Forms of Business Ownership Chapter 5

Issues entrepreneurs should consider when evaluating forms of business ownership Tax Considerations Liability Exposure Start-up and future capital requirements Control Managerial ability Business goals Management succession plans Cost of formation

Sole Proprietorship a business owned and managed by one individual; the business and the owner are one and the same in the law

Advantages of a Sole Proprietorship Simple to create Least costly form of ownership to begin Profit incentive Total decision making authority No special legal restrictions Easy to discontinue

Disadvantages of a Proprietorship Unlimited personal liability Limited skills and capabilities Feelings of isolation Limited access to capital Lack of continuity of the business

The Partnership A partnership is an association of two or more people who co-own a business for the purpose of making a profit. A Partnership Agreement is a document that states in writing the terms under which the partners agree to operate the partnership and that protects each partner’s interest in the business.

Advantages of the Partnership Easy to establish Complementary skills Division of profits Larger pool of capital Ability to attract limited partners General Partners share owning/operating/managing a business and have unlimited liability, while Limited Partners make financial investments, don’t take an active role in management, and their liability is limited to the amount they have invested.

Disadvantages of the Partnership Unlimited liability of at least one partner Capital accumulation Difficulty in disposing of partnership interest Potential for personality and authority conflicts Partners are bound by the law of agency

Limited Partnerships A Limited Partnership is a partnership composed of at least one general partner and at least one limited partner. A Limited Liability Partnership (LLP) is a special type of Limited Partnership in which all partners are limited partners. In many states they must be professionals.

Corporations A corporation is a legal entity apart from its owners that receives the right to exist from the state in which it is incorporated. A corporation may be Closely Held (shares held by just a few people - often family, employees, etc.) or Publicly Held (large number of shareholders)

Advantages of Corporations Limited liability of stockholders Ability to attract capital Ability to continue indefinitely Transferable ownership

Disadvantages of the Corporation Cost and time involved in the incorporation process Double taxation Potential for diminished managerial incentives Legal requirements and regulatory red tape Potential loss of control by the founder

Other Forms of Ownership The S-Corporation is 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. The Limited Liability Company (LLC) is like a S-Corporation (a cross between a corporation and a partnership), but it is not subject to many of the restrictions imposed on S-Corporations. The Professional Corporation is designed to offer professionals the advantages of corporate ownership The Joint Venture is much like a partnership, but formed for a specific purpose.