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Lesson 4.3 CHOOSE THE LEGAL FORM OF YOUR BUSINESS
Chapter 4 Lesson 4.3 CHOOSE THE LEGAL FORM OF YOUR BUSINESS GOALS Evaluate the different legal forms for a business.
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TYPES OF BUSINESS ARRANGEMENTS
Chapter 4 TYPES OF BUSINESS ARRANGEMENTS Sole proprietorship Partnership Corporation S corporation
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Chapter 4 SOLE PROPRIETORSHIP A business that is owned exclusively by one person is a sole proprietorship. Sole proprietorship is the most common form of ownership in the United States. Disadvantages Investment: You are the only one investing money Risk: If a sole proprietorship fails and debts remain, the entrepreneur’s private assets may be taken to pay what is owed
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Chapter 4 PARTNERSHIP Many entrepreneurs prefer to go into business with one ore more partners so that they have someone with whom to share decision-making and management responsibilities Advantages Shared decisions Someone else to contribute capital All loses are shared between partners Disadvantages Share profits Liable for errors of partners
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Partnership Agreement
Chapter 4 Partnership Agreement When two or more entrepreneurs go into business together, they generally sign a partnership agreement The purpose of this agreement is to set down in writing the rights and responsibilities of each of the owners
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Partnership Agreement
Chapter 4 Partnership Agreement A partnership agreement identifies Name of the business Names of the partners Type and value of the investment each contributes Managerial responsibilities Accounting methods to be used Right of each partner Division of profits and losses Salaries to be withdrawn by partners Duration of the partnership Conditions under which the partnership can be dissolved Distribution of assets Procedures for dealing with death of partner
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CORPORATION A corporation is treated independently of its owners
Chapter 4 CORPORATION A corporation is treated independently of its owners A corporation has the legal rights of an individual and the corporation, not the owners, pay taxes, enters into contract s and may be held liable for negligence Ownership of a corporation is in the form of shares of stock Share of stock: unit of ownership in a corporation People who own stock in a corporation are known as stockholders or shareholders Every corporation has a board of directors Group of people who meet several times a year to make important decisions affecting the company Dividends Dividends are distributions of profits to shareholders by corporations
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Corporations Setting up a corporation is more difficult and complex
Chapter 4 Corporations Setting up a corporation is more difficult and complex To incorporate a business means to set up a business as a corporation To incorporate you will need the assistance of a lawyer Corporations are subject to much more government regulation Income is taxed twice Taxed on income Taxed on dividends they receive from corporation
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Chapter 4 Why incorporate? Most entrepreneurs set up their businesses as corporation because of liability Liability is the amount owed to others The shareholders liability is limited to the amount of money each shareholder invested in the company when he or she purchased stock Incorporations allow businesses to raise money by selling stock Lenders are more willing to loan money to incorporations
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Chapter 4 S CORPORATION An S corporation is a corporation organized under subchapter S of the Internal Revenue Code whose income is taxed as a partnership. S Corporations are not taxed as a business The individual shareholders are taxed on the profits they earn Many companies set up as an S Corporation at first because they lose money in the early years Any money lost in the early years can be used to offset other sources of taxable income
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CHARACTERISTICS OF THE LEGAL FORMS OF BUSINESS
Chapter 4 CHARACTERISTICS OF THE LEGAL FORMS OF BUSINESS Sole Proprietorship Partnership Corporation S Corporation FEATURE Simple to start Decisions made by one person Low initial cost Limited liability Limited government regulation Ability to raise capital Double taxation of profits
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