Chapter Forms of Ownership of Small Businesses 3

Irwin/McGraw- Hill © The McGraw-Hill Companies, Inc., 2003 Selecting the Right Legal Form Sole Proprietorship – A business that is owned exclusively by one person. most popular (73%) - Popular in all industries Partnership – A business owned by two or more people – 7% Popular in finance, real estate, and insurance Corporations – legal rights of a person that may be owned by many people - 20%

Irwin/McGraw- Hill © The McGraw-Hill Companies, Inc., 2003 Comparison of Proprietorships, Partnerships, and Corporations in Selected Industries Industry Services82%3%15% Trade70%4%26% Construction77%3%20% Finance43%32%25% Manufacturing57%5%38% Percentage of firms in the industry Proprietorships Partnerships Corporation

Irwin/McGraw- Hill © The McGraw-Hill Companies, Inc., 2003 Relative Position of U.S. Proprietorships, Partnerships, and Corporations A. Proprietorships are the most numerous. B. Corporations produce the most revenue. Distribution by total number Distribution by revenues ProprietorshipsCorporationsPartnerships

Irwin/McGraw- Hill © The McGraw-Hill Companies, Inc., 2003 Proprietorship A business owned by 1 person Oldest form of ownership Least costly form to begin Easy to enter, operate and terminate – very little gov’t control Favorable tax status – taxed at owners personal income tax rate. Negatives- If don’t have enough funds to pay obligations have to pay out of personal assets. Limited skills and capabilities Limited access to capital Feeling of isolation

Irwin/McGraw- Hill © The McGraw-Hill Companies, Inc., 2003 Types of Partnerships GENERAL PARTNERSHIP ? each partner actually participates as an equal in managing the business ? each partner is liable for the acts of other partners LIMITED PARTNERSHIP ? one or more general partners conduct the business ? one or more limited partners contribute capital but do not participate in management and are not liable for the debts of the general partners

Irwin/McGraw- Hill © The McGraw-Hill Companies, Inc., 2003 Partnership Advantages – Don’t have to come up with all of the capital, Combined managerial skills, losses will be shared by all partners, little gov’t regulation, taxation Disadvantages – Don’t want to share responsibilities and profits, fear being held legally liable for the errors of their partners, can lead to disagreements (personality and authority conflicts).

Irwin/McGraw- Hill © The McGraw-Hill Companies, Inc., 2003 Articles of Copartnership (Partnership Agreement) Set down in writing the rights, duties, and responsibilities of each of the owners. Drawn up during the pre-operating period See overhead

Irwin/McGraw- Hill © The McGraw-Hill Companies, Inc., 2003 Corporation The corporation, not the owners, pays taxes, enters into contracts, and may be held liable for negligence. More formal and complex than other business forms Ownership is in the form of shares of stock (shareholders/stockholders) Board of directors – make decisions (elect officers, salaries, rules, dividend amount Transferable ownership – ability to continue indefinitely

Irwin/McGraw- Hill © The McGraw-Hill Companies, Inc., 2003 Corporation Advantages – Liability is limited to amount of money each shareholder invested. Unlimited life, specialized and professional management Disadvantage – Can be costly. Meet with lawyer to help file chartering, registering, detail purpose of business. Double Taxation – corporation pays taxes on its income and shareholders pay taxes on the dividends they receive. Increased government control, Potential loss of control by founder(s)

Irwin/McGraw- Hill © The McGraw-Hill Companies, Inc., 2003 Corporations C-Corporation – Traditional form of a corporation S-Corporation – No different from any other corporation from a legal perspective. For tax purposes, however, and S corporation is taxed like a partnership, passing all of its profits (or losses) through to individual shareholders. Business with fewer than 75 stockholders. Only common stock is issued