Chapter 2 Business Planning and Organization BCN 4708 Fall 2008

Business Types Sole Proprietorship Sole Proprietorship Partnership Partnership General Vs Limited General Vs Limited Joint Ventures Joint Ventures Corporation Corporation S-Corporation aka Subchapter S S-Corporation aka Subchapter S

Sole Proprietorship Simplest form of Business organization Simplest form of Business organization Owner is manager and makes all decisions Owner is manager and makes all decisions Compliance with state and local business licensing requirements only Compliance with state and local business licensing requirements only Advantages: easy to create, total control by owner, transferable, and liquidity Advantages: easy to create, total control by owner, transferable, and liquidity Disadvantages: personal liability, death of owner, must use property to secure loans, taxes and benefits not tax deductible. Disadvantages: personal liability, death of owner, must use property to secure loans, taxes and benefits not tax deductible.

Partnership Two or more persons in an agreement Two or more persons in an agreement Co-owners Co-owners liability liability Partnership agreement (like a Business Plan) Partnership agreement (like a Business Plan) General Partnership General Partnership Pooled resources Pooled resources Limited Partnership Limited Partnership At least one general partner and one or more limited partners At least one general partner and one or more limited partners Limited partner Capital for Return on capital Limited partner Capital for Return on capital Limited say limited liability Limited say limited liability

Partnership Advantages: increased ability to raise capital, pooling of resources, pooling of talents, shared responsibility and minimal administration costs. Advantages: increased ability to raise capital, pooling of resources, pooling of talents, shared responsibility and minimal administration costs. Disadvantages: General partners have unlimited liability, termination upon death, bankruptcy or withdrawal, non- transferable, benefits not tax-deductible Disadvantages: General partners have unlimited liability, termination upon death, bankruptcy or withdrawal, non- transferable, benefits not tax-deductible

Joint Ventures Special combination of two or more persons or entities. Special combination of two or more persons or entities. Specific Venture Specific Venture No designation as a partnership or corporation No designation as a partnership or corporation Same rules as partnership Same rules as partnership Usually limited to single transactions Usually limited to single transactions

Corporation Creations of statutes Creations of statutes Separate legal entity under the laws of state Separate legal entity under the laws of state Same rights as individuals have Same rights as individuals have Most costly to form Most costly to form Issues Stock Issues Stock ESOP ESOP

Corporation Advantages: Exemption of liability, continuity of existence, death has no effect, high level of management, transferable ownership, fringe benefits are tax deductible, and able to raise capital. Advantages: Exemption of liability, continuity of existence, death has no effect, high level of management, transferable ownership, fringe benefits are tax deductible, and able to raise capital. Disadvantages: Lack of centralized control, closely regulated, expensive, record keeping, and double taxation. Disadvantages: Lack of centralized control, closely regulated, expensive, record keeping, and double taxation.

S-Corporation Shareholders absorb all corp. income or losses; report as individual taxpayers. Shareholders absorb all corp. income or losses; report as individual taxpayers. Eliminates the problem of double taxation. Eliminates the problem of double taxation. IRS regulations IRS regulations Has most of the same advantages and disadvantages. Has most of the same advantages and disadvantages.

S-Corporation Must be domestic Must be domestic One class of stock One class of stock Only individuals and estates can be shareholders Only individuals and estates can be shareholders Cannot be part of another organization Cannot be part of another organization Max number of shareholders Max number of shareholders No non-resident alien shareholders No non-resident alien shareholders 20% of revenue must be from domestic sources 20% of revenue must be from domestic sources Dividends, interest, royalties, rents, annuities, and securities transactions < 20% of total revenue Dividends, interest, royalties, rents, annuities, and securities transactions < 20% of total revenue

LLC Owners will be the same from the beginning to the end. Owners will be the same from the beginning to the end. There is no stock in an LLC. There is no stock in an LLC. The ownership is represented by 100% membership interest. The ownership is represented by 100% membership interest. Typically used when you have investment in real estate or a rental property, Typically used when you have investment in real estate or a rental property, The tenants should have no doubt that the owner is not you, it is a company. The tenants should have no doubt that the owner is not you, it is a company. An LLC is treated like a corporation for tax purposes. An LLC is treated like a corporation for tax purposes. It can have the same flow through attribute an S corporation is allowed. It can have the same flow through attribute an S corporation is allowed. It can also have a closed status, like a C corporation. It can also have a closed status, like a C corporation. There is no record keeping requirements with an LLC. There is no record keeping requirements with an LLC. There is no board of directors. There is no board of directors. No requirement to hold board of directors or shareholders meetings. No requirement to hold board of directors or shareholders meetings. Therefore there are no corporate minutes. Therefore there are no corporate minutes.

Control of Business Sole Proprietorship – absolute power over all decisions. Sole Proprietorship – absolute power over all decisions. Partnership – Control is shared between partners as per the agreement Partnership – Control is shared between partners as per the agreement Corporation- depends on stock ownership, exercised through regular board meetings by the board of directors Corporation- depends on stock ownership, exercised through regular board meetings by the board of directors