Chap03 Choosing a Form of Ownership
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Transcript of Chap03 Choosing a Form of Ownership
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Chapter 3: Forms of Ownership 1Copyright 2003 Prentice Hall Publishing Company
Choosing a Form of
Ownership
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There is no one best form of ownership.There is no one best form of ownership.
The best form of ownership depends on anThe best form of ownership depends on an
entrepreneurs particular situation.entrepreneurs particular situation. The key to choosing a form of ownershipThe key to choosing a form of ownership
is understanding how each formsis understanding how each formscharacteristics affect an entrepreneurscharacteristics affect an entrepreneurs
specific business and personalspecific business and personalcircumstances.circumstances.
Choosing a Form ofChoosing a Form of
OwnershipOwnership
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Chapter 3: Forms of Ownership 3Copyright 2003 Prentice Hall Publishing Company
Factors to ConsiderFactors to Consider
Tax considerationsTax considerations
Liability exposureLiability exposure
StartStart--up capital requirementsup capital requirements
ControlControl
Managerial abilityManagerial ability
Business goalsBusiness goals Management succession plansManagement succession plans
Cost of formationCost of formation
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Chapter 3: Forms of Ownership 4Copyright 2003 Prentice Hall Publishing Company
Forms of OwnershipForms of Ownership
Sole ProprietorshipSole Proprietorship
PartnershipPartnership
CorporationCorporation
S CorporationS Corporation
Limited Liability CompanyLimited Liability Company
Joint VentureJoint Venture
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Forms of Ownership
Percent of Businesses
Corporation
20.1%
Partnership
7.7%
Sole P roprietorship
72.2%
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Forms of Ownership
Percent of Sales
Corporation
87.1%
Partnership
8.1%
Sole Proprietorship
4.8%
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Forms ofOwnership
Percent ofIncome
Corporation
69%
Partnership15%
Sole Proprietorship
16%
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Chapter 3: Forms of Ownership 8Copyright 2003 Prentice Hall Publishing Company
Advantages of the SoleAdvantages of the Sole
ProprietorshipProprietorship
Simple to createSimple to create
Least costly form to beginLeast costly form to begin
Profit incentiveProfit incentive
Total decision making authorityTotal decision making authority
No special legal restrictionsNo special legal restrictions
Easy to discontinueEasy to discontinue
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Chapter 3: Forms of Ownership 9Copyright 2003 Prentice Hall Publishing Company
Disadvantages of the SoleDisadvantages of the Sole
ProprietorshipProprietorship
Unlimited personal liabilityUnlimited personal liability
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Liability Features of the Basic Forms of OwnershipLiability Features of the Basic Forms of Ownership
Sole ProprietorshipSole Proprietorship
Claims of Sole Proprietors Creditors
Sole Proprietors PersonalAssets
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Chapter 3: Forms of Ownership 11Copyright 2003 Prentice Hall Publishing Company
Disadvantages of the SoleDisadvantages of the Sole
ProprietorshipProprietorship
Limited access to capitalLimited access to capital
Limited skills and capabilitiesLimited skills and capabilities
Feelings of isolationFeelings of isolation
Lack of continuityLack of continuity
Unlimited personal liabilityUnlimited personal liability
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Chapter 3: Forms of Ownership 12Copyright 2003 Prentice Hall Publishing Company
PartnershipPartnership
An association of two or more people whoAn association of two or more people who
coco--own a business for the purpose ofown a business for the purpose of
making a profit.making a profit.
Take the time to create a writtenTake the time to create a written
partnership agreement!partnership agreement!
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Chapter 3: Forms of Ownership 13Copyright 2003 Prentice Hall Publishing Company
Advantages of the PartnershipAdvantages of the Partnership
Easy to establishEasy to establish
Complementary skills of partnersComplementary skills of partners
Division of profitsDivision of profits
Larger pool of capitalLarger pool of capital
Ability to attract limited partnersAbility to attract limited partners
Little government regulationLittle government regulation
FlexibilityFlexibility
TaxationTaxation
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Chapter 3: Forms of Ownership 14Copyright 2003 Prentice Hall Publishing Company
Disadvantages of the PartnershipDisadvantages of the Partnership
Unlimited liability of at least one partnerUnlimited liability of at least one partner
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Liability Features of the Basic Forms of OwnershipLiability Features of the Basic Forms of Ownership
PartnershipPartnership
Claims of Partnerships Creditors
PartnershipsAssetsGeneral
Partners
Personal
Assets
General
Partners
Personal
Assets
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Chapter 3: Forms of Ownership 16Copyright 2003 Prentice Hall Publishing Company
Disadvantages of the PartnershipDisadvantages of the Partnership
Capital accumulationCapital accumulation
Difficulty in disposing of partnershipDifficulty in disposing of partnership
interestinterest
Lack of continuityLack of continuity
Potential for personality and authorityPotential for personality and authority
conflictsconflicts
Partners bound by the law of agencyPartners bound by the law of agency
Unlimited liability of at least one partnerUnlimited liability of at least one partner
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Chapter 3: Forms of Ownership 17Copyright 2003 Prentice Hall Publishing Company
Limited PartnershipLimited Partnership
A partnership composed of at least oneA partnership composed of at least onegeneral partner and one or more limitedgeneral partner and one or more limited
partners.partners. The general partner in this partnership isThe general partner in this partnership is
treated exactly as in a general partnership.treated exactly as in a general partnership.
