Chapter 4.3 Choose the legal form of your Business Mrs. Leonard Entrepreneurship

Types of Business Arrangements There are three main types of ownership arrangements from which to choose: Sole Proprietorship – business that is owned by one person Partnership – business owned by two or more people Corporation – business with the legal rights of a person and which may be owned by many people S – Corporation – corporation organized under subchapter S of the Internal Revenue Code whose income is taxed as a partnership

Sole Proprietorship Enable one person to be in control of all business aspects Most common type of ownership May be small businesses with just a few employees, or they may be large businesses with hundreds of employees Government exercises very little control over sole proprietorships So more will be established and run simply Accurate tax record and certain employment laws must be met

Disadvantages of a Sole Proprietorship Difficult to raise money for the sole proprietorship You are the only one contributing money Face a risk that owners of partnerships or corporations do not If a sole proprietorship fails and debts remain, the entrepreneurs private assets may be taken to pay what is owed

Partnership In partnerships, entrepreneurs have someone with whom to share decision-making and management responsibilities In a partnership one entrepreneur will not have to come up with all of the capital alone If any losses the business incurs will be shared by all of the partners Little government regulation

Disadvantages of a Partnership Entrepreneurs may not like sharing responsibilities and profits All partners are liable for errors of the partners Can lead to disagreements and end bitterly

Partnership Agreement When two or more entrepreneurs go into business together, they generally sign a partnership agreement Purpose of the partnership agreement is to set down in writing the rights and responsibilities of each of the owners

Partnership Identifies Name of the business or partnership Names of the partners Type and value of the investment each partner contributes Managerial responsibilities to be handled by each partner Accounting methods to be used Rights of each partner to review and/or audit accounting documents Division of profits and losses among partners Salaries to be withdrawn by the partners Duration of the partnership Conditions under which the partnership can be dissolved Distribution of assets upon dissolution of the partnership Procedure for dealing with the death of a partner

Corporation A corporation is treated independently of its owners Since a corporation has the legal rights of a person, the corporation, not the owners, pay taxes, enters into contracts, and may be held liable for negligence Ownership of a corporation is in the form of shares of stock Share of stock – a unit of ownership in a corporation People who own stock in the corporation are called shareholders or stockholders The individual or group that owns the most shares maintains control of the company

Corporation Board of Directors – every corporation has a group of people who meet several times a year to make important decisions affecting the company Responsible for electing the corporation’s senior officers, determining their salaries, and setting the corporations' rules for conduction business Decides how much the corporation should pay in dividends Dividends – distributions of profits to shareholders by corporations Company’s officers, not the board of directors, are responsible for the day-to-day management of the corporation

Disadvantages of a Corporation Complicated Costly to establish Incorporate – means to set up a business as a corporation Will need assistance of a lawyer, who will help you file articles of incorporation with the state official responsible for chartering, or registering, corporations Articles of incorporation must be written that fully detail the purpose of the business If not written well, the corporations activities can be limited

Disadvantages of a Corporation Corporations are subject to much more government regulation than sole proprietorships or partnerships Much more paperwork Double Taxation Corporation pays taxes on its income, and shareholders pay taxes on the dividends they receive from the corporation Corporations profits are taxed as corporate income and again as individual income

Why Incorporate? Liability – amount owed to others Shareholders liability is limited to the amount of money each shareholder invested in the company when he or she purchased stock Incorporations allows businesses to raise money by selling stock Lenders are also more willing to lend money to corporations than to sole proprietorships or partnerships Since shareholders do not affect the management of a corporation, the main shareholder of the company can change through the buying and selling of stock without disrupting the day-to-day business

S Corporation S corporation – corporation organized under subchapter S of the Internal Revenue Code whose income is taxed as a partnership Unlike regular corporations, an S corporation is not taxed as a business Individual shareholders are taxed on the profits they earn Many companies establish themselves as S corporations because they lose money in the early years Any losses suffered by S corporations can be used to offset other sources of taxable income

4.3 Assessment Advantages Disadvantages Corporation Sole Proprietorship Partnership On your Chapter 4 assessment page, create a table of advantages and disadvantages of the three legal forms of ownership Think Critically (page 97) #1-3. Type the question and answer in bold. 4.3 T/F and MC worksheet