Forms of Business Ownership

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Forms of Business Ownership

  1. 1. Forms of Business Ownership It’s just paper. All I own is a pickup truck and a little Walmart stock. ……………………………… .. Sam Walton
  2. 2. Evaluation Criteria <ul><li>Tax consideration </li></ul><ul><li>Liability exposure </li></ul><ul><li>Start-up and future capital requirement </li></ul><ul><li>Control </li></ul><ul><li>Managerial ability </li></ul><ul><li>Business goals </li></ul><ul><li>Management succession plans </li></ul><ul><li>Cost of formation </li></ul>
  3. 3. Sole Proprietorship <ul><li>A business owned and managed by one individual; the business and the owner are one and the same in the eyes of the law </li></ul>
  4. 4. Sole Proprietorship <ul><li>Advantages </li></ul><ul><li>Simple to create </li></ul><ul><li>Least costly form </li></ul><ul><li>Profit incentive </li></ul><ul><li>Total decision-making </li></ul><ul><li>No special legal restrictions </li></ul><ul><li>Easy to discontinue </li></ul>
  5. 5. Sole Proprietorship <ul><li>Disadvantages </li></ul><ul><li>Unlimited personal liability </li></ul><ul><li>Limited skills and abilities </li></ul><ul><li>Feelings of isolation </li></ul><ul><li>Limited access to capital </li></ul><ul><li>Lack of continuity of business </li></ul>
  6. 6. Partnership <ul><li>An association of two or more people who co-own a business for the purpose of making a profit </li></ul>A partnership agreement or the Uniform Partnership Act
  7. 7. Partnership <ul><li>Advantages </li></ul><ul><li>Easy to establish </li></ul><ul><li>Complementary skills </li></ul><ul><li>Division of profits </li></ul><ul><li>Larger pool of capital </li></ul><ul><li>Ability to attract limited partners </li></ul><ul><li>Little governmental regulation </li></ul><ul><li>Flexibility </li></ul><ul><li>Taxation </li></ul>
  8. 8. Partnership <ul><li>Disadvantages </li></ul><ul><li>Unlimited liability of at least one </li></ul><ul><li>Difficulty in disposing of interest </li></ul><ul><li>Lack of continuity </li></ul><ul><li>Potential for personality and authority conflicts </li></ul><ul><li>Partners bound by law of agency </li></ul>
  9. 9. Special Partnerships <ul><li>Limited partnership -composed of at least one general partner and at least one limited partner </li></ul><ul><li>Limited liability partnership -a special type of limited partnership, in which all partners are limited partners </li></ul><ul><li>Master limited partnership -a partnership whose shares are traded on stock exchanges, just like corporations </li></ul>
  10. 10. Corporations <ul><li>A separate legal entity apart from its owners which receives the right to exist from the state in which in which it is incorporated </li></ul><ul><li>Domestic </li></ul><ul><li>Foreign </li></ul><ul><li>Alien </li></ul><ul><li>Publicly held </li></ul><ul><li>Closely held </li></ul>
  11. 11. Corporations <ul><li>Certificate of Incorporation </li></ul><ul><li>Name </li></ul><ul><li>Statement of purpose </li></ul><ul><li>Time horizon </li></ul><ul><li>Names and addresses of incorporators </li></ul><ul><li>Place of business </li></ul><ul><li>Capital stock authorization’ </li></ul><ul><li>Capital required at time of incorporation </li></ul><ul><li>Provisions for preemptive rights </li></ul><ul><li>Restrictions on transfering shares </li></ul><ul><li>Names and addresses of officers </li></ul><ul><li>By-laws </li></ul>
  12. 12. Corporations <ul><li>Advantages </li></ul><ul><li>Limited liability of stockholders </li></ul><ul><li>Ability to attract capital </li></ul><ul><li>Ability to continue indefinitely </li></ul><ul><li>Transferable ownership </li></ul>
  13. 13. Corporations <ul><li>Disadvantages </li></ul><ul><li>Cost and time in incorporating </li></ul><ul><li>Double taxation </li></ul><ul><li>Potential for diminished incentives </li></ul><ul><li>Legal requirements and red tape </li></ul><ul><li>Potential loss of control </li></ul>
  14. 14. An S Corporation <ul><li>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: </li></ul><ul><li>Domestic US corporation </li></ul><ul><li>No nonresident alien stockholder </li></ul><ul><li>One class of common stock </li></ul><ul><li>Limit shareholders </li></ul><ul><li>No more than 100 shareholders </li></ul><ul><li>Less than 25% of gross revenues passive </li></ul>
  15. 15. S Corporation <ul><li>Advantages </li></ul><ul><li>All of advantages of a regular C corporation </li></ul><ul><li>Single taxation </li></ul><ul><li>Avoids tax on appreciation of asset sold </li></ul><ul><li>Pay SSS for employees </li></ul><ul><li>Different lines of businesses as subsidiaries, simpler tax filing </li></ul>
  16. 16. S Corporation <ul><li>Highly profitable service companies with large number of shareholders for whom profits are compensation or retirement benefits </li></ul><ul><li>Fast-growing companies that must retain earnings to finance growth </li></ul><ul><li>Corporations in which the loss of benefits exceed tax savings </li></ul><ul><li>Corporations with sizable net operating losses </li></ul>
  17. 17. S Corporation <ul><li>Liquidating </li></ul><ul><li>Pay all taxes and debts </li></ul><ul><li>Obtain written approval of shareholders to dissolve company </li></ul><ul><li>File statement of intent to dissolve with secretary of state </li></ul><ul><li>Distribute all remaining assets </li></ul>
  18. 18. Limited Liability Company <ul><li>A relatively new form of ownership that, like an S corporation, is a cross between a partnership and a corporation; it is not subject to many of the restrictions imposed on S corporations; only 2 of the following: </li></ul><ul><li>Limited liability </li></ul><ul><li>Continuity of life </li></ul><ul><li>Free transferability of interest </li></ul><ul><li>Centralized management </li></ul>
  19. 19. Limited Liability Corporation <ul><li>Articles of organization -name and address, method of management, duration, names and addresses of each organizer </li></ul><ul><li>Operating agreement -no more than 2 of: limited liability, continuity of life, free transferability of interest, centralized management </li></ul>
  20. 20. Limited Liability Corporation <ul><li>Limited personal liability </li></ul><ul><li>No limit on number of shareholders </li></ul><ul><li>No ban on nonresident alien </li></ul><ul><li>No restriction on a member’s ability to manage the company </li></ul><ul><li>Avoids double taxation </li></ul><ul><li>Flexibility to divide income as owners see fit </li></ul><ul><li>Not subject to self-employment tax except for managing member </li></ul>
  21. 21. <ul><li>Professional Corporatio n-lawyers, accountants, doctors, dentists, etc. </li></ul><ul><li>Joint Venture -partnership formed for a specific purpose </li></ul>

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