MANA 3325 – Thurburn Lecture 09-12-13 Slides

1. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership What factors should be considered before deciding on a form of ownership?

2. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Factors to Consider when choosing a Form of Ownership: Tax considerations Liability exposure Start-up and future capital requirements Control Managerial ability Business goals Management succession plans Cost of formation What are the major Forms of Ownership?

3. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Major Forms of Ownership: • Sole Proprietorship • General Partnership • Limited Partnership (LP) • Limited Liability Partnership (LLP) • Corporation • S Corporation • Professional Corporation (PC) • Limited Liability Company (LLC) • Joint Venture (JV)

4. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership

5. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership

6. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership What are the advantages of a Sole Proprietorship?

7. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Advantages of the Sole Proprietorship: • Simple to create • Least costly form to begin • Profit incentive • Total decision making authority • No special legal restrictions • Easy to discontinue What are the dis-advantages of a Sole Proprietorship?

8. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Disadvantages of the Sole Proprietorship: • Unlimited personal liability • Limited skills and capabilities • Feelings of isolation • Limited access to capital • Lack of continuity of the business

9. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Sole Proprietorship Claims of Sole Proprietor’s Creditors Sole Proprietor’s Personal Assets Define Partnership…

10. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Partnership Form of Ownership: • An association of two or more people who co-own a business for the purpose of making a profit. • Always wise to create a partnership agreement. • The best partnerships are built on trust and respect. What are the Advantages of a Partnership?

11. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Advantages of Partnership Organization: • Easy to establish • Complementary skills of partners • Division of profits • Larger pool of capital • Ability to attract limited partners What are the Disadvantages of a Partnership?

12. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Dis-Advantages of Partnership Organization: • Unlimited liability of at least one partner • Capital accumulation • Difficulty in disposing of partnership interest without dissolving the partnership • Potential for personality and authority conflicts • Partners bound by law of agency

13. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership General Partnership Form of Ownership Claims of Partnership’s Creditors General Partner’s Personal Assets General Partner’s Personal Assets Partnership’s Assets What is a Limited Partnership?

14. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Limited Partnership Form of Ownership: A partnership composed of at least one general partner and one or more limited partners. A general partner in this partnership is treated exactly as in a general partnership. A limited partner has limited liability and is treated as an investor in the business.

15. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Limited Partnership Form of Ownership: Claims of Partnership’s Creditors BARRIER General Partner’s Personal Assets Partnership’s Assets Limited Partner’s Personal Assets What is an LLP?

16. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Limited Liability Partnerships Form of Ownership • All partners in the business are limited partners. • Gives the advantage of limited liability for the debts of the partnership. • Does not pay taxes – income is passed through to the limited partners who pay taxes on their share of the company’s income. • Limited to certain professions… attorney, cpas, etc. Define Corporation.

17. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Corporation Form of Ownership • A separate legal entity from its owners. • Unlimited Life • Taxable What Types of Corporations are there?

18. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Corporation Form of Ownership Types of corporations: • Domestic – a corporation doing business in the state in which it is incorporated. • Foreign – a corporation doing business in a state other than the state in which it is incorporated. • Alien – a corporation formed in another country but doing business in the United States.

19. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Corporation Form of Ownership Types of corporations: • Publicly held – a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges. • Closely held – a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends. What are the advantages of a corporation?

20. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Advantages of Corporation: • Limited liability of stockholders • Ability to attract capital • Ability to continue indefinitely • Transferable ownership

21. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Corporation Claims of Corporation’s Creditors barrier barrier Corporation’s Assets Shareholder’s Personal Assets Shareholder’s Personal Assets

22. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Partnership Claims of Partnership’s Creditors Corporate General Partner Assets BARRIER Partnership’s Assets Limited Partner’s Personal Assets BARRIER Corporate Shareholders What are Disadvantages of Coropration?

23. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Dis-Advantages of Corporation: • Cost and time of incorporation process • Double taxation • Potential for diminished managerial incentives • Legal requirements and regulatory “red tape” • Potential loss of control by founder(s) What informaiton goes into the Articles of Incorporation?

24. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Articles of Incorporation/Charter: • Name • Purpose • Life Span… or unending • Incorporator(s) Information • Place of Business • Shares Authorized • Capital Required • Preemptive Rights – Anti-dilutive Provisions • Shareholder Restrictions • Officer(s) Information • Rules - Bylaws

25. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership What is an S Corporation?

26. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership S Corporation • No different from any other corporation from a legal perspective. • An S corporation is taxed like a partnership, passing all of its profits (or losses) through to individual shareholders. • To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year. What are the Advantages of an S Corp?

27. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership S Corporation Advantages: • Retains all of the advantages of regular corporation: • Continuity of existence • Transferability of ownership • Limited personal liability for owners What are the Dis-Advantages of an S Corp?

28. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership S Corporation Dis-Advantages: • Entrepreneurs considering both S and C status should review the impact of the decision on their companies. • S corporation status is usually beneficial to start-up companies anticipating net losses because founders can use the loss to offset other income, and lower their tax bill.

29. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership S Corporation Claims of S Corporation’s Creditors barrier barrier S Corporation’s Assets Shareholder’s Personal Assets Shareholder’s Personal Assets

30. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Limited Liability Company (LLC): Resembles an S Corporation but is not subject to the same restrictions. Two documents required: • Articles of organization • Operating agreement

31. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Limited Liability Company Claims of LLC’s Creditors barrier barrier LLC’s Assets Member’s Personal Assets Member’s Personal Assets What is a Professional Corporation?

32. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Professional Corporation: • Designed for professions – lawyers, doctors, dentists, accountants and other professionals • Created in the same manner as a corporation • Identified by the abbreviations: • P.C. – Professional Corporation • P.A. – Professional Association • S.C. – Service Corporation What Limitation must a PC comply with?

33. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Professional Corporation Limitations: Shares Owned By Licensed Professionals. At least One Incorporator must be Licensed. At least One Directory must be Licensed. Articles must designate Personal Services to be provided. Licensing Board Certifies that All Shares are held by Duly Licensed Individuals. What is a Joint Venture?

34. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Joint Venture: Much like a partnership, but it: • Is formed for a specific purpose • Has a beginning and an end

35. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Is there a Form of Ownership that is better than the others? Is there a Form of Ownership that is worse that the others? Is there a Form of Ownership that is evil?

36. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership Factors to Consider when choosing a Form of Ownership: Tax considerations Liability exposure Start-up and future capital requirements Control Managerial ability Business goals Management succession plans Cost of formation

37. MANA 3325 – Thurburn Lecture 09-12-13 Slides Forms of Business Ownership What would be the best form of ownership for… A Local Restaurant? A Food Truck Business? A Lawn Care Business? A Chiropractor? A Software Company? A Consulting/Coaching Business?