Chapter 3: Forms of Ownership1Copyright 1999 Prentice Hall Publishing Company Choosing a Form of Ownership

l There is no one “best” form of ownership. l The best form of ownership depends on an entrepreneur’s particular situation. l The key to choosing a form of ownership is understanding how each form’s characteristics affect an entrepreneur’s specific business and personal circumstances. Choosing a Form of Ownership

Chapter 3: Forms of Ownership3Copyright 1999 Prentice Hall Publishing Company Forms of Ownership l Sole Proprietorship l Partnership l Corporation l S Corporation l Limited Liability Company l Joint Venture

Chapter 3: Forms of Ownership8Copyright 1999 Prentice Hall Publishing Company Advantages of the Sole Proprietorship l Simple to create l Least costly form to begin l Profit incentive l Total decision making authority l No special legal restrictions l Easy to discontinue

Chapter 3: Forms of Ownership9Copyright 1999 Prentice Hall Publishing Company Disadvantages of the Sole Proprietorship l Unlimited personal liability

Liability Features of the Basic Forms of Ownership Sole Proprietorship Claims of Sole Proprietor’s Creditors Sole Proprietor’s Personal Assets

Chapter 3: Forms of Ownership11Copyright 1999 Prentice Hall Publishing Company Disadvantages of the Sole Proprietorship l Limited access to capital l Limited skills and capabilities l Feelings of isolation l Lack of continuity l Unlimited personal liability

Chapter 3: Forms of Ownership12Copyright 1999 Prentice Hall Publishing Company Advantages of the Partnership l Easy to establish l Complementary skills of partners l Division of profits l Larger pool of capital l Ability to attract limited partners l Little government regulation l Flexibility l Taxation

Chapter 3: Forms of Ownership13Copyright 1999 Prentice Hall Publishing Company Disadvantages of the Partnership l Unlimited liability of at least one partner

Liability Features of the Basic Forms of Ownership Partnership Claims of Partnership’s Creditors Partnership’s Assets General Partner’s Personal Assets General Partner’s Personal Assets General Partner’s Personal Assets General Partner’s Personal Assets

Chapter 3: Forms of Ownership15Copyright 1999 Prentice Hall Publishing Company Disadvantages of the Partnership l Capital accumulation l Difficulty in disposing of partnership interest l Lack of continuity l Potential for personality and authority conflicts l Partners bound by the law of agency l Unlimited liability of at least one partner

Chapter 3: Forms of Ownership16Copyright 1999 Prentice Hall Publishing Company Limited Partnership l A partnership composed of at least one genral partner and one or more limited partners. l The general partner in this partnership is treated exactly as in a general partnership. l The limited partner has limited liability and is treated as an investor in the business.

Liability Features of the Basic Forms of Ownership Limited Partnership Claims of Partnership’s Creditors Partnership’s Assets General Partner’s Personal Assets General Partner’s Personal Assets Limited Partner’s Personal Assets Limited Partner’s Personal Assets Barrier

Chapter 3: Forms of Ownership18Copyright 1999 Prentice Hall Publishing Company The Corporation l A separate legal entity from its owners. l Types of corporations: â Domestic - a corporation doing business in the state in which it is incorporated. â Foreign - a corporation chartered in one state and doing business in another state. â Alien - a corporation formed in another country but doing business in the United States.

Chapter 3: Forms of Ownership19Copyright 1999 Prentice Hall Publishing Company The Corporation l Types of corporations: â Publicly held - a corporation that has a large number of shareholders and whose stock usuually is traded on one of the large stock exchanges. â Closely held - a corporation whose shares are in the control of a relatively small number of people, often family members, relatives, or friends.

Chapter 3: Forms of Ownership20Copyright 1999 Prentice Hall Publishing Company Advantages of the Corporation l Limited liability of the stockholders

Liability Features of the Basic Forms of Ownership Corporation Claims of Corporation’s Creditors Corporation’s Assets Shareholder’s Personal Assets Shareholder’s Personal Assets Shareholder’s Personal Assets Shareholder’s Personal Assets Barrier

Chapter 3: Forms of Ownership22Copyright 1999 Prentice Hall Publishing Company Advantages of the Corporation l Ability to attract capital l Ability to continue indefinitely l Transferable ownership l Limited liability of stockholders

Chapter 3: Forms of Ownership23Copyright 1999 Prentice Hall Publishing Company Disadvantages of the Corporation l Cost and time of incorporating l "Double taxation" l Potential for diminished managerial incentives l Legal requirements and regulatory "red tape" l Potential loss of control by founder(s)

Chapter 3: Forms of Ownership24Copyright 1999 Prentice Hall Publishing Company S Corporation l No different from any other corporation from a legal perspective. l For tax purposes, however, an S corporation is taxed like a partnership, passing all of its profits (or losses) through to the individual shareholders. l To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year.

Liability Features of the Basic Forms of Ownership S-Corporation Claims of S-Corporation’s Creditors S-Corporation’s Assets Shareholder’s Personal Assets Shareholder’s Personal Assets Shareholder’s Personal Assets Shareholder’s Personal Assets Barrier

Chapter 3: Forms of Ownership26Copyright 1999 Prentice Hall Publishing Company Limited Liability Company (LLC) l Resembles an S Corporation but is not subject to the same restrictions. l Two documents required: the articles of organization and the operating agreement. l An LLC cannot have more than two of these four corporate characteristics: â Limited liability â Continuity of life â Free transferability of interest â Centralized management

Liability Features of the Basic Forms of Ownership Limited Liability Company (LLC) Claims of LLC’s Creditors LLC’s Assets Member’s Personal Assets Member’s Personal Assets Member’s Personal Assets Member’s Personal Assets Barrier