Forms of Business Ownership Introduction

Sole Proprietorship  “a business owned by one person who is subject to claims of creditors”  Advantages: 1) ease of formation 2) retention of profits 2) retention of profits 3) tax advantages 3) tax advantages 4) control of decisions 4) control of decisions 5) flexibility 5) flexibility 6) fewer gov’t. regulations 6) fewer gov’t. regulations 7) pride of ownership 7) pride of ownership

Sole Proprietorship (cont’d)  Disadvantages: 1) unlimited liability 2) limited capital 3) unstable business life/lack of life/lack of continuity continuity 4) limited operating/ mgt. skills mgt. skills 5) hiring employees 5) hiring employees

Partnership  “the voluntary association of two or more people who have combined their resources to carry on as co- owners of a lawful enterprise for their joint profit”

Advantages of Partnership  1) ease of formation  2) complementary skills  3) access to capital  4) tax advantages  5) retention of profits  6) group decision making  7) minimal governmental control

Disadvantages of Partnership  1) unlimited liability  2) uncertain duration  3) conflict  4) dissolution

Types of Partnership  1) active/general partner  2) secret partner  3) silent partner  4) dormant partner  5) limited partner

Selecting a Partner  “Don’t go into business with a friend because you will likely lose that friend”  Characteristics of a “good” partner

Partnership Agreements  advisable even if the partners are friends  can delineate the responsibilities of each partner and protect everyone with an interest in the business  Uniform Partnership Act  Articles of Partnership

Articles of Partnership  should address the following:  1) legal name of the partnership  2) nature of the business  3) duration of the partnership  4) contributions  5) sales, loans and leases  6) withdrawals and salaries  7) responsibility and authority  8) dissolution  9) arbitration

Corporation  “an artificial being, invisible, intangible, and existing only in contemplation of law; an entity that is something that has a distinct existence separate and apart from the existence of its individual members”

Corporation (cont’d)  composed of: shareholders/stockholdersdirectorsofficers

Advantages of Corporations  1) limited liability  2) transfer of ownership  3) stability/perpetual life  4) acquisition of capital  5) skilled managers  6) stockholders as customers

Disadvantages of Corporations  1) taxes  2) rigidity  3) shared ownership  4) regulations

Types of Corporations  1) domestic  2) foreign  3) alien  4) publicly held/open  5) closely held/closed

“S” Corporations  provided for in subchapter S of the tax code  created especially for small business  taxed like partnerships

“S” Corporations (cont’d)  Advantages:  1) lower “current” income tax  2) exemption from the corporate alternative minimum tax  3) flexibility in using different accounting methods

“S” Corporations (cont’d)  Disadvantages:  1) multistate “S” corporations  2) banks may be reluctant to lend to “S” corporations that distribute all their earnings  3) rigid restrictions

Restrictions of “S” Corporations: 1) limit of 75 stockholders 2) stockholders must be individuals, estates, or certain trusts 3) no corporations, partnerships, or nonresident aliens can be stockholders 3) only one class of outstanding stock 4) the firm must be a domestic corporation 5) certain states do not permit “S” corp. Status 6) all stockholders must agree to the decision for form an S-corporation 7) company cannot be an ineligible corporation

Incorporating a Small Business  legal counsel is recommended  most states have specific standards  Articles of Incorporation

Articles of Incorporation  At a minimum must include: –Corporate name –Location of the company –Purpose of the company –Duration –Names and addresses of incorporators –Amount and type of stock to be issued –Capital required at time of incorporation

Articles of Incorporation (cont’d) –Provisions for stockholders preemptive rights –Names and addresses of initial directors and officers –Provisions for regulation of the affairs of the company –Right to amend, alter, or repeal corporate provisions –Bylaws

Limited Liability Company  “combines aspects of partnerships with the limited liability of a corporation”  new form of business ownership  approved in all states  owners are known as members

Limited Liability Company (cont’d)  Advantages:  1) corporate-like limited liability and asset protection  2) flexibility of partnership  3) no significant requirements  4) tax status of partnership

Joint Venture  “an agreement between two or more groups to form a business entity in order to achieve a specific goal or to operate for a specific period of time” (Pride, Hughes, Kapoor 2005) (Pride, Hughes, Kapoor 2005) - acts like a general partnership, but is clearly for a limited period of time or a single project

Small Business  “ a business which is independently owned and operated and is not dominant in its field of operations”  1) quantitative criteria  2) qualitative criteria

Quantitative Criteria  number of employees  dollar sales volume

Qualitative Criteria  Actively managed by its owner(s)  Highly personalized  Largely local in its area of operations  Largely dependent on internal sources of capital to finance its growth  The business is not a major force (dominant) in the particular industry

Small Business Adm. (SBA) Guidelines  Manufacturing: maximum of 500 – 1500 employees  Wholesaling: maximum of 100 employees  Retailing: yearly sales/receipts from $6million - $24.5 million  Mining: maximum of 500 employees

SBA Guidelines (cont’d)  General Construction: average annual receipts from $12 million- $28.5 million  Special Trade Construction: annual sales up to $12 million  Agriculture: maximum annual receipts of $.75 million - $5 million  Services: maximum annual receipts ranging from $6 million - $29 million

Small Business Sector  Since 1995, the number of small businesses in the United States has increased 49%  Over 70% of new businesses can be expected to fail within their first 5 years…..the primary reason is mismanagement

Small Business Industries  Distribution Industries: concerned with the movement of goods from producers to consumers (33%)  Service Industries: (48%) –75% nonfinancial services –8% financial services  Production Industries: (19%)

Characteristics of Small Business Owners  Motivated to achieve  Calculated risk takers  Self-confident  Orderly  Willing to work long hours  Healthy  Committed  Antistatus  Superior conceptual ability  Optimistic

Reasons Why Small Businesses Fail  1) capital: money-related problems  2) management: lack the skill to manage money, time, personnel, and inventory  3) planning: overexpansion