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ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT ● 6E

Chapter 5: Forms of Business Organization

CHAPTER

Choosing a Form of Ownership

5

Forms of
Business Ownership

Copyright

© 2011 Pearson Education, Inc. Publishing as Prentice Hall







Ch, 5: Forms of Business Ownership

Copyright

Copyright

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© 2011 Pearson Education, Inc. Publishing as Prentice Hall

© 2011 Pearson Education, Inc. Publishing as Prentice Hall

The best form of ownership depends on
an entrepreneur’s particular situation.

Key: Understanding the characteristics of
each form of ownership and how well they
match an entrepreneur’s business and
personal circumstances.

Copyright

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© 2011 Pearson Education, Inc. Publishing as Prentice Hall

Major Forms of Ownership

Tax considerations
Liability exposure
Start-up and future capital requirements
Control
Managerial ability
Business goals
Management succession plans
Cost of formation

Ch, 5: Forms of Business Ownership

There is no one “best” form of ownership.

Ch, 5: Forms of Business Ownership

Factors Affecting the Choice

Sole Proprietorship

Partnership

Corporation

S Corporation

Limited Liability Company

Joint Venture

Ch, 5: Forms of Business Ownership

Copyright

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© 2011 Pearson Education, Inc. Publishing as Prentice Hall

FIGURE 5.1 (A)

FIGURE 5.1 (B)

Forms of Business
Ownership –
Percentage of Business

Forms of Business
Ownership Percentage of Sales

5-5

Ch, 5: Forms of Business Ownership

Copyright

© 2011 Pearson Education, Inc. Publishing as Prentice Hall

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 The best partnerships are built on trust and respect. 5: Forms of Business Ownership Copyright  Simple to create  Least costly form to begin  Profit incentive  Total decision making authority FIGURE 5. Publishing as Prentice Hall 5-8 Liability Features of the Basic Forms of Ownership Sole Proprietorship Unlimited personal liability Claims of Sole Proprietor’s Creditors Sole Proprietor’s Personal Assets Ch.ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT ● 6E Chapter 5: Forms of Business Organization Advantages of the Sole Proprietorship Ch.1 (C)  No special legal restrictions Forms of Business Ownership Percentage of Sales  Easy to discontinue © 2011 Pearson Education. 5: Forms of Business Ownership Copyright © 2011 Pearson Education. Inc. Inc.10 Partnership 5 . 5: 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 Ch.  Always wise to create a partnership agreement. Publishing as Prentice Hall Copyright © 2011 Pearson Education. Publishing as Prentice Hall 5 . Publishing as Prentice Hall 5 . 5: Forms of Business Ownership Disadvantages of the Sole Proprietorship  Copyright © 2011 Pearson Education. Inc.12 2 . Ch. 5: Forms of Business Ownership Copyright © 2011 Pearson Education. Inc. Inc. Publishing as Prentice Hall 5-9 Ch. Publishing as Prentice Hall 5-7 Ch.11  An association of two or more people who co-own a business for the purpose of making a profit. 5: Forms of Business Ownership Copyright © 2011 Pearson Education. Inc.

16 Disadvantages of the Partnership Partnership Partnership’s Assets 5 . Inc.18 3 .17 Unlimited liability of at least one partner Capital accumulation Difficulty in disposing of partnership interest without dissolving the partnership Lack of continuity Potential for personality and authority conflicts Partners bound by law of agency Ch.ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT ● 6E Chapter 5: Forms of Business Organization Types of Partners Advantages of the Partnership  General partners Easy to establish   Complementary skills of partners   Division of profits  Larger pool of capital  Ability to attract limited partners  Ch.  5 . 5: Forms of Business Ownership Copyright  5 . 5: Forms of Business Ownership Copyright © 2011 Pearson Education.  Every partnership must have at least one general partner.14 Unlimited liability of at least one partner Ch. 5: Forms of Business Ownership Liability Features of the Basic Forms of Ownership General Partner’s Personal Assets © 2011 Pearson Education.15 © 2011 Pearson Education.  Have limited liability for the partnership’s debts. Inc. 5: Forms of Business Ownership Copyright Take an active role in managing a business.13 © 2011 Pearson Education. Have unlimited liability for the partnership’s debts. Inc. Inc. Inc.  Cannot participate in the day-to-day management of a company. Publishing as Prentice Hall Disadvantages of the Partnership Advantages of the Partnership  Copyright  General Partner’s Personal Assets   5 . Publishing as Prentice Hall 5 . Publishing as Prentice Hall   Claims of Partnership’s Creditors  Ch. 5: Forms of Business Ownership Copyright © 2011 Pearson Education. Publishing as Prentice Hall Copyright © 2011 Pearson Education. Publishing as Prentice Hall Limited partners Ch. 5: Forms of Business Ownership        Easy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners Minimal government regulation Flexibility Taxation Ch. Inc. Publishing as Prentice Hall 5 .

