3-1 Forms Of Ownership Of Small Business Primary Legal Forms Primary Legal Forms Advantages & Disadvantages Of Each Form Advantages & Disadvantages Of Each Form Other Legal Forms Other Legal Forms Chapter 3

3-2 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 2 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Right Legal Form: Business Factors To Consider Future Size Your vision regarding the size of your business. Nature Nature of the business. Desired Control The level of control you desire. Legal Vulnerability The level of structure desired. Tax Implications Tax implication of different ownership structure. Expected Profit (Loss) Re-investment Personal Cash Needs

3-3 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 3 Definition: PROPRIETORSHIP PARTNERSHIP CORPORATION Is a business formed and owned by a group of people, called stockholders, given special rights, privileges, and limited liabilities by law. Is a business that is owned by one person Is a business owned by two or more persons who have unlimited liability for its debts and obligations.

3-4 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 4 Proprietorship Secrecy Unique tax advantages Owner doesn’t have to share profits Relative freedom of action and control Easiest and simplest form to organize, operate, and dissolve Advantages Limited capital Difficulty in obtainingcredit Inadequate managementand employee skills Unlimited liability forthe firm’s debts Limited life becausebusiness and owner arelegally the same Disadvantages

3-5 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 5 Partnership Easy to form Can use the ideas and plans of more than one person Specialized skills available from individual partners Can raise more capital since good credit may be available Obtain financial resources from more than one person Advantages Limited life Unlimited liability for debts ofthe firm Each partner is responsible forthe acts of every other partner Death of any of the partnersterminates the partnership A partner cannot obtain bondingprotection against the acts ofthe other partner(s) Disadvantages

3-6 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 6 General Partnership Operations Uniform Partnership Act Partners Responsible For Other Partners’ Actions Liability: Personal Property At Risk All Debts Of Firm Resolve Disputes Among Partners(?) S. Wanke/PhotoLink/Getty Images

3-7 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 7 Types Of Partnerships GeneralPartner GeneralPartner Partners Liable For Each Others’ ActionsGeneralPartner LimitedPartnerLimitedPartnerLimitedPartner Manage With Unlimited Liability Liability = Capital Contribution

3-8 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 8 Partnership: Legal/Tax Documents Articles of Co-Partnership Tax Forms –Form 1065 K-1: Partner’s Share Of Income, Credit, Deductions –Form 4562: Depreciation –Form 1040: Individual Income Tax Return –Schedule E: Supplemental Income & Loss –Schedule SE: Self-Employment Tax –Form 1040-ES: Estimated Tax For Individual

3-9 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 9 Corporation Can have representative management Ease of raising large amounts of capital Legal entity separate and distinct from its owners as individuals Relatively permanent, since life of firm not affected by loss of any shareholder Owners’ liability for the firm’s debt limited to their investment in it. Advantages Impersonal Owners have limited interest infirm’s activities-except profits High incorporation fees andhigh taxes, especially doubleincome taxation Burdensome procedures,reports, and statementsrequired by governments Powers limited to those statedin charter-may be difficult todo business in another state Disadvantages

3-10 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 10 Formation Of Corporation Articles Of Incorporation- Filed With State Corporate Charter-Comes From State Buy-Sell Agreement- Include In Articles Of Incorporation

3-11 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 11 Corporate Governance Stockholders Board Of Directors Corporate Officers Elects Appoints

3-12 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 12 Other Legal Forms Of Ownership Limited Liability Partnership –Protects Individual Partners –Not Recognized By Every State Family Limited Liability Partnership –Partners Related –Agriculture/Family Farms Professional Service Corporation –Provides Licensed Professional Services –Doctors, Lawyers, & Accountants

3-13 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 13 Nonprofit Corporations Civic, Charitable, Educational, Religious Tax Exempt Cooperative Independent Producers Buys/Sells For Clients Joint Venture Fractional Ownership Other Legal Forms Of Ownership (cont’d)