Forms of Business Organization in the United States

Principal forms  Sole proprietorship (inidividual ownership)  Partnership (association of persons) General partnership Limited partnership  Corporation (association of capital) C-corporation S-corporation

Sole proprietorship  Also called individual ownership – a business owned by one person (a restaurant, a retail store, a farm etc.)  The owner has unlimited control over the business and enjoys all the profits  The owner also has unlimited personal responsibility for the losses and debts

Sole proprietorship - advantages  The simplest way to set up a business – low start-up costs  Less administrative paperwork  Owner in direct control of decision making  Minimal working capital required  All profits to the owner

Disadvantages  Owner fully responsible for all debts and obligations related to his or her business  Creditor would normally have a right against all of his or her assets, business or personal (unlimited liability)  Difificult to raise capital  Lack of continuity in business organization in the absence of the owner

Partnership  A partnership is an agreement in which two or more persons combine their resources with a view to making a profit  A partnership agreement should be drawn up

Partnership agreement  The legal document that defines each person’s rights and responsibilities, as well as provisions for running the company, both day-to-day and in the event that someone dies or the company dissolves.

Partnership agreement – cont. It should address the following issues:  Decision-making  Capital contribution  Salaries/distribution  Death/disability  Dissolution

General partnership  All members share the management of the business  Each member is personally liable for all the debts and obligations of the business  Each partner must assume the consequences of the action of other partner(s)

Limited partnership  Some members are general partners who control and manage the business and may be entitled to a greater share of the profits  Other partners are limited and contribute only capital, take no part in management and are liable for debts to a specified extent only  A legal document, setting out specific requirements, must be drawn up

Partnership - advantages  Ease of formation  Low start-up costs  Additional sources of investment  Broader management base

Partnership - disadvantages  Unlimited liability for general partners  Lack of continuity  Capital divided authority  Possible conflicts between partners

Corporation - definitions  A legal entity that is separate from its owners, shareholders  An artificial person created under law and empowered to achieve a specific purpose  An organization formed with the state governmental approval to act as an artificial person to carry on business (or other activities) for profit

 A separate legal entity owned by shareholders and ruled by a board of directors who elect officers to do day to day management.

Types of corporations  Private business corporations  Non-profit corporations (for religious, educationsal, charitable purposes)  Public corporations (formed by governments for public purposes)  Close corporations (a few shareholders with a working or familial connections permitted to operate informally)

The Articles of Incorporation  The document that sets out the rules for running the company’s internal affairs  Includes the names of the incorporators (the responsible parties), the amount of stock it will be authorized to issue and its purpose  Determines the rights and obligations of members and directors  Shareholders elect a board of directors

C and S corporations  Income from a C corporation is taxed twice. The corporation pays tax on its net income. Then, shareholders also pay tax on distributions. Income from an S corporation is taxed once at the shareholder level.

Corporation - advantages  Perpetual life (succession) – continuous existence  Limited liability (shareholders protected from personal claims)  Access to capital – easier to raise capital  Transferability of shares (or of ownership) – shares can be bought, sold, exchanged or given  Professional, specialized management

Disadvantages  Closely regulated  The most expensive form to organize  Extensive record keeping necessary  Higher taxation (double taxation of dividens, larger business tax rates)

Corporations in the USA  Out of all business organization forms, corporations amount only to 20 percent  They do 80 percent of the busines in the country

Vocabulary  Sole proprietorship – pojedinačno vlasništvo  Business entity – poslovni subjekt  Partnership – partnerstvo, društvo osoba  Limited partnership – komanditno društvo  Corporation – društvo kapitala  Creditor - vjerovnik  Retail store – dućan s maloprodajom

 Artificial person – pravna osoba  Government grant – odobrenje vlade  Perpetual life – trajni život  Limited liability – ograničena odgovornost  Transferability of shares – prenosivost dionica

Complete the following:  The sole proprietor has ________ control over the business.  In a partnership, profits and losses are shared ________ unless otherwise agreed.  One of the attributes of a corporation is _______ liability.

 The sole proprietor has UNLIMITED control over the business.  In a partnership, profits and losses are shared EQUALLY unless otherwise agreed.  One of the attributes of a corporation is LIMITED liability.

Translate the following:  Each business form has its own advantages and disadvantages. It is selected by people contemplating the formation of a business from the standpoint of financial responsibility, control of operation, possibilities of growth and expansion, and the possibilities of capitalization and financial development.

Thank you for your attention!