FORMS OF OWNERSHIP

Lecture delivered by : Kumar Arijit

Assistant Professor - Management
INTRODUCTION TO FORMS OF
B USINESS AND FORMATION OF
PARTNERSHIPS

I wanted to be an editor or a journalist.

I wasn't really interested in being an
entrepreneur, but I soon found I had to
become an entrepreneur in order to
keep my magazine going.

Sir Richard Branson, Entrepreneur

• Choice of Suitable form of ownership–
A CrucialDecision
• The form of ownership determines the -
• Division of Profits
• Extent of liability
• Extent of Risk
• Division of Power
• Control of Owner
• Long term commitment, cannot be altered easiliy
FORMS OF OWNERSHIP
1) Sole Proprietorship
2) Joint Hindu Family Firm
3) Partnership Firm
4) Private Company
5) Public Company
6) Cooperative Society
 SOLE PROPRIETORSHIP
• A sole proprietorship has only one owner and is
an extension of its owner
• Itis not a legal entity and cannot sue or be sued,
so creditors/claimants sue the owner
• Advantages: no formalities, taxes flow to owner,
owner takes all profit andcontrol
• Disadvantage: owner bears all risk of loss
 Advantages of the SoleProprietorship

• Simple to create
• Least costly form to begin
• Profit incentive
• Total decision making authority
• No special legal restrictions
• Easy to discontinue
Disadvantages of the SoleProprietorship

 Unlimited personal liability

• Limited access to capital
• Limited skills and capabilities
• Feelings of isolation
• Lack of continuity
PARTNERSHIP

• An association of two or more people who co-

own a business for the purpose of making a
profit.
• Take the time to create a written partnership
agreement!
Advantages of the Partnership

• Easy to establish
• Complementary skills of partners
• Division of profits
• Larger pool of capital
• Ability to attract limitedpartners
• Little government regulation
• Flexibility
• Taxation
DISADVANTAGES OF THE
PARTNERSHIP

• Unlimited liability of atleast one partner

THE CORPORATION

• A separate legal entity from its owners.

• Types of corporations:
– Domestic - a corporation doing business in the
state in which it isincorporated.
– Foreign - a corporation chartered in one state and
doing business in another state.
– Alien - a corporation formed in another country,
but doing business in the UnitedStates.
ADVANTAGES OF THE
CORPORATION
• Limited liability of the stockholders
Disadvantages of the Corporation

• Cost and time of incorporating

• “Double taxation”
• Potential for diminished managerial
incentives
• Legal requirements and regulatory “red
tape”
• Potential loss of control byfounder(s)
LIMITED LIABILITY COMPANY
(LLC)
• The LLCis a relatively new type of hybrid business structure that is now permissible in moststates.

• It is designed to provide the limited liability features of a corporation and the tax efficiencies and
operational flexibility of apartnership.

• Formation is more complex and formal than that of a general partnership.

• The owners are members, and the duration of the LLCis usually determined when the organization papers
are filed. The time limit can be continued, if desired, by a vote of the members at the time of expiration.

• LLCsmust not have more than two of the four characteristics that define corporations: Limited liability to
the extent of assets, continuity of life, centralization of management, and free transferability of ownership
interests.
 LIMITED LIABILITY
COMPANY
• A limited liability company (LLC) combines the
nontax advantages of corporations with
favorable tax treatment of partnerships
• An LLCis owned by members, who may manage
themselves or retain a manager to run the
business
• Members have limited liability for theobligations
of the LLC
IDEAL FORM OF OWNERSHIP
1. Ease of Formation
2. Sufficient Finances
3. Limited Liability
4. Transferability of Interest
5. Efficient Management
IDEAL FORM OF OWNERSHIP –
CONTD.
6. Continuity and Stability
7. Flexibility of Operations
8. Minimum Govt. Control
9. Retention of BusinessSecrets
10. Low Tax Burden
FACTORS TO CHOICE OF
OWNERSHIP
1. Nature of Business

2. Size and Area of Operations

3. Degree of Control Desired

4. Amount of Capital Required

5. Degree of Risk Involves

FACTORS TO CHOICE OF
OWNERSHIP – CONTD..
6. Division of Surplus

7. Duration of Business

8. Government regulation and control

9. Managerial Requirements
 ROLE OF SMALL BUSINESS –
INDIAN ECONOMY PERSPECTIVE
1) Generation of Employment
2) Balanced Regional Development
3) Optimization of Capital
4) Mobilization of LocalResources
5) Exchange Earnings
6) Development of Entrepreneurship
7) Egalitarian Society
8) Social Advantage
PROBLEMS

1) Shortage of Materials and Power

2) Lack of Adequate Finance
3) Outdated Technology
4) Inadequate Marketing Facilities
5) Weak Orgn Management
6) Lack of Trained Personnel
MEASURES TAKEN BY
GOVT.
1. Protective Measures
• Products reserved for exclusive production
• Concessions in excise, sales tax
• Govt. gives preference to products bySSI
2. Promotional Measures
• Imported raw materials are provided at reasonablerates
• Development of industrial estates to provide sheds to SSI
• Extension of price preference toproducts by SSI
• Preference given to SSIin landallocation
• Technical assistance by Central Small Industries Orgn
• Financial assistance by banks and public financial
institutes.
FACTORS TO
CONSIDER
• Tax considerations
• Liability exposure
• Start-up capital requirements
• Control
• Managerial ability
• Business goals
• Management succession plans
• Cost of formation
LEARNING
OBJECTIVES

• Choosing a form of business

• Creation of partnership
• Purported partners
• Partnership capital and property
• Partnership interests

37 - 34
 OVERVIEW
• Choosing a form of business is important
because the business owner’s liability and
control of the business vary greatlyamong the
many forms of business

Which form you

choose depends on
where you want to
go

37 - 35
THINGS TO
CONSIDER

• Your vision regarding the size and nature of your business.

• The level of control you wish to have.

• The level of structure you are willing to dealwith.

• The business' vulnerability to lawsuits.

• Tax implications of the different ownership structures.

• Expected profit (or loss) of the business.

• Whether or not you need to reinvest earnings into the business.

• Your need for access to cash out of the business for yourself.