Publishing as Prentice Hall 5 . Inc. Ch. 5: Forms of Business Ownership Copyright Copyright © 2011 Pearson Education.  Alien – a corporation formed in another country but doing business in the United States. Publishing as Prentice Hall 5 . 5: Forms of Business Ownership Copyright © 2011 Pearson Education. Inc.21 Liability Features of the Basic Forms of Ownership Ch. Inc.19 Corporation Ch. Types of corporations: Domestic – a corporation doing business in the state in which it is incorporated. Inc.  Foreign – a corporation doing business in a state other than the state in which it is incorporated. Inc. often family members. Inc. 5: Forms of Business Ownership Copyright © 2011 Pearson Education. A general partner in this partnership is treated exactly as in a general partnership. Closely held – a corporation in which shares are controlled by a relatively small number of people. 5: Forms of Business Ownership Claims of Corporation’s Creditors Corporation’s Assets Ch. Publishing as Prentice Hall 5 .22 Advantages of the Corporation Corporation Shareholder’s Personal Assets Limited liability of stockholders  Limited liability of stockholders  Ability to attract capital  Ability to continue indefinitely  Transferable ownership Shareholder’s Personal Assets © 2011 Pearson Education. or friends.ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT ● 6E Chapter 5: Forms of Business Organization Corporation Limited Partnership     A partnership composed of at least one general partner and one or more limited partners. Publishing as Prentice Hall 5 . Publishing as Prentice Hall  5 . relatives. A limited partner has limited liability and is treated as an investor in the business.23 Ch. 5: Forms of Business Ownership Copyright © 2011 Pearson Education. 5: Forms of Business Ownership Copyright © 2011 Pearson Education.24 4 .  5 . Ch. Publishing as Prentice Hall  A separate legal entity from its owners.20 Advantages of the Corporation 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.

Inc.28 1.ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT ● 6E Chapter 5: Forms of Business Organization Disadvantages of the 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) Ch. passing all of its profits (or losses) through to individual shareholders. Inc. and the corporation must file with the IRS within the first 75 days of its tax year. 5: Forms of Business Ownership Copyright © 2011 Pearson Education. Publishing as Prentice Hall Limited Liability Company (LLC) Liability Features of the Basic Forms of Ownership  An LLC cannot have more than two of Limited Liability Company . Inc.29 Ch. Continuity of life LLC’s Assets 3.  To elect “S” status. Free transferability of interest 4. 5: Forms of Business Ownership Copyright © 2011 Pearson Education. Publishing as Prentice Hall Member’s Personal Assets 5 . 5: Forms of Business Ownership Copyright Member’s Personal Assets © 2011 Pearson Education. Inc. Inc. all shareholders must consent.  Two documents required:  Articles of organization  Operating agreement Shareholder’s Personal Assets © 2011 Pearson Education. Publishing as Prentice Hall S Corporation 5 . Publishing as Prentice Hall 5 . 5: Forms of Business Ownership S-Corporation Claims of S-Corporation’s Creditors S-Corporation’s Assets Ch. Publishing as Prentice Hall 5 .30 5 .LLC these four corporate characteristics: Claims of LLC’s Creditors 5 .25  No different from any other corporation from a legal perspective. Ch. Limited liability 2. Inc. 5: Forms of Business Ownership Copyright © 2011 Pearson Education.26 Limited Liability Company (LLC) Liability Features of the Basic Forms of Ownership Shareholder’s Personal Assets Copyright  Resembles an S Corporation but is not subject to the same restrictions. 5: Forms of Business Ownership Copyright © 2011 Pearson Education.  An S corporation is taxed like a partnership. Centralized management Ch.27 Ch. Publishing as Prentice Hall 5 .

Inc.32 Conclusion  The “right” choice of the form of ownership is unique to every entrepreneur and their business. 5: Forms of Business Ownership Copyright © 2011 Pearson Education.ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT ● 6E Chapter 5: Forms of Business Organization The Professional Corporation The Joint Venture  Designed for professions – lawyers. Publishing as Prentice Hall 5 . photocopying.31 Ch.A. – Service Corporation Ch. in any form or by any means. Publishing as Prentice Hall 5 .33 Ch. and strategic about this important decision. or transmitted. Printed in the United States of America.  Each form has advantages and disadvantages. 5: Forms of Business Ownership Copyright © 2011 Pearson Education.C. electronic. but it:  Is formed for a specific purpose  Created in the same manner as a corporation  Has a beginning and an end  Identified by the abbreviations:  P. 5: Forms of Business Ownership Copyright © 2011 Pearson Education. recording. Publishing as Prentice Hall 5 . Ch. Inc. No part of this publication may be reproduced. accountants and other professionals Much like a partnership. mechanical.C. or otherwise. 5: Forms of Business Ownership Copyright © 2011 Pearson Education. Inc. Publishing as Prentice Hall 5 . without the prior written permission of the publisher. stored in a retrieval system.34 6 . – Professional Association  S.  The entrepreneur must be thoughtful All rights reserved. – Professional Corporation  P. doctors. dentists. Inc.