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Forms of business organizations

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Forms of business organizations

  1. 1. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 1 FORMS OF BUSINESS ORGANIZATIONS  Sole Proprietorship  Partnership  Corporation
  2. 2. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 2 SOLE PROPRIETORSHIP & PARTNERSHIP A business owned by one person is called a ‘Sole Proprietorship’. A business owned by two or more persons is called a ‘Partnership’. Owners of a partnership are called co-owners or partners.
  3. 3. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 3 SOLE PROPRIETORSHIP & PARTNERSHIP Proprietorships and Partnerships are business organizations that do not have legal identities distinct from their owners. For most proprietorships and partnerships, owners also manage the business. The amount of a proprietor’s personal wealth and his or her ability to borrow limit the size of a proprietorship.
  4. 4. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 4 SOLE PROPRIETORSHIP & PARTNERSHIP The profit of most proprietorships and partnerships is not taxed. The profit is income for the owners who pay income taxes on the profit as part of their personal income taxes.
  5. 5. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 5 SOLE PROPRIETORSHIP & PARTNERSHIP ADVANTAGES Easy to form Inexpensive to form Few government regulations No corporate income taxes
  6. 6. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 6 SOLE PROPRIETORSHIP & PARTNERSHIP DISADVANTAGES Limited life of business Difficult to obtain large sum of capital Unlimited personal liability
  7. 7. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 7 CORPORATION A business organized as a separate legal entity and with ownership divided into transferable shares of capital stock is called a ‘Corporation’. A corporation is separate from its owners and managers. Here, owners are not personally liable.
  8. 8. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 8 CORPORATION ADVANTAGES Unlimited life Professional management Easy transferability of ownership interest Limited liability Comparatively easy to raise large amounts of capital
  9. 9. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 9 CORPORATION DISADVANTAGES Time consuming Heavy taxation High cost of formation Subject to greater government regulations Double taxation --- Corporate tax & Individual income tax
  10. 10. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 10 Sole Proprietorships Corporations Partnerships Limited Liability Corporate tax on profits + Personal tax on dividends Unlimited Liability Personal tax on profits
  11. 11. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 11 DOUBLE TAXATION -- Example Earnings Before Income and Tax (EBIT) 10m Less: Interest Expense (1m) Earnings Before Tax (EBT) 9m Less: Tax @ 40% (3.6m) Earnings After Tax (EAT) or Net Income available to common stockholders 5.4m
  12. 12. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 12 DOUBLE TAXATION -- Example It is assumed that company’s: Dividend Payout Ratio = 50% Retained Earnings Ratio = 50% Outstanding Common Stock = 1m
  13. 13. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 13 DOUBLE TAXATION -- Example • EPS = Net Income available to common stock holders/Outstanding common stock = $5.4m/1m = $5.4 • DPS = EPS x Dividend Payout Ratio = $5.4 x 50% = $2.7
  14. 14. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 14 DOUBLE TAXATION-- Example It is assumed that Mr. X owns 100,000 shares of this company; • Dividend Income = $2.7 x 100,000 shares = $270,000 • If Personal Income Tax = 10%, then Mr. X’s personal income = 270,000 – 10% of 270,000 = 270,000 – 27,000 = $243,000
  15. 15. PREPARED & PRESENTED BY: ALI RASHID CHEEMA 15 FORMS OF BUSINESS ORGANIZATIONS In terms of numbers, 73% of businesses are operated as sole proprietorships, 6% as partnerships and 21% as corporations. In terms of dollar value of sales, 91% of all business is conducted by corporations, 5% by sole proprietorships and 4% by partnerships.

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