Chapter 5 Selecting a Form of Business Ownership

Learning Objectives Selecting a Form of Business Ownership Existing FirmsSole Proprietor Risk & Return Partnership Corporation

Selecting a Form of Business Ownership Selecting a Form Sole Proprietor Partnership Corporation Risk & Return Existing Firms Insert Chart from page 159

Selecting a Form of Business Ownership Unlimited liability ( 无限责任） the responsibility of business owners for all the debts of the business. Limited liability ( 有限责任） the responsibility of a business owners for losses only up to the amount they invest.

Selecting a Form of Business Ownership A person invested $20,000 to a business. One year later, due to unsuccessful management, the debts amount to $30,000. If he declares bankruptcy, how much does he need to pay?

Selecting a Form of Business Ownership Sole Proprietorship Sole Proprietor Partnership Corporation Risk & Return Existing Firms 6% Profit 70% of all Businesses Single Owner

Selecting a Form of Business Ownership Sole Proprietorships （个体工商户） Sole Proprietor Partnership Corporation Risk & Return Existing Firms Disadvantages - Losses - Unlimited Liability - Limited Funds - Limited Skills Advantages - Earnings - Easy Organization - Control - Low Taxes

Selecting a Form of Business Ownership Partnership （合伙企业） Sole Proprietor Partnership Corporation Risk & Return Existing Firms General Partnership Limited Partnership General Partners Limited Partners

Selecting a Form of Business Ownership Partnerships( 合伙企业） Sole Proprietor Partnership Corporation Risk & Return Existing Firms Disadvantages - Shared Control - Unlimited Liability - Shared Profits Advantages - Additional Funds - Shared Losses - Specialization

Selecting a Form of Business Ownership Corporations （公司） Sole Proprietor Partnership Corporation Risk & Return Existing Firms

Selecting a Form of Business Ownership Corporation ( 公司） The difference between corporation and company 1. Corporation (American English) company (British English) 2. Corporation only mean incorporated organization; while company can mean both incorporated and unincorporated organization.

Selecting a Form of Business Ownership 公司法 Company Law (British English) Corporate Law (American English) Corporation Law ( 比较少见，但也有）

Selecting a Form of Business Ownership Legal entity （法人） A corporation is a legal entity, which is an artificial being that exists only in the eyes of the law. It can be owned by one person or many persons. all the owners have limited liabilities.

How Owners Affect Management

Selecting a Form of Business Ownership Stockholder Returns Sole Proprietor Partnership Corporation Risk & Return Existing Firms Stock PriceDividends Publicly Held Privately Held

Selecting a Form of Business Ownership Corporations Sole Proprietor Partnership Corporation Risk & Return Existing Firms Disadvantages - High Expense - Financial Disclosure - Agency Problems - High Taxes Advantages - Limited Liability - Access to Funds - Ownership Transfer Capital Gains

Selecting a Form of Business Ownership Double Taxation Sole Proprietor Partnership Corporation Risk & Return Existing Firms

Types of Corporations  Regular ‘C’  S Corporation  Limited Liability Companies

Selecting a Form of Business Ownership S-Corporations Sole Proprietor Partnership Corporation Risk & Return Existing Firms Limited Liability Personal Tax

Selecting a Form of Business Ownership Conditions for Establishing S-Corporation 1. Have no more than 75 (or 150, including spouses) shareholders. 2. have shareholders that are individuals or estates and are citizens or permanent residents of the US. 3. have only one class of outstanding stock. 4. not have more than 25% of income derived from passive sources (rents, royalties, interest, etc.).

Selecting a Form of Business Ownership Limited Liability Company LLC Sole Proprietor Partnership Corporation Risk & Return Existing Firms Limited Liability Partnership Benefits

Selecting a Form of Business Ownership LLC A limited liability company is similar to S corporation but without the special eligibility requirements.

Selecting a Form of Business Ownership Advantages of LLC 1. Limited liability 2. choice of taxation 3. flexible ownership rules 4. flexible distribution of profit and losses 5. operating flexibility

Selecting a Form of Business Ownership Disadvantages of LLC 1. no stock 2. limited life span (no more than 30 years in some state) 3. fewer incentives 4. LLC members must pay self- employment taxes on profit. S- corporations pay self- employment tax on salary.

Selecting a Form of Business Ownership 公司 In China there are two kind of 公司 (corporation/company) 有限责任公司 (Limited liability company) (private/closed corporation) 股份公司 ( Joint stock limited company) (public/open corporation)

Selecting a Form of Business Ownership 两种公司的区别 Difference in starting Difference in the number of shareholders Difference in holding 出资证明和股票 Difference in share transferring Difference in publicity of the legal documents Difference in profit distribution

Selecting a Form of Business Ownership 一人公司和个人独资企业的区 别 Limited liability Pay both enterprise income tax and personal income tax Registration capital no less then 100,000 RMB Unlimited liability Pay personal income tax No restriction of registration capital

Selecting a Form of Business Ownership Comparing Business Forms Sole Proprietor Partnership Corporation Risk & Return Existing Firms Can Change No Magic Answer

Selecting a Form of Business Ownership Equity Sole Proprietor Partnership Corporation Risk & Return Existing Firms Firm “A” Partnership Firm “B” Corporation After-tax earnings $15 million Owner’s Equity $100 million$300 million Return on Equity 15%5%

Selecting a Form of Business Ownership Owning an Existing Business Sole Proprietor Partnership Corporation Risk & Return Existing Firms Family Business Existing Business Franchise

Selecting a Form of Business Ownership Franchise Sole Proprietor Partnership Corporation Risk & Return Existing Firms Disadvantages - Sharing Profits - Less Control Advantages - Proven Style - Name Recognition - Financial Support Chain Style Distributorship

Cost of Fast-Food Franchise CompanyInitial FeeRoyalty Burger King$50,0008.5% McDonald’s$45,0008% Wendy’s$25,0008% Domino’sNone8.5% Subway$10, % Krispy Kreme$40,0005.5%