6 - 1 Copyright © 2016 Pearson Education, Inc. Forms of Business Ownership 6 Section 2: The Entrepreneurial Journey Begins

 Explain the advantages and disadvantages of a sole proprietorship and a partnership.  Describe the similarities and differences of the C corporation and the S corporation.  Understand the characteristics of the limited liability company.  Explain the process of creating a legal entity for a business.  Understand the advantages and disadvantages of buying an existing business.  Define the steps involved in the right way to buy a business.  Understand how the negotiation process works and identify the factors that affect it Copyright © 2016 Pearson Education, Inc.

 There is no one “best” form of ownership.  The best form of ownership depends on an entrepreneur’s particular situation.  Key: Understanding the characteristics of each form of ownership and how well they match an entrepreneur’s business and personal circumstances Copyright © 2016 Pearson Education, Inc.

 Tax considerations  Liability exposure  Start-up and future capital requirements  Control  Managerial ability  Business goals  Management succession plans  Cost of formation Copyright © 2016 Pearson Education, Inc.

 Sole Proprietorship  General Partnership  Limited Partnership  Corporation  S Corporation  Limited Liability Company Copyright © 2016 Pearson Education, Inc.

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 Simple to create  Least costly form to begin  Profit incentive  Total decision making authority  No special legal restrictions  Easy to discontinue Copyright © 2016 Pearson Education, Inc.

 Unlimited personal liability  The company’s debts are the owner’s debts.  Limited skills and capabilities  Feelings of isolation  Limited access to capital  Lack of continuity of the business Copyright © 2016 Pearson Education, Inc.

 An association of two or more people who co- own a business for the purpose of making a profit.  Always wise to create a partnership agreement: states in writing the terms under which the partners agree to operate the partnership and that protects each partner’s interests in the business Copyright © 2016 Pearson Education, Inc.

 Three key elements of any partnership under RUPA: 1.Common ownership in a business. 2.Agreement on how the business’s profits and losses will be shared. 3.The right to participate in managing the operation of a partnership Copyright © 2016 Pearson Education, Inc.

 Easy to establish  Complementary skills of partners  Division of profits  Larger pool of capital  Ability to attract limited partners Copyright © 2016 Pearson Education, Inc.

 General partners:  Take an active role in managing a business.  Have unlimited liability for the partnership’s debts.  Every partnership must have at least one general partner.  Limited partners:  Cannot participate in the day-to-day management of a company.  Have limited liability for the partnership’s debts Copyright © 2016 Pearson Education, Inc.

 Two types of limited partners: 1.Silent partners:  Not active in a business but are generally known to be members of the partnership 2.Dormant partners:  Neither active nor generally known to be associated with the business Copyright © 2016 Pearson Education, Inc.

 Easy to establish  Complementary skills of partners  Division of profits  Larger pool of capital  Ability to attract limited partners  Minimal government regulation  Flexibility  Taxation Copyright © 2016 Pearson Education, Inc. (continued from 6-14)

 Unlimited liability of at least one partner  Capital accumulation  Difficulty in disposing of partnership interest without dissolving the partnership  Potential for personality and authority conflicts  Partners bound by law of agency Copyright © 2016 Pearson Education, Inc.

 All partners in a business are limited partners.  Gives the advantage of limited liability for the debts of the partnership.  Does not pay taxes – income is passed through to the limited partners who pay taxes on their share of the company’s income Copyright © 2016 Pearson Education, Inc.

 Corporation: a separate legal entity from its owners.  Types of corporations:  Publicly held: a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges.  Closely held: a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends Copyright © 2016 Pearson Education, Inc.

 Identify the company as a corporation by using “Inc.” or “Corporation” in the business name.  File all reports and pay all necessary fees required by the state in a timely manner.  Hold annual meetings to elect officers and directors.  Keep minutes of every meeting (formal and informal) of the officers and directors Copyright © 2016 Pearson Education, Inc.

 Be sure that the corporation’s board makes all major decisions.  Make it clear that the business is a corporation – officers should sign all documents in the corporation’s name.  Keep corporate assets and the personal assets of the owners separate Copyright © 2016 Pearson Education, Inc. (continued)

 Traditional form of incorporation.  Pays taxes at the corporate tax rate and stockholders also pay taxes on dividends they receive at their individual tax rates.  Double taxation: a disadvantage of the corporate form of ownership in which the corporation’s profits are taxed twice, once at the corporate rate and again at the individual rate on the portion of profits distributed to shareholders as dividends Copyright © 2016 Pearson Education, Inc.

 No different from any other corporation from a legal perspective.  An S corporation is taxed like a partnership, passing all of its profits (or losses) through to individual shareholders.  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.  Follow 1/3, 1/3, 1/3 rule of thumb Copyright © 2016 Pearson Education, Inc.

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 Resembles an S Corporation but is not subject to the same restrictions.  Two documents required: 1.Articles of organization: creates an LLC by establishing its name and address, method of management, its duration, etc. 2.Operating agreement: establishes for an LLC the provisions governing the way it will conduct business Copyright © 2016 Pearson Education, Inc.

 The average cost to create a legal business entity is about $1,000, but it can range from $500 to $5,000.  Can use Web sites like MyCorporation and BizFilings and incorporate for just $100.  But, be careful! The cost of filing incorrectly can be high.  States have different regulations on forming business entities Copyright © 2016 Pearson Education, Inc.