The limited partner has limited liabilityThe limited partner has limited liability
and is treated as an investor in theand is treated as an investor in thebusiness.business.
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Liability Features of the Basic Forms of OwnershipLiability Features of the Basic Forms of Ownership
Limited PartnershipLimited PartnershipClaims of Partnerships Creditors
PartnershipsAssets
General
PartnersPersonal
Assets
Limited
PartnersPersonal
Assets
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Chapter 3: Forms of Ownership 19Copyright 2003 Prentice Hall Publishing Company
The CorporationThe Corporation
A separate legal entity from its owners.A separate legal entity from its owners.
Types of corporations:Types of corporations:
DomesticDomestic -- a corporation doing business in thea corporation doing business in the
state in which it is incorporated.state in which it is incorporated.
ForeignForeign -- a corporation chartered in one statea corporation chartered in one stateand doing business in another state.and doing business in another state.
AlienAlien -- a corporation formed in anothera corporation formed in another
country, but doing business in the Unitedcountry, but doing business in the UnitedStates.States.
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Chapter 3: Forms of Ownership 20Copyright 2003 Prentice Hall Publishing Company
The CorporationThe Corporation
Types of corporations:Types of corporations:
Publicly heldPublicly held-- a corporation that has a largea corporation that has a largenumber of shareholders and whose stocknumber of shareholders and whose stockusually is traded on one of the large stockusually is traded on one of the large stockexchanges.exchanges.
Closely heldClosely held-- a corporation whose shares are ina corporation whose shares are inthe control of a relatively small number ofthe control of a relatively small number ofpeople, often family members, relatives, orpeople, often family members, relatives, or
friends.friends.
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Chapter 3: Forms of Ownership 21Copyright 2003 Prentice Hall Publishing Company
Advantages of theAdvantages of the
CorporationCorporation
Limited liability of the stockholdersLimited liability of the stockholders
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Liability Features of the Basic Forms of OwnershipLiability Features of the Basic Forms of Ownership
CorporationCorporationClaims of Corporations Creditors
CorporationsAssets
ShareholdersPersonalAssets
ShareholdersPersonalAssets
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Chapter 3: Forms of Ownership 23Copyright 2003 Prentice Hall Publishing Company
Advantages of theAdvantages of the
CorporationCorporation
Ability to attract capitalAbility to attract capital
Ability to continue indefinitelyAbility to continue indefinitely
Transferable ownershipTransferable ownership
Limited liability of stockholdersLimited liability of stockholders
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Chapter 3: Forms of Ownership 24Copyright 2003 Prentice Hall Publishing Company
Disadvantages of the CorporationDisadvantages of the Corporation
Cost and time of incorporatingCost and time of incorporating
Double taxationDouble taxation
Potential for diminished managerialPotential for diminished managerialincentivesincentives
Legal requirements and regulatory redLegal requirements and regulatory red
tapetape
Potential loss of control by founder(s)Potential loss of control by founder(s)
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Chapter 3: Forms of Ownership 25Copyright 2003 Prentice Hall Publishing Company
S CorporationS Corporation
No different from any other corporationNo different from any other corporationfrom a legal perspective.from a legal perspective.
For tax purposes, however, an SFor tax purposes, however, an S
corporation is taxed like a partnership,corporation is taxed like a partnership,passing all of its profits (or losses)passing all of its profits (or losses)through to the individual shareholders.through to the individual shareholders.
To elect S status, all shareholders mustTo elect S status, all shareholders must
consent, and the corporation must fileconsent, and the corporation must filewith the IRS within the first 75 days of itswith the IRS within the first 75 days of itstax year.tax year.
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Liability Features of the Basic Forms of OwnershipLiability Features of the Basic Forms of Ownership
S-CorporationS-CorporationClaims of S-Corporations Creditors
S-CorporationsAssets
ShareholdersPersonalAssets
ShareholdersPersonalAssets
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Chapter 3: Forms of Ownership 27Copyright 2003 Prentice Hall Publishing Company
Limited Liability Company (LLC)Limited Liability Company (LLC)
Resembles an S Corporation but isResembles an S Corporation but is
notnotsubject to the same restrictions.subject to the same restrictions.
Two documents required:Two documents required:
thethe articlesoforganizationarticlesoforganization
thethe operatingagreementoperatingagreement
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Chapter 3: Forms of Ownership 28Copyright 2003 Prentice Hall Publishing Company
Limited Liability Company (LLC)Limited Liability Company (LLC)
An LLC cannot have more thanAn LLC cannot have more than twotwo ofof
these four corporate characteristics:these four corporate characteristics:
Limited liabilityLimited liabilityContinuity of lifeContinuity of life
Free transferability of interestFree transferability of interest
Centralized managementCentralized management
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Liability Features of the Basic Forms of OwnershipLiability Features of the Basic Forms of Ownership
Limited Liability Company (LLC)Limited Liability Company (LLC)Claims of LLCs Creditors
LLCsAssets
MembersPersonalAssets
MembersPersonalAssets