Post on 15-Jan-2016
Chapter 4.3Choose the legal form of your Business
Mrs. Leonard
Entrepreneurship
Types of Business Arrangements
There are three main types of ownership arrangements from which to choose: Sole Proprietorship – business that is owned by one
person Partnership – business owned by two or more people Corporation – business with the legal rights of a person
and which may be owned by many people S – Corporation – corporation organized under subchapter S of
the Internal Revenue Code whose income is taxed as a partnership
Sole Proprietorship Enable one person to be in control of all business
aspects Most common type of ownership May be small businesses with just a few
employees, or they may be large businesses with hundreds of employees
Government exercises very little control over sole proprietorships So more will be established and run simply Accurate tax record and certain employment laws must
be met
Disadvantages of a Sole Proprietorship
Difficult to raise money for the sole proprietorship You are the only one contributing money
Face a risk that owners of partnerships or corporations do not If a sole proprietorship fails and debts remain, the
entrepreneurs private assets may be taken to pay what is owed
Partnership
In partnerships, entrepreneurs have someone with whom to share decision-making and management responsibilities
In a partnership one entrepreneur will not have to come up with all of the capital alone
If any losses the business incurs will be shared by all of the partners
Little government regulation
Disadvantages of a Partnership Entrepreneurs may not like sharing
responsibilities and profits All partners are liable for errors of the
partners Can lead to disagreements and end bitterly
Partnership Agreement
When two or more entrepreneurs go into business together, they generally sign a partnership agreement
Purpose of the partnership agreement is to set down in writing the rights and responsibilities of each of the owners
Partnership Identifies1. Name of the business or partnership2. Names of the partners3. Type and value of the investment each partner contributes4. Managerial responsibilities to be handled by each partner5. Accounting methods to be used6. Rights of each partner to review and/or audit accounting documents7. Division of profits and losses among partners8. Salaries to be withdrawn by the partners9. Salaries to be withdrawn by the partners10. Duration of the partnership11. Conditions under which the partnership can be dissolved12. Distribution of assets upon dissolution of the partnership13. Procedure for dealing with the death of a partner
Corporation
A corporation is treated independently of its owners Since a corporation has the legal rights of a person, the
corporation, not the owners, pay taxes, enters into contracts, and may be held liable for negligence
Ownership of a corporation is in the form of shares of stock
Share of stock – a unit of ownership in a corporation People who own stock in the corporation are called shareholders
or stockholders The individual or group that owns the most shares maintains
control of the company
Corporation Board of Directors – every corporation has a group
of people who meet several times a year to make important decisions affecting the company Responsible for electing the corporation’s senior
officers, determining their salaries, and setting the corporations' rules for conduction business
Decides how much the corporation should pay in dividends
Dividends – distributions of profits to shareholders by corporations Company’s officers, not the board of directors, are
responsible for the day-to-day management of the corporation
Disadvantages of a Corporation
Complicated Costly to establish Incorporate – means to set up a business as a
corporation Will need assistance of a lawyer, who will help you file
articles of incorporation with the state official responsible for chartering, or registering, corporations
Articles of incorporation must be written that fully detail the purpose of the business If not written well, the corporations activities can be limited
Disadvantages of a Corporation
Corporations are subject to much more government regulation than sole proprietorships or partnerships Much more paperwork
Double Taxation Corporation pays taxes on its income, and shareholders
pay taxes on the dividends they receive from the corporation
Corporations profits are taxed as corporate income and again as individual income
Why Incorporate? Liability – amount owed to others
Shareholders liability is limited to the amount of money each shareholder invested in the company when he or she purchased stock
Incorporations allows businesses to raise money by selling stock
Lenders are also more willing to lend money to corporations than to sole proprietorships or partnerships
Since shareholders do not affect the management of a corporation, the main shareholder of the company can change through the buying and selling of stock without disrupting the day-to-day business
S Corporation S corporation – corporation organized under
subchapter S of the Internal Revenue Code whose income is taxed as a partnership
Unlike regular corporations, an S corporation is not taxed as a business Individual shareholders are taxed on the profits they
earn Many companies establish themselves as S
corporations because they lose money in the early years Any losses suffered by S corporations can be used to
offset other sources of taxable income
4.3 Assessment
1. On your Chapter 4 assessment page, create a table of advantages and disadvantages of the three legal forms of ownership
2. Think Critically (page 97) #1-3. Type the question and answer in bold.
3. 4.3 T/F and MC worksheet
Advantages Disadvantages
Corporation
Sole Proprietorship
Partnership