Choosing a Form of Business Ownership Chapter Five Choosing a Form of Business Ownership

Types of Business Ownership Sole Proprietorship Partnership General LLP Corporation C-Corp S-Corp LLC Copyright © Houghton Mifflin Company. All rights reserved.

Sole Proprietorships A business that is owned (and usually operated) by one person The simplest form of business ownership and the easiest to start The most widespread form of business ownership Copyright © Houghton Mifflin Company. All rights reserved.

Advantages and Disadvantages of Sole Proprietorships Ease of start-up (and shut down) Pride of ownership Retention of profits Flexibility No special taxes DISADVANTAGES Unlimited liability A legal concept that holds a business owner personally responsible for all the debts of the business Lack of continuity Lack of money Limited management skills Difficulty in hiring employees Copyright © Houghton Mifflin Company. All rights reserved.

Partnerships A voluntary association of two or more persons to act as co-owners of business for profit Less common form of ownership than sole proprietorship or corporation No legal limit on the maximum number of partners; most have only 2 Large accounting, law, and advertising partnerships have multiple partners Copyright © Houghton Mifflin Company. All rights reserved.

Types of Partners General partner A person who assumes full or shared responsibility for operating a business Limited partner A person who contributes capital to a business but has no management responsibility or liability for losses beyond the amount he or she invested in the partnership Copyright © Houghton Mifflin Company. All rights reserved.

The Partnership Agreement Articles of partnership An agreement listing and explaining the terms of the partnership Agreement should state Who will make final decisions What each partner’s duties will be How much each partner will invest How much profit or loss each partner receives or is responsible for How the partnership can be dissolved Copyright © Houghton Mifflin Company. All rights reserved.

Advantages and Disadvantages of Partnerships Ease of start-up Availability of capital and credit Personal interest Combined business skills and knowledge Retention of profits No special taxes DISADVANTAGES Unlimited liability Lack of continuity Management disagreements Frozen investment Copyright © Houghton Mifflin Company. All rights reserved.

Corporations An artificial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy or sell property, to borrow money, to sue or be sued, and to enter into binding contracts There are 5.1 million corporations in the U.S. They comprise only 20% of all businesses, but they account for 84.4 % of sales revenues Copyright © Houghton Mifflin Company. All rights reserved.

Seven Largest U.S. Corporations Insert Table 5.1, 9e, p. 158 with title and source Copyright © Houghton Mifflin Company. All rights reserved.

Corporations (cont’d) Corporate ownership Stock The shares of ownership of a corporation Stockholder A person who owns a corporation’s stock Closed corporation A corporation whose stock is owned by relatively few people and is not sold to the general public Open corporation A corporation whose stock is bought and sold on security exchanges and can be purchased by any individual Copyright © Houghton Mifflin Company. All rights reserved.

Forming a Corporation Incorporation The process of forming a corporation Most experts recommend consulting a lawyer Copyright © Houghton Mifflin Company. All rights reserved.

Forming a Corporation (cont’d) Where to incorporate Businesses can incorporate in any state they choose Some states offer fewer restrictions, lower taxes, and other benefits to attract new firms Domestic corporation A corporation in the state in which it is incorporated Foreign corporation A corporation in any state in which it does business except the one it which it is incorporated Alien corporation A corporation chartered by a foreign government and conducting business in the U.S. Copyright © Houghton Mifflin Company. All rights reserved.

Forming a Corporation (cont’d) Corporate charter A contract (submitted as articles of incorporation) between the corporation and the state in which the state recognizes the formation of the artificial person that is the corporation Charter includes Firm’s name and address Incorporators’ names and addresses Purpose of the corporation Maximum amount of stock and types of stock to be issued Rights and privileges of stockholders Length of time the corporation is to exist Copyright © Houghton Mifflin Company. All rights reserved.

Forming a Corporation (cont’d) Stockholders’ rights Common stock Stock owned by individuals or firms who may vote on corporate matters but whose claims on profit and assets are subordinate to the claims of others Preferred stock Stock owned by individuals or firms who usually do not have voting rights but whose claims on dividends are paid before those of common-stock holders Dividend A distribution of earnings to the stockholders of a corporation Proxy A legal form listing issues to be decided at a stockholders’ meeting and enabling stockholders to transfer their voting rights to some other individual or individuals Copyright © Houghton Mifflin Company. All rights reserved.

Corporate Structure Board of directors The top governing body of a corporation, the members of which are elected by the stockholders Responsible for setting corporate goals, developing strategic plans to meet those goals, and the firm’s overall operation Outside directors: experienced managers or entrepreneurs from outside the corporation who have specific talents Inside directors: top managers from within the corporation Copyright © Houghton Mifflin Company. All rights reserved.

Corporate Structure (cont’d) Corporate officers The chairman of the board, president, executive vice presidents, corporate secretary, treasurer, or any other top executive appointed by the board Implement the chosen strategy and direct the work of the corporation, periodically reporting results to the board Copyright © Houghton Mifflin Company. All rights reserved.

Hierarchy of Corporate Structure Stockholders exercise a great deal of influence through their right to elect the board of directors Copyright © Houghton Mifflin Company. All rights reserved.

Advantages and Disadvantages of Corporations Limited liability Each owner’s financial liability is limited to the amount of money that he or she has paid for the corporation’s stock Ease of raising capital Ease of transfer of ownership Perpetual life Specialized management DISADVANTAGES Difficulty and expense of formation Government regulation and increased paperwork Double taxation Lack of secrecy Copyright © Houghton Mifflin Company. All rights reserved.

Special Types of Business Ownership S-corporations A corporation that is taxed as though it were a partnership (income is taxed only as the personal income of stockholders) Advantages Avoids double taxation of a corporation Retains the corporation’s legal benefit of limited liability S-corporation criteria No more than 100 stockholders allowed Stockholders must be individuals, estates, or exempt organizations There can be only one class of outstanding stock The firm must be a domestic corporation There can be no nonresident-alien stockholders All stockholders must agree to the decision to form an S-corporation Copyright © Houghton Mifflin Company. All rights reserved.

Special Types of Business Ownership (cont’d) Limited-liability company (LLC) A form of business ownership that provides limited-liability protection and is taxed like a partnership Advantages Avoids double taxation of a corporation Retains the corporation’s legal benefit of limited liability Difference between LLC and S-corporation LLCs not restricted to 100 stockholders LLCs have fewer restrictions on who can be a stockholder Copyright © Houghton Mifflin Company. All rights reserved.

Special Types of Business Ownership (cont’d) Government-owned corporations A corporation owned and operated by a local, state, or federal government Purpose To ensure that a public service is available Examples Tennessee Valley Authority (TVA), the National Aeronautics and Space Administration (NASA), and the Federal Deposit Insurance Corporation (FDIC) Copyright © Houghton Mifflin Company. All rights reserved.

Special Types of Business Ownership (cont’d) Not-for-profit corporations Corporations organized to provide social, educational, religious, or other services, rather than to earn a profit Charities, museums, private schools, and colleges are organized as not-for-profits primarily to ensure limited liability Copyright © Houghton Mifflin Company. All rights reserved.

Businesses are registered with the State’s Secretary of State Starting a business http://www.nj.gov/njbusiness/start/ Businesses are registered with the State’s Secretary of State Copyright © Houghton Mifflin Company. All rights reserved.