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

2. Types of Business Ownership
Sole Proprietorship
Partnership
General
LLP
Corporation
C-Corp
S-Corp
LLC
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3. 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
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4. 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
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5. 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
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6. 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
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7. 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
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8. 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
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9. 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
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10. Seven Largest U.S. Corporations
Insert Table 5.1, 9e, p. 158 with title and source
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11. 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
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12. Forming a Corporation Incorporation
The process of forming a corporation
Most experts recommend consulting a lawyer
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13. 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.
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14. 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
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15. 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
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16. 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
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17. 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
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18. Hierarchy of Corporate Structure
Stockholders exercise a great deal of influence through their right to elect the board of directors
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19. 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
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20. 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
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21. 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
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22. 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)
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23. 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
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24. Businesses are registered with the State’s Secretary of State
Starting a business
Businesses are registered with the State’s Secretary of State
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