasoning and Holding:
– Agreement was for a limited term
and plaintiff Southex entered
contracts with third parties “in its
own name, rather than in the
name of the putative partnership.”
– Court concluded partnership did
not exist and affirmed the
judgment for RIBA
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40. Thought Questions
• Do you want to start a business?
If you wanted to start a business
(snowboards, for example),
would you choose partnership
as the form of business?
37 - 40

41. Test Your Knowledge
• True=A, False = B
– The Revised Uniform Partnership Act (RUPA) is
a model partnership statute.
– Partnership is an “association of two or more
persons to carry on as co-owners a business
for profit.”
– Partnership capital belongs to the individual
partners in equal shares.
37 - 41

42. Test Your Knowledge
• Multiple Choice
– The partnership interest includes a
partner’s:
(a) Management and other rights participation
(b) Share of profits and losses and right to receive
partnership distributions
(c) Ownership interest in partnership capital
(d) both A and B
(e) none of the above
37 - 42

43. Things to consider
• Your vision regarding the size and nature of your business.
• The level of control you wish to have.
• The level of structure you are willing to deal with.
• The business' vulnerability to lawsuits.
• Tax implications of the different ownership structures.
• Expected profit (or loss) of the business.
• Whether or not you need to reinvest earnings into the business.
• Your need for access to cash out of the business for yourself.

44. Reference
• http://www.slideshare.net/bachajee007/sme-
chapter-3
• http://www.slideshare.net/sgohar/12-8-08-
presentation
• http://www.slideshare.net/yassa12/types-of-
business-ownership2
• http://www.slideshare.net/UAF_BA330/ch38-reg
• http://www.slideshare.net/stephenongch/mba10
34-cg-law-ethics-week-11-business-ownership-
2013