2. Organizational Forms Businesses are generally structured as:
20-2
Organizational Forms
Businesses are generally structured as:
Sole proprietorship
Partnership
Corporation
Limited liability company (LLC)
While different states have variations on the above forms, the descriptions and discussion that follow generally apply to all businesses in the United States.
Learning Outcome 20-1: Identify the business organizational forms available in the United States whose purpose is to earn a profit.
Page: 322

3. 20-3
Sole Proprietorship
A Sole Proprietorship is a business owned and operated by one person.
Advantages:
Extremely easy to form.
Owner has complete authority (within the boundaries of the law).
Owner can be creative.
All profits flow directly to the owner.
Easy to dissolve the business if necessary.
Learning Outcome 20-2: Define sole proprietorship and discuss its advantages and disadvantages.
Page: 322

4. Sole Proprietorship (cont.)
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Sole Proprietorship (cont.)
Sole Proprietorship
Disadvantages:
Owner has unlimited liability.
Owner’s assets are at risk.
Difficulty in raising money to finance the operations of the business.
Learning Outcome 20-2: Define sole proprietorship and discuss its advantages and disadvantages.
Page: 322

5. 20-5
Partnership
A partnership is business owned and operated by two or more persons.
Shares of partners might be equal, or vary according to an partners’ contract/agreement.
Dissolution per agreement occurs due to:
The death or disability of one of the partners.
The expulsion of one of the partners.
Illegality of the partnership’s business.
The retirement of one of the partners.
The bankruptcy of the business.
Learning Outcome 20-3: Define partnership and discuss the advantages and disadvantages of organizing as a partnership, as well as the advantages and disadvantages of being a limited partner.
Page: 323

6. 20-6
Partnership (Cont.)
Dissolution of partnership followed by a winding- up period, during which there is an orderly liquidation of the partnership assets.
Joint venture: Individuals become partners for only a short period of time or for only a single project.
The Uniform Partnership Act (UPA), which governs partnerships, has been adopted by the majority of states.
Learning Outcome 20-3: Define partnership and discuss the advantages and disadvantages of organizing as a partnership, as well as the advantages and disadvantages of being a limited partner.
Page: 323

7. Partnership (cont.) Advantages:
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Partnership (cont.)
Advantages:
Each partner has the right to share in the profits of the business.
Each individual partner will be responsible for paying the income taxes on those profits (or deduct losses).
Each partner also has a right to share in the value of the firm’s assets; all business assets are owned jointly by all partners.
Easy to form and owners have complete authority for the running of the business.
Learning Outcome 20-3: Define partnership and discuss the advantages and disadvantages of organizing as a partnership, as well as the advantages and disadvantages of being a limited partner.
Page: 323

8. Partnership (cont.) Disadvantages:
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Partnership (cont.)
Disadvantages:
Each partner has unlimited liability.
Partners have joint and several liability.
Partners may disagree on how the business should be run.
Learning Outcome 20-3: Define partnership and discuss the advantages and disadvantages of organizing as a partnership, as well as the advantages and disadvantages of being a limited partner.
Page: 323

9. Example: Partnership Facts:
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Example: Partnership
Facts:
Petrillo and Patel co-owned a bakery as equal general partners.
Petrillo responsible for sidewalk in front of store.
Petrillo failed to remove ice from sidewalk, a pedestrian slipped and injured her leg.
The pedestrian sued only Patel.
Patel liable to pedestrian and could recoup losses by suing Petrillo.
This illustrates risk of partnership and why it’s important to have liability insurance.
Learning Outcome 20-3: Define partnership and discuss the advantages and disadvantages of organizing as a partnership, as well as the advantages and disadvantages of being a limited partner.
Page: 324

10. 20-10
Limited Partnership
A limited partnership is a business in which there are one or more general partners and one or more limited partners.
Limited partnerships receive the same tax treatment as all partnerships.
Authority, dissolution, and so forth are governed by the partnership contract.
Learning Outcome 20-3: Define partnership and discuss the advantages and disadvantages of organizing as a partnership, as well as the advantages and disadvantages of being a limited partner.
Page: 324

11. Limited Partnership (cont.)
20-11
Limited Partnership (cont.)
Limited Partnership -
Advantages:
Personal liability is limited to each partner’s investment in the business.
Disadvantages:
Each partner may not be able to participate in overall management of business, lest he or she deemed by courts to be a general partner, and lose his or her limited liability.
Learning Outcome 20-3: Define partnership and discuss the advantages and disadvantages of organizing as a partnership, as well as the advantages and disadvantages of being a limited partner.
Page: 324

12. Limited Liability Partnership
20-12
Limited Liability Partnership
Limited Liability Partnership (LLP)
A limited liability partnership is type of partnership used by professionals in business together.
Generally, in a LLP, all partners have limited liability for other partners’ negligence.
Common LLPs:
Law firms
Accounting firms
Medical practices
Learning Outcome 20-3: Define partnership and discuss the advantages and disadvantages of organizing as a partnership, as well as the advantages and disadvantages of being a limited partner.
Page: 325

13. Corporation A business formed as a separate legal entity.
20-13
Corporation
A business formed as a separate legal entity.
Individuals can start a corporation by applying for a charter in one of the 50 states.
Corporations are owned by shareholders, who purchase shares of stock in the corporation.
Learning Outcome 20-4: Explain the major characteristics of a corporation.
Page: 325

