Chapter 3 Forms of Ownership of Small Businesses University of Bahrain College of Business Administration MGT 239: Small Business MGT239 1

Selecting the Right Legal Form Factors to consider: Size Nature Control Vulnerability to lawsuits Tax Profit/loss Reinvestment Cash needed MGT239 2

Selecting the Right Legal Form Normal progression: Proprietorship – Partnership – Corporation Sole proprietorship is the most popular form MGT239 3

Why form Proprietorship? Proprietorship: a business that is owned and usually run by one person. In Bahrain this type of ownership is referred to as Single Person Company (SPS). Advantages: Secrecy Profit Freedom Easiest form tax MGT239 4

Sole Proprietorship Disadvantages: Limited capital Difficult to obtain credit Limited management skills Unlimited liability Limited life MGT239 5

Partnership Is a voluntary association between two or more persons to start a business Partnership agreement: (i.e. how much time and capital each will provide, responsibilities, Decision making process … ) The mistake of 50/50 The 51/49 approach MGT239 6

Partnership Advantages Easy to form Distribution of responsibilities Use ideas of more than one person Specialized skills Rise more capital MGT239 7

Partnership Disadvantages: Limited life Unlimited Liability The act of one person effects the entire team Death of one partner terminates the business No protection gains the act of others MGT239 8

Types of Partnership General – In Bahrain called Joint Partners Limited – In Bahrain Called Sleeping Partners. Business in Bahrain that have both Joint and sleeping partners are called (Commandate by Share Companies or Simple Commandate Company). In Bahrain a partnership with only general partners is called Partnership Company. Article of copartnership: MGT239 9

Why Form a Corporation? Corporation: is a business owned and formed by a group of people (stockholders), with specific right, privileges, and limited liability. C Corporation: The traditional form of corporation. MGT239 10

Corporations Advantages Management Access to capital Unlimited liability Perpetual life Legal entity separated from owners MGT239 11

Corporations Disadvantages: Impersonal (shareholders are distant from the business) Owners have limited interest in the firm ’ s activities (except for profit) Tax Government procedures and requirements MGT239 12

How to Form a Corporation Incorporators: people who initiate the corporation Incorporation: the process of forming a corporation Articles of incorporations: The incorporators submit the article of incorporations to the state. Once it is approved it becomes the Corporate charter: Provides information about the business. It is a contract between the corporation and the sate in which the later recognizes the formation of the corporation (the artificial person) MGT239 13

The charter and thus the article of incorporation includes: Firms name and address Incorporators name and address Purpose of the corporation Max. amount and type of stocks to be issues Rights of stockholders Length of time the corporation is to exist. MGT239 14

Corporations Dangerous Possibilities: One owner can leave and start a competing business, benefiting from all information he/she has in hand. Incorporators can include a buy-sell agreement : explain how stockholders can buy each other ’ s interest. MGT239 15

How to Form a Corporation? Stock holders Board of directors Corporate officers MGT239 16

Corporations S Corporation: can be formed with fewer than 75 people, exempted from double taxation and excessive paper work. Tax paid at individual level after income distributed to stockholders. Restrictions on S corporations (depends on the country) for example in the U.S:  Can issue only common stocks  All investors must be individuals, no corporations or partnership can invest in the business.  Only U.S citizens can invest in such corporations MGT239 17

Other Forms of Business Limited Liability Company: combines benefits of the corporation (limited ability) with the advantages of partnership (taxation). LLC must not have more than two of the four characteristics that defines a corporations:  Limited liability  Continuity of life  Centralization of management  Free transferability of ownership MGT239 18

In Bahrain With Limited Liability Company W.L.L: Shares not offered to the public Minimum 2 max. 50 shareholders Share holders liable to the company debt ’ s up to the amount they invested. There are also: Bahrain Shareholding Company (Public) B.S.C Public Bahrain Shareholding Company Closed B.S.C. Closed. MGT239 19

Other Forms of Business Limited liability partnership (LLP): Organized to protect individual partners from personal liability for the negligent acts of other partners or employees. The family limited liability partnership (FLLP): The majority of the partners are related, has the same advantages as LLP. Professional Service Corporations (PSC): Organized for the sole purpose of providing professional services. Each shareholder is licensed. Limited liability for shareholders. MGT239 20

Other Forms of Business Nonprofit corporations Cooperatives: serves its members Joint venture: temporary association between two or more business to achieve certain project. Fractional ownership: can be defined as percentage share of an expensive assts (Time share in the sky) MGT239 21

How to evaluate the legal Form of organization See Figure 3.5 Evaluate: Current situation Future risk Does the legal form protect against this risk Is unlimited liability a series potential problem Do you currently have financial needs Tax advantages Management advantages Are you making use of the advantages available to the present form of the business MGT239 22