BUSINESS FORMATION CHAPTER 9

What is Business Formation ? What is the legal formation of a business? Why the legal business formation is important?

TYPES OF BUSINESS FORMATION 1.Sole Proprietorship 2.Partnership a. General Partnership b. Limited Partnership 3.Limited Liability Corporation 4.Corporation a. S Corporation b. Professional Corporation 4. Joint venture

SOLE/SINGLE PROPRIETORSHIP the meaning of sole Proprietorship The simplest and least expensive form of business ownership The company and the owner are one and the same and it can be used to name the company Example: Mary Jane Smith Interior Design Services The decision making process The advantages The disadvantages The legal and financial responsibilities of the owner The continuity of the business

Advantages Of Sole Proprietorship Simplest to start. All that is necessary is to establish a location, obtain any local business license, required and begin operation. The owner may want to open a bank account in the firm’s name, prepare the appropriate business Stationery, and begin to establish credit with trade sources. Great freedom in management All profits go to the proprietor minimal formal actions to create the proprietorship. No required filings with the federal government to begin the business, unless employees are hired.

Disadvantages Of Sole Proprietorship Personal liability for all debts and taxes Personal liability for legal claims from lawsuits Illness or death of the owner result in failure of the business Difficult for the sole proprietor to take vacations Owner could experience tax problems since business & personal income are easily mixed It requires multiple management skills Difficult to sell business. Interior design businesses often flourish because of the personal reputation of the owner.

PARTNERSHIPS Why partnerships are formed? The meaning of partnership: When two or more individuals agree to start a business The owners and there legal responsibilities Partners are co-owners unless some other agreement about the level of ownership has been made. They act on each others behalf, depending on the type of partnership they formed. The action of any one of them bind the company to agreements. Types of Partnership: General Partnership Limited Partnership

TWO TYPES OF PARTNERSHIPS 1. GENERAL PARTNERSHIPS Definition Why to create a general partnership? The owners and there legal/financial responsibilities The decision making process Naming of the firm maybe a trade-name Example: Creative Interior Designs; Interior Design Associates name may consist of the partner’s names or any other legal business names The continuity of the business Advantages and disadvantages Example (s)

2. LIMITED PARTNERSHIP Definition A type of business formation in which a business is formed with at least one general partner, and other partners who invest as limited partners. Why to create a limited partnership? The owners and there legal/financial responsibilities General partners have responsibility for the management of the firm They assume the same kind of personal financial and liability responsibility that is true for members of a regular partnership The role of limited partner is as an investor Limited partner contribute assets toward the operation of the partnership and receives a portion of the profits. The decision making process The continuity of the business Advantages: Limited partners have financial responsibility for only the losses & debts of the partnership to the Amount of each limited partner’s investment in the firm. Thus provide them with ability to protect their personal assets and money. A limited partnership used to be a good option for designers who are looking for people to invest in their company. Disadvantages More expensive to start than a general partnership. Example (s)

Limited Liability Company (LLC) Definition Why to create a Limited Liability Company (LLC)? The owners and there legal/financial responsibilities The decision making process Naming of the firm The continuity of the business Advantages and disadvantages Example (s)

CORPORATION The Definition An association of individuals created by statutory requirements of law and is a legal entity. Sometimes referred to as C corporation It can sue and be sued legal entity means: Exist independently of its originators or any other member The owners and their legal responsibilities Owners are called stockholders or shareholders The decision making process The corporation is a legal entity how? Raising capital Advantages and disadvantages The continuity of the business Survives even after the death of any or all its stockholders Types of corporations Example (s)

TYPES OF CORPORATE STRUCTURES 1.Private Corporation formed for private, profit making interests 2.General Corporation formed for private, profit making interests 3.Public Corporation those formed by some government agency for the benefit of the public If a corporation sells its stock on one of the formal stock exchanges, Such as the New York Stock Exchange, American Stock Exchange. 4.Close Corporation: Also called/Family/Closely Held Corporation when all the shares of stock of a corporation are privately held by few individuals, and the stock is not traded on any of the public markets. 5.Domestic Corporation a corporation formed in one state and doing business only in that state 6.Foreign Corporation: a corporation formed in one state but doing business in another state.

S CORPORATION Definition The owners and their legal responsibilities (formally called a subchapter S Corporation) enjoys all the advantages of the Corporation Formed in a very similar manner to a corporation, how? It is also an expected to meet all the same requirements for articles of incorporation. The difference between the corporation and S Corporation relates to taxes. Why this business formation is used? Many interior designers use the S corporation form when they begin their practice in order to have the liability protection of the corporation. Designers also may wish to elect S Corporation status in the early years of business when it is most likely to experience business losses. These losses are absorbed by the shareholders rather than by the business. Advantages and disadvantages

Professional Corporation/Professional Association Definition Naming of the firm Must include the initials PC/PSC Professional Corporation/Professional Association- a corporation formed by persons in professions such as law, medicine, dentistry, accounting, or architecture. In many states, only professional services that are licensed or have other legal authorization by the state may register as professional corporation Formed in a very similar manner to a corporation The owners and their legal responsibilities

JOINT VENTURE Definition a temporary contractual association of two or more persons or firms that Agree to share in the responsibilities, losses, and profits of a particular project or business venture. Key to joint venture Naming of the firm Treated like a partnership Does not have a legal entity Owners and their liabilities Reasons for creating joint venture Comparing partnership and joint venture Example: SONYERICSON