COPYRIGHT © 2011 South-Western/Cengage Learning. 1 Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide or previous slide.

COPYRIGHT © 2011 South-Western/Cengage Learning. 2 Quote of the Day “Business underlies everything in our national life, including our spiritual life. Witness the fact that in the Lord’s Prayer, the first petition is for daily bread. No one can worship God or love his neighbor on an empty stomach.” Woodrow Wilson, United States president

COPYRIGHT © 2011 South-Western/Cengage Learning. 3 Sole Proprietorships  A sole proprietorship is an unincorporated business owned by one person.  Sole proprietorships are easy and inexpensive to create and operate.  Earnings are reported on the owner’s personal tax returns.

COPYRIGHT © 2011 South-Western/Cengage Learning. 4 Corporations  Corporations offer limited liability – usually the managers’ and investors’ personal property is not at risk.  Corporate stock can be bought and sold, making investments easy to get.  Corporations have perpetual existence; they can continue without their founders.  Corporations involve a lot of expense and effort to create and operate.  Profits are taxable.

COPYRIGHT © 2011 South-Western/Cengage Learning. 5 Close Corporations  “Close corporation” and “closely held corporation” refer to a corporation whose stock is not publicly traded on a stock exchange.  Common provisions of close corporations: Protection of Minority Shareholders Transfer Restrictions Flexibility Dispute Resolution

COPYRIGHT © 2011 South-Western/Cengage Learning. 6 “S” Corporations  Shareholders of S corps have the best of all worlds: the limited liability of a corporation and the tax status of a partnership.  The disadvantages of an S corp are: There can only be one class of stocks. There can be no more than 75 shareholders. Shareholders cannot be partnerships or other corporations. Shareholders must be U.S. citizens or residents.

COPYRIGHT © 2011 South-Western/Cengage Learning. 7 Limited Liability Companies  An LLC offers the limited liability of a corporation and the tax status of a partnership, without the disadvantages of an S corporation.  The LLC offers: Limited liability, Favorable tax status, Flexibility in management and membership, Duration even after a member withdraws  The biggest disadvantage with LLC is the legal uncertainty involved since state laws vary and organization forms are not standardized.

COPYRIGHT © 2011 South-Western/Cengage Learning. 8 General Partnership  A partnership is an unincorporated association of two or more co-owners who carry on a business for profit.  Each co-owner is a general partner.  Unless otherwise agreed, partners share profits, losses and management equally.  Partnerships are easy to form (sometimes it happens unintentionally!)  Partners can be held personally liable for the partnership actions and debts.

COPYRIGHT © 2011 South-Western/Cengage Learning. 9 Partnership Pros & Cons  Advantages: They don’t pay taxes They are easy to form.  Disadvantages: Each partner is liable personally. Funding may be difficult (can’t sell shares). Management may be difficult. Transferability is limited.

COPYRIGHT © 2011 South-Western/Cengage Learning. 10 Liability  Tort Liability – A partnership is liable for intentional and negligent torts of a partner in the ordinary course of business or when the partner is acting with actual authority.  Personal Liability – each partner is personally liable for the debts of the partnership.  Joint and Several Liability – a creditor may sue the partners jointly as a group or separately as individuals.

COPYRIGHT © 2011 South-Western/Cengage Learning. 11 Formation  Partnership by estoppel applies if: Participants tell other people that they are partners (even though they are not), or they allow other people to say, without contradiction, that they are partners. A third party relies on this assertion; and The third party suffers harm.

COPYRIGHT © 2011 South-Western/Cengage Learning. 12 Management Rights  Each partner has equal rights in management of the partnership unless otherwise agreed.  Large partnerships are often managed by a few designated managing partners or an executive committee.  Unless agreed otherwise, partners have an equal vote on matters of partnership business.

COPYRIGHT © 2011 South-Western/Cengage Learning. 13 Management Duties  Duty of Care – duty owed by partners to manage the partnership affairs without gross negligence, reckless conduct, intentional misconduct, or knowing violation of law.  Duty of Loyalty – duty of utmost loyalty. Duty to not compete with partnership, turn over any profit to partnership, and avoid conflicts of interest.  Duty of Good Faith & Fair Dealing – duty to deal with each other and the partnership in a fair way.

COPYRIGHT © 2011 South-Western/Cengage Learning. 14 Terminating a Partnership  Dissociation occurs if a partner quits.  When one or more partners dissociate, the partnership can either buy out the departing partner(s) and continue in business or wind up the business and terminate the partnership.  A partner always has the power to leave a partnership but may not have the right.

COPYRIGHT © 2011 South-Western/Cengage Learning. 15 Termination of the Partnership Business  Ending a partnership business involves three steps: Dissolution --decision to end business; can be voluntary or automatic. Winding Up -- During the winding up process, all debts of the partnership are paid, and the remaining proceeds are distributed to the partners. Termination -- the end; happens when winding up is complete.

COPYRIGHT © 2011 South-Western/Cengage Learning. 16 Circumstances that Require Dissolution  Partner withdraws from a partnership at will.  Partner is dissociated and half the other partners vote to wind up business.  All partners agree to dissolve.  The term expires or partnership achieves its goal.  Partners agree in advance on events that will cause dissociation.  Partnership business becomes illegal.  A court determines that the partnership cannot function successfully.

COPYRIGHT © 2011 South-Western/Cengage Learning. 17 Limited Liability Partnerships (LLPs)  Partners in an LLP are not personally liable for debts of the partnership (whether arising from contract or tort).

COPYRIGHT © 2011 South-Western/Cengage Learning. 18 Limited Partnerships & Limited Liability Limited Partnerships  Have general (active management) and limited (money-only) partners.  In a limited partnership, only the general partners are personally liable.  In a limited liability limited partnership, the general partner is not personally liable for the debts of the partnership.  Limited partnerships are not taxable entities.

COPYRIGHT © 2011 South-Western/Cengage Learning. 19 Limited Partnerships & Limited Liability Limited Partnerships  Formation of limited partnerships require a filed certificate of limited partnership.  General partners have management rights; limited partners do not.  Limited partners may transfer the value of their interest, but the interest itself only if the partnership agreement permits.  Usually, limited partnerships have perpetual existence.

COPYRIGHT © 2011 South-Western/Cengage Learning. 20 Professional Corporations  Most states let professionals incorporate.  In many states, PCs provide more liability protection than a partnership.  The corporation may be liable for an individual member’s mistakes, but the innocent professionals are not at risk.

COPYRIGHT © 2011 South-Western/Cengage Learning. 21 Joint Venture  A joint venture is a partnership for a limited purpose.  Nonprofit enterprises do not qualify as a joint venture.

COPYRIGHT © 2011 South-Western/Cengage Learning. 22 Other Forms of Organization  Business Trusts – an unincorporated association run by trustees for the benefit of investors  Cooperatives – groups of individuals or businesses that join together to gain the advantage of volume purchases or sales  Franchises are not actually a separate form of business – they can take almost any one of the ones discussed already. Franchising is a popular method of starting a business that is a compromise between employment and starting your own business. Franchisees have freedom to make many choices, but are limited in other ways.

COPYRIGHT © 2011 South-Western/Cengage Learning. 23 “No one form of organization is right for every business. The proper choice depends upon factors such as sources of financing, tax issues, liability concerns, and the entrepreneur’s goals.” “No one form of organization is right for every business. The proper choice depends upon factors such as sources of financing, tax issues, liability concerns, and the entrepreneur’s goals.”