Forms of Business Ownership

1. Forms of Business Ownership It’s just paper. All I own is a pickup truck and a little Walmart stock. ………………………………..Sam Walton

2. Evaluation Criteria • Tax consideration • Liability exposure • Start-up and future capital requirement • Control • Managerial ability • Business goals • Management succession plans • Cost of formation

3. Sole Proprietorship A business owned and managed by one individual; the business and the owner are one and the same in the eyes of the law

4. Sole Proprietorship Advantages • Simple to create • Least costly form • Profit incentive • Total decision-making • No special legal restrictions • Easy to discontinue

5. Sole Proprietorship Disadvantages • Unlimited personal liability • Limited skills and abilities • Feelings of isolation • Limited access to capital • Lack of continuity of business

6. Partnership An association of two or more people who co-own a business for the purpose of making a profit A partnership agreement or the Uniform Partnership Act

7. Partnership Advantages • Easy to establish • Complementary skills • Division of profits • Larger pool of capital • Ability to attract limited partners • Little governmental regulation • Flexibility • Taxation

8. Partnership Disadvantages • Unlimited liability of at least one • Difficulty in disposing of interest • Lack of continuity • Potential for personality and authority conflicts • Partners bound by law of agency

9. Special Partnerships • Limited partnership-composed of at least one general partner and at least one limited partner • Limited liability partnership-a special type of limited partnership, in which all partners are limited partners • Master limited partnership-a partnership whose shares are traded on stock exchanges, just like corporations

10. Corporations A separate legal entity apart from its owners which receives the right to exist from the state in which in which it is incorporated • Domestic • Foreign • Alien • Publicly held • Closely held

11. Corporations Certificate of Incorporation • Name • Statement of purpose • Time horizon • Names and addresses of incorporators • Place of business • Capital stock authorization’ • Capital required at time of incorporation • Provisions for preemptive rights • Restrictions on transfering shares • Names and addresses of officers • By-laws

12. Corporations Advantages • Limited liability of stockholders • Ability to attract capital • Ability to continue indefinitely • Transferable ownership

13. Corporations Disadvantages • Cost and time in incorporating • Double taxation • Potential for diminished incentives • Legal requirements and red tape • Potential loss of control

14. An S Corporation A corporation that retains the legal characteristics of a regular C corporation but has the advantage of being taxed as a partnership if it meets certain criteria: Domestic US corporation No nonresident alien stockholder One class of common stock Limit shareholders No more than 100 shareholders Less than 25% of gross revenues passive

15. S Corporation Advantages • All of advantages of a regular C corporation • Single taxation • Avoids tax on appreciation of asset sold • Pay SSS for employees • Different lines of businesses as subsidiaries, simpler tax filing

16. S Corporation • Highly profitable service companies with large number of shareholders for whom profits are compensation or retirement benefits • Fast-growing companies that must retain earnings to finance growth • Corporations in which the loss of benefits exceed tax savings • Corporations with sizable net operating losses

17. S Corporation Liquidating • Pay all taxes and debts • Obtain written approval of shareholders to dissolve company • File statement of intent to dissolve with secretary of state • Distribute all remaining assets

18. Limited Liability Company A relatively new form of ownership that, like an S corporation, is a cross between a partnership and a corporation; it is not subject to many of the restrictions imposed on S corporations; only 2 of the following: Limited liability Continuity of life Free transferability of interest Centralized management

19. Limited Liability Corporation • Articles of organization-name and address, method of management, duration, names and addresses of each organizer • Operating agreement-no more than 2 of: limited liability, continuity of life, free transferability of interest, centralized management

20. Limited Liability Corporation • Limited personal liability • No limit on number of shareholders • No ban on nonresident alien • No restriction on a member’s ability to manage the company • Avoids double taxation • Flexibility to divide income as owners see fit • Not subject to self-employment tax except for managing member

21. Professional Corporation-lawyers, accountants, doctors, dentists, etc. • Joint Venture-partnership formed for a specific purpose