1. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 5-1

2. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 5-2 Chapter 5

3. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  There is no one “best” form of ownership  The best form of ownership depends on an entrepreneur’s particular situation  The key to choosing a form of ownership is understanding how each form’s characteristics affect an entrepreneur’s specific business and personal circumstances 5-3

4. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 5-4 Number of Days to Start a Business in the United States

5. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Factors to consider:  Tax considerations  Liability exposure  Start-up and future capital requirements  Control  Managerial ability  Business goals  Management succession plans  Cost of formation  Cost of maintaining 5-5

6. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 5-6 Forms of Business Ownership

7. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Sole proprietorship: the simplest and most popular form of ownership  The sole proprietor is the only owner and ultimate decision maker for the business 5-7

8. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Advantages of a Sole Proprietorship  Simple to create  Least costly form to establish  Profit incentive  Total decision-making authority  No special legal restrictions  Easy to discontinue 5-8

9. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Disadvantages of the Sole Proprietorship  Unlimited personal liability  Failure of the business can ruin a sole proprietor financially  Limited access to capital  Limited skills and abilities  Feelings of isolation  Lack of continuity for the business 5-9

10. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Partnership: an association of two or more people who co-own a business for the purpose of making a profit  Take the time to create a written partnership agreement: a document that states all of the terms of operating the partnership for the protection of each partner involved  Addresses in advance potential conflicts 5-10

11. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  A partnership agreement contains: 1.Name of the partnership 2.Purpose of the business 3.Location of the business 4.Duration of the partnership 5.Names of the partners and their legal addresses 6.Contributions of each partner to the business, at the creation of the business and later 7.Agreement on how the profits or losses will be distributed 8.Agreement on salaries or drawing rights against profits for each partner 5-11

12. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 9.Procedure for expansion through the addition of new partners 10.Distribution of the partnership’s assets if the partners voluntarily dissolve the partnership 11.Sale of the partnership interest 12.Absence or disability of one of the partners 13.Voting rights 14.Decision-making authority 15.Financial authority 16.Handing tax matters 17.Alterations or modifications of the partnership agreement 5-12

13. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  The Uniform Partnership Act  Uniform Partnership Act: codifies the body of law dealing with partnerships in the United States  Three key elements: 1.Common ownership interest in a business 2.Sharing the business’s profits and losses 3.Right to participate in managing the partnership  Partners must abide by:  Duty of loyalty  Duty of obedience  Duty of care  Duty to inform 5-13

14. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Advantages of the Partnership  Easy to establish  Complementary skills  Division of profits  Larger pool of capital  Ability to attract limited partners  Little government regulation  Flexibility  Taxation 5-14

15. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Disadvantages of the Partnership  Unlimited liability of at least one partner  Capital accumulation  Difficulty in disposing of partnership interest  Potential for personality and authority conflicts  Partners are bound by the law of the agency 5-15

16. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Limited Partnerships  Limited partnership: a partnership composed of at least one general partner and one or more limited partners  The general partner in a limited partnership is treated exactly as in a general partnership  The limited partner has limited liability and is treated as an investor in the business  The limited partner does not take an active role in managing the business 5-16

17. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Limited Liability Partnerships  Limited liability partnership: a partnership in which all partners in the business are limited partners, having only limited liability for the debts and obligations of the partnership  Usually restricted to professionals – attorneys, physicians, dentists, accountants, etc. 5-17

18. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Corporation: an artificial legal entity created by the state that can sue or be sued in its own name, enter into and enforce contracts, hold the title to and transfer property, and be found civilly and criminally liable for violations of the law 5-18

19. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  C-corporations: creations of the state  Domestic corporation: a corporation doing business in the state in which it is incorporated  Foreign corporation: a corporation chartered in one state and doing business in another state  Alien corporation: a corporation formed in another country but doing business in the United States 5-19

20. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Publicly held corporation: a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges  Closely held corporation: a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends 5-20

21. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Requirements for incorporation: 1.The corporation’s name 2.The corporation’s statement of purpose 3.The company’s time horizon 4.Names and addresses of the incorporators 5.Place of business 6.Capital stock authorization 7.Capital required at the time of incorporation’ 8.Provision for preemptive rights, if any, that are granted to stockholders 5-21

22. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 9.Restrictions on transferring shares  Treasury stock  Right of first refusal 10.Names and addresses of the officers and directors of the corporation 11.Rules under which the corporation will operate  Bylaws  Corporate charter: approved articles of incorporation 5-22

23. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Advantages of the Corporation  Limited liability of stockholders  Ability to attract capital  Private placement  Public offering  Ability to continue indefinitely  Transferable ownership 5-23

24. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Disadvantages of the Corporation  Cost and time involved in the incorporation process  Double taxation  Potential for diminished managerial incentives  Stock option  Stock ownership plan  Legal requirements and regulatory red tape  Potential loss of control by the founders 5-24

25. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Professional Corporations Professional corporation: offers professionals such as lawyers, doctors, dentists, accountants, and others, the advantages of the corporate form of ownership 5-25

26. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  S corporation: a distinction that is made only for federal income tax purposes  No different from any other corporation from a legal perspective  For tax purposes, however, an S- corporation is taxed like a partnership, passing all of its profits (or losses) through to the 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 5-26

27. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  S-corporations must meet the following criteria:  Must be a U.S.-based corporation  No nonresident alien shareholders  Only one class of common stock  No more than 100 shareholders (increased from 75)  No more than 25% of corporate income from passive investment sources  Corporations and partnerships cannot be shareholders 5-27

28. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Advantages of an S Corporation  All of the advantages of a regular corporation  Passes all of its profits or losses through to individual shareholders  Income is only taxed once at the individual tax rate  Avoids the double taxation disadvantage of the C corporation  Avoids the tax C corporations pay on assets that have appreciated in value and are sold 5-28

29. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Disadvantages of an S Corporation  Tax advantages may not be permanent  When is an S Corporation a Wise Choice?  Beneficial to start-up companies that anticipate net losses and to highly profitable firms with substantial dividends to pay to shareholders  Also attractive to companies that plan to reinvest most of their earnings to finance growth 5-29

30. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Resembles an S-Corporation but is not subject to the same restrictions  Two documents:  Articles of organization  Operating agreement 5-30

31. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  An LLC cannot have more than two of these four corporate characteristics:  Limited liability  Continuity of life  Free transferability of interest  Centralized management 5-31

32. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Nonprofit organizations  Uses revenues to pursue social value rather than to create personal value for investors  To form a non profit organization:  File the certificate of incorporation  Purpose clause  Select individuals to serve on the board of directors  Develop a mission statement  Establish bylaws and board policies  File require forms with the IRS  Develop a fund-raising plan 5-32

33. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  For-Profit Social Venture  Primary goal is creating social value, but financial viability is required  Dual focus  Double bottom line  Are subject to market forces 5-33

34. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  New Forms of Social Ventures  The low-profit limited liability company (L3C) is a cross between a nonprofit and a for-profit LLC  Builds on the structure of the existing LLC; it provides the liability protection of a corporation, can sell shares of ownership, and is not tax exempt  Formed to pursue a social mission  Meant to integrate the best of both the nonprofit and the for-profit LLC by creating a market for investments in financially risky but socially beneficial activities 5-34

35. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 5-35 The L3C Versus the Traditional LLC and Nonprofit

36. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 5-36