FORMS OF

BUSINESS
ORGANIZATION

FORMS OF BUSINESS ORGANIZATION

Introduction and Understanding of

Three Principal Forms of Business

Organization
Essential Attributes and Characteristics
Analyzing Business Needs and
Selecting Appropriate Business Form

Organizational Form: Questions to Ask

How many Owners will there be today?
In the future?
Costs to Form and Operate?
Taxes: Will there be any Income to tax?
All taxes come due eventually!
Is Limiting Liability Important? What kinds
of Liability: Contractual or Tort
(Express and Implied Warranties)?
Obtaining Future Financial Capital?

FORMS OF BUSINESS ORGANIZATION

Organizational Forms determined by

Owners Objectives: Liability, Profit

Distribution, Taxation and Capital Structure
Dealings with Outside World: Other Owners,

Heirs, Employees, Customers and Future

Owners of Business
Legislative Goals: Special-Purpose Entities to
encourage investments, in, for example,
Small Businesses or Affordable Housing

FORMS OF BUSINESS ORGANIZATION

Three Organizational Forms

developed by Business Owners

Sole Proprietorship
General Partnership
Corporation

FORMS OF BUSINESS ORGANIZATION

DEFINITIONS
Sole
Proprietorship

Any Business Owned

and Operated by an
Individual

General
Partnership

Corporation

Two or More
Persons
Operating a
Business for a
Profit

Legislatively
Created and
Regulated
Governance,
Ownership and
Financial
Structure

FORMS OF BUSINESS ORGANIZATION

FORMATION
Sole
General
Proprietorship Partnership

No Formalities or
Legal
Documentation;
May be Implied
from Conduct or
Actions

Written or Oral
Agreement or
May be Implied
from Conduct or
Actions

Corporation

Filing of Articles
of Incorporation
with Secretary of
State and
Payment of
Fees

FORMS OF BUSINESS ORGANIZATION

GOVERNING DOCUMENTS
Sole
Proprietorsh
ip

General
Partnership

Corporation

None Required

None Required;
Most have
Agreement
specifying Rights,
Duties and
Obligations

Articles of
Incorporation
create Corporation;
Bylaws prescribe
its Operation

Articles of
Incorporation

FORMS OF BUSINESS ORGANIZATION

NATURE OF OWNERSHIP
Sole
Proprietorshi
p

General
Partnership

Corporation

Residual

Claim on Corporate

For Contribution,
Partner receives
Wholly Owned by
Equity and Right to
Proportionate Share
Single Individual
Vote for Directors
of Profits/Losses and
and Essential
Partnership Property
Governance

FORMS OF BUSINESS ORGANIZATION

LIABILITY
Sole
Proprietors
hip

General
Partnership

Sole Proprietor
Personally
Liable for All
Debts and
Obligations

Partners are Jointly

and Severally Liable
for all Partnership
Obligations, in
Contract and in Tort

Corporation

Shareholders

Liability limited to
Extent of Capital
Contribution
[Limited Liability]

FORMS OF BUSINESS ORGANIZATION

TAXATION
Sole
Proprietors
hip

General
Partnership

Not a Taxable
Entity; Income
(Loss) passes
through to Sole
Proprietor

Partnership not a
Taxable Entity;
Allocations of
Income and Loss
allowed within
Partnership before
Pass-Through

Corporation

Corporation

taxed as Separate
Entity and
Dividends/Capital
Gains also Taxed
[Double Taxation]

FORMS OF BUSINESS ORGANIZATION

MANAGEMENT
Sole
Proprietorsh
ip

Sole Proprietor
has Complete
Management
Control

General
Partnership

All Partners have

Equal Rights in
Partnerships
Management and
Conduct

Corporation

Managed by

Board of Directors

elected by
Shareholders; Board
may Delegate
Authority to
Appointed Officers

FORMS OF BUSINESS ORGANIZATION

TRANSFER OWNERSHIP INTERESTS

Sole
General
Proprietorshi
Partnership
p

Sole
Proprietorship not
Transferable;
Property and
Products are
Transferable

Limited Right of
Transfer subject
to Consent by all
Partners

Corporation

Freely
Transferable
through Formal
(NYSE) and
Informal (Private
Equity) Capital
Markets

FORMS OF BUSINESS ORGANIZATION

WITHDRAWAL OF OWNER
Sole
Proprietors
hip

General
Partnership

Corporation

Partner Death or
Terminates Sole Withdrawal may
Proprietorship
Terminate
Partnership

Corporation has
Unlimited Life

THE AGENCY PROBLEM

Occurswhen(1)GoalsofPrincipalandAgentConflictand
(2)PrincipalcannotVerifywhatAgentisdoing

Corporate
Shareholders
(Principal)

Investor: Maximum
Returns
(High-Risk/HighReturn)

Cannot operate

Business
Liability is Limited:
Can Lose only

Corporate
Management
(Agent)

Manager: Stable
Returns
(Low-Risk/LowReturn)

Can operate
Business
Unlimited Liability:
Lose Job and Income

FIXES FOR AGENCY PROBLEM

Align Managers Interests with
Shareholders with Incentivebased Compensation (Bonuses)
and Stock Options linked to
Corporations Performance
Improve Corporate Governance
with Shareholder Activism:
Change Rules for Nominating
Directors

SPECIAL PURPOSE ENTITIES (SPE)

Limited
Partnership

General
Partner
(Manager
with
Unlimited
Liability) and
Limited
Partner

Limited
Liability
Corporation
(LLC)

Hybrid with
Corporate
Liability
Protections
and
Partnership
Tax

Subchapter-S
Corporation

Identical to
Subchapter
-C
Corporation
except
Income/Loss
es Pass
Through to