1. Chapter 12 Legal Forms of Organization

2. Copyright © Houghton Mifflin Company12-2 Overview How to make the decision Legal forms of organization –Sole proprietorship –Partnership –Corporation –Limited liability company –Professional corporations –Nonprofit corporations

3. Copyright © Houghton Mifflin Company12-3 How Would You Decide?

4. Copyright © Houghton Mifflin Company12-4 Criteria for Choice Who will be the owners? Level of liability protection required Operating requirements and costs Effect on the tax strategy of the company & the founders –When do you expect to earn a profit? –How do you want to distribute earnings? Effect on financing plans

5. Copyright © Houghton Mifflin Company12-5 Summary of Forms General Partnership S-Corp C-CorpFull CorporateNon-Profit Bridge FormsLLC PartnershipLimited Partnership Sole Proprietor

6. Copyright © Houghton Mifflin Company12-6 Sole Proprietorship 76% of all businesses Flexible, easy, inexpensive Does not exist apart from the owner, so pays no tax Salary or draw not deductible as expense Hobby rule (3 of 5 years)

7. Copyright © Houghton Mifflin Company12-7 Sole Proprietorship: Disadvantages Unlimited liability Difficult to raise debt capital Lacks advantage of team Survival dependent on owner

8. Copyright © Houghton Mifflin Company12-8 Partnership Association of two or more persons as a business Doctrine of ostensible authority –One partner can bind the partnership Specific property rights Share in profit/loss according to contribution

9. Copyright © Houghton Mifflin Company12-9 Partnership Agreement Duties and responsibilities Profit/loss distribution Transfer of interest Duration and dissolution Arbitration and dispute resolution Type of partnership –general versus limited –secret, silent, dormant

10. Copyright © Houghton Mifflin Company12-10 C-Corporation Legal entity Survival of death and separation Limited liability of shareholders Issue different classes of stock Raise capital by selling stock More status Benefit from retirement funds, profit sharing, stock options Owners can lease their assets to the corp

11. Copyright © Houghton Mifflin Company12-11 Disadvantages of Corporation Complex and costs more Stockholders do not have benefit of writing off losses Double taxation (earnings and dividends) Pay taxes on profits whether or not distributed as dividends Accountable to board of directors

12. Copyright © Houghton Mifflin Company12-12 S-Corporation Not a tax-paying entity Owners taxed on corporate earnings Deduct losses on personal income tax up to amount invested No more than 75 stockholders, US citizens or legal residents One class of stock

13. Copyright © Houghton Mifflin Company12-13 Disadvantages of S-Corp Difficult to get loans if distributes earnings No deductions based on medical reimbursements or health insurance plans If not a cash business, may not be able to pay taxes out of business Must convert to C for IPO

14. Copyright © Houghton Mifflin Company12-14 Limited Liability Company Limited liability of corporation with pass-through tax advantages of partnership Members and interests Articles of organization Managers, officers, members not personally liable Most organize for tax purposes as partnership No limitation to membership, more than one class of stock

15. Copyright © Houghton Mifflin Company12-15 Non-Profit Established for charitable, public, religious, or mutual benefit IRS 501(c)(3) tax exempt Limited liability Owners give up proprietary interest Perpetual existence Apply for grants

16. Copyright © Houghton Mifflin Company12-16 Take-Aways List what students took away from the discussion in real time