Chapter 2 Page 36 Lesson 2.3 CHOOSE THE LEGAL FORM OF YOUR BUSINESS Evaluate the different legal forms for a business. GOALS
Chapter 2 Page 36 TYPES OF BUSINESS ARRANGEMENTS Sole proprietorship – one owner Sole proprietorship Partnership – two or more owners Partnership Corporation – many owners Corporation S corporation Limited Liability Company (LLC) Limited Liability Company (LLC)
Chapter 2 Page 37 SOLE PROPRIETORSHIP A business that is owned exclusively by one person (or a husband and wife) is a sole proprietorship. Sole proprietorship is the most common form of ownership in the United States. Advantages Fewer government regulations than a corporation Easier to start Disadvantages Investment (funding is more difficult to obtain) Unlimited Liability / Risk – can lose personal assets if business