14. 20-14
Corporation (cont.)
Articles of incorporation: List the general powers of the company.
Bylaws: Provide rules for the meetings of the corporation.
Quorum: This is required for action to be taken at a meeting.
Learning Outcome 20-4: Explain the major characteristics of a corporation.
Page: 325

15. 20-15
Corporation (cont.)
A corporation is considered a kind of legal person, and courts have granted corporations similar constitutional rights to those granted to individuals and other organizations.
Corporations may be required to have:
A corporate seal.
Special tax identification number.
Learning Outcome 20-4: Explain the major characteristics of a corporation.
Page: 325

16. Corporation (cont.) Advantages: Limited liability to shareholders.
20-16
Corporation (cont.)
Advantages:
Limited liability to shareholders.
Courts are extremely hesitant to pierce the corporate veil.
Easy for a corporation to raise capital and obtain additional financing by issuing and selling new shares.
Learning Outcome 20-4: Explain the major characteristics of a corporation.
Page: 325

17. Corporation (cont.) Disadvantages:
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Corporation (cont.)
Disadvantages:
Corporations are required to pay separate income taxes at a special corporate rate for any year during which a profit is earned.
Expense associated with forming and maintaining the company.
Learning Outcome 20-4: Explain the major characteristics of a corporation.
Page: 325

18. Subchapter S Corporation
20-18
Subchapter S Corporation
A corporation but with the advantage of being taxed as a partnership.
The company must comply with tax regulations, such as the restriction that there be a limited number of shareholders, among other requirements.
Learning Outcome 20-4: Explain the major characteristics of a corporation.
Page: 327

19. Corporate Directors and Officers
20-19
Directors: Voted in by shareholders of corporation. Responsible for managing overall strategy and operations of firm over long term.
Members of the board: The directors are members of a board. Responsible for managing overall strategy and operations of firm over long term.
Officers: Directors appoint officers. Exercise control over normal, routine matters that arise on daily basis.
Examples: President, vice president and others.
Learning Outcome 20-4: Explain the major characteristics of a corporation.
Page: 327

20. Fiduciary Responsibility
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Fiduciary Responsibility
Directors and officers exercise authority while working under duty of loyalty and duty of care.
Duty of Loyalty
A director has legal and ethical obligation to administer affairs of corporation with personal integrity, honesty, and candor.
Example: Directors prohibited from advancing own personal or outside business interests at corporate expense.
Learning Outcome 20-4: Explain the major characteristics of a corporation.
Page: 327

21. Fiduciary Responsibility (cont.)
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Fiduciary Responsibility (cont.)
Duty of Care
Director has legal and ethical obligation to act diligently and prudently in conducting corporate affairs.
Director responsible for selecting, monitoring, and evaluating competent management.
Director must promote and advance policies and strategic initiatives of firm, while at all times making certain implementation of policies and strategies adheres to principles of law and safety.
Learning Outcome 20-4: Explain the major characteristics of a corporation.
Page: 327

22. Example: Fiduciary Responsibility
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Facts:
Lennox, a partner in a law firm, also served on board of directors for a corporation.
When the company decided to purchase a warehouse, Lennox convinced the board of directors to hire his firm to handle the transaction for an exorbitant fee.
Lennox has breached his duty of loyalty and violated his legal and ethical responsibilities
Learning Outcome 20-4: Explain the major characteristics of a corporation.
Page: 327

23. Limited Liability Company (LLC)
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Limited Liability Company (LLC)
A relatively new organizational form recognized by all 50 states.
It is taxed like a partnership for federal tax purposes (state laws vary in terms of state tax treatment).
The members (owners) act as a management team and share in the overall control of the business.
Learning Outcome 20-5: Describe limited liability companies.
Page: 328

24. Limited Liability Company (cont.)
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Limited Liability Company (cont.)
Laws governing the formation of LLCs vary from state to state
Generally, to organize an LLC, members draft an operating agreement that serves to govern the business in important matters.
Operating agreements cover topics such as how the LLC will be managed, the members’ rights and responsibilities, and how the LLC will be dissolved.
Learning Outcome 20-5: Describe limited liability companies.
Page: 328

25. Limited Liability Company (LLC)
20-25
Limited Liability Company (LLC)
Advantages:
The LLC provides all members with limited liability, while allowing them to participate in the management of the business.
The LLC is treated in the same manner as a partnership by the IRS.
Members can avoid double taxation of earnings.
In most states, an LLC is quite easy to form.
Learning Outcome 20-5: Describe limited liability companies.
Page: 328

26. Limited Liability Company (LLC)
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Limited Liability Company (LLC)
Disadvantages:
Owners frequently have difficulty in raising additional funds to expand or maintain the business.
There may be times when members of the management team may disagree on how the business should be run.
Learning Outcome 20-5: Describe limited liability companies.
Page: 328

27. Other Organizational Forms
20-27
Other Organizational Forms
Organizational forms whose purpose is to aid society are known as not-for-profit organizations.
Examples:
Charitable organizations
Political parties
Labor unions
Social clubs
Universities
Learning Outcome 20-6: Identify organizational forms that are not business entities.
Page: 329