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CHAPTER

Forms of Business Ownership

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3.1. Choosing a Form of Ownership


There is no one best form of ownership.


The best form of ownership depends on an entrepreneurs particular situation.

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

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3.2. Factors Affecting the Choice


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

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3.3. Major Forms of Ownership

Sole Proprietorship

Partnership
Corporation

S Corporation
Limited Liability Company Joint Venture

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FIGURE 5.1 (A)


Forms of Business Ownership Percentage of Business

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FIGURE 5.1 (B)


Forms of Business Ownership Percentage of Sales

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3.4. Sole Proprietorships

Sole Proprietorship
A business that is owned and operated by one person. The enterprise has no existence apart from its owner. To establish a sole proprietorship, a person merely needs to obtain whatever local and state licenses are necessary to begin operations.

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3.4.1. Advantages and Disadvantages of the Sole Proprietorship

Advantages Simple to create Least costly form to begin Profit incentive Total decision making authority No special legal restrictions Easy to discontinue

Disadvantages Unlimited personal liability Limited skills and capabilities Feeling of isolation Limited access to capital Lack of continuity

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Ownership Requirements One owner

Tax Treatment Income and losses pass through to owner and are taxed at personal rates

Liability Unlimited personal liability

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3.5. Partnership

An association of two or more people who co-own a business for the purpose of making a profit. Always wise to create a partnership agreement. The best partnerships are built on trust and respect.

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3.5.1. Types of Partners

General partners
Take an active role in managing a business. Have unlimited liability for the partnerships debts. Every partnership must have at least one general partner.

Limited partners
Cannot participate in the day-to-day management of a company. Have limited liability for the partnerships debts.

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3.5.2. Limited Partnership

A partnership composed of at least one general partner and one or more limited partners. A general partner in this partnership is treated exactly as in a general partnership. A limited partner has limited liability and is treated as an investor in the business.

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3.5.3. Advantages & Disadvantages of the Partnership


Advantages Easy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners Minimal government regulation Flexibility Taxation
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Disadvantages 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
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Ch, 3: Forms of Business Ownership

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Ownership Requirements
Two or more owners

Tax Treatment Income and losses pass through to partners and are taxed at personal rates; flexibility in profit-loss allocations to partners

Liability Unlimited personal liability; Personal assets of partners are at risk

Advantages Ease of formation Pooled talent Pooled resources Somewhat easier access to financing Some tax benefits
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Drawbacks Unlimited personal liability Divided authority and decisions Potential for conflict Continuity of transfer of ownership
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Ownership Requirements

Tax Treatment
Income and losses pass through to partners and are taxed at personal rates; flexibility in profitloss allocations to partners

Liability Limited, although one partner must retain unlimited liability

Two or more owners

Advantages Good way to acquire capital from limited partners

Drawbacks Cost and complexity of forming can be high Limited partners cannot participate in management of business without losing liability protection
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Ch, 3: Forms of Business Ownership

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3.6. The Corporation


A separate legal entity from its owners. Types of corporations:


Domestic a corporation doing business in the country in which it is incorporated. Foreign a corporation doing business in a country other than the country in which it is incorporated. Alien a corporation formed in another country but doing business in the Cambodia. Publicly held a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges. Closely held a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends.
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Types of corporations:

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3.6.1. Advantages & Disadvantages of the Corporation


Advantages Limited liability of stockholders Ability to attract capital Ability to continue indefinitely Transferable ownership
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Disadvantages

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)
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3.7. Limited Liability Company (LLC)


Resembles an S Corporation but is not subject to the same restrictions. Two documents required: Articles of organization Operating agreement An LLC cannot have more than two of these four corporate characteristics: 1. Limited liability 2. Continuity of life 3. Free transferability of interest 4. Centralized management

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Ownership Requirements Unlimited number of members; flexible membership arrangements for voting rights and income

Tax Treatment Income and losses pass through to partners and are taxed at personal rates; flexibility in profit-loss allocations to partners

Liability

Limited

Advantages
Greater flexibility Not constrained by regulations on C and S corporations Taxed as partnership, not as corporation
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Drawbacks
Cost of switching from one form to this can be high Need legal and financial advice in forming operating agreement
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3.8. Public Limited Company

A PLC is a form of a limited company that meets the following requirements:


company may have 2 to 30 shareholders may not offer its shares or other securities to the public generally, but may offer them to shareholders, family members and managers. may have one or more restrictions on the transfer of each class of its shares. A company treated as a private limited company from the date of registration.

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3.9. The Professional Corporation


Designed for professions lawyers,
doctors, dentists, accountants and other professionals

Created in the same manner as a


corporation

Identified by the abbreviations:


P.C. Professional Corporation P.A. Professional Association S.C. Service Corporation
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3.10. The Joint Venture


Much like a partnership, but it:

Is formed for a specific purpose

Has a beginning and an end

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3.11. Legal Challenges for the Entrepreneurial Venture


Inception of the Venture The Ongoing Venture

Legal Concepts
Growth and Continuity of the Venture
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3.11.1. Major Legal Concepts and Entrepreneurial Ventures

I. Inception of an Entrepreneurial Venture

A. Laws governing intellectual property


II. Ongoing Venture: Business Development and Transactions

1. Patents 2. Copyrights 3. Trademarks

A. Personnel Law

B. Forms of business organization


1. Sole proprietorship 2. Partnership 3. Corporation 4. Franchise

1. Hiring and firing policies 2. Equal Employment Opportunity Commission 3. Collective bargaining 1. Legal contracts 2. Sales contracts 3. Leases

B. Contract Law

C. Tax considerations D. Capital formation E. Liability questions

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3.11. Major Legal Concepts and Entrepreneurial Ventures

III. Growth and Continuity of an Entrepreneurial Venture

A. Tax considerations

1. Federal, state, and local 2. Payroll 3. Incentives


1. Zoning (property) 2. Administrative agencies (regulatory) 3. Consumer law 1. Property laws and ownership 2. Wills, trusts, and ownership 3. Bankruptcy

B. Governmental regulations

C. Continuity of ownership rights

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3.11.2. Articles of Incorporation


Elements to Include:

Company name Business purpose Names and addresses of incorporators Names and addresses of initial officers and directors Address of corporations home office

Capital required at time of incorporation


Capital stock to be authorized Corporate bylaws Corporations time horizon Other pertinent miscellaneous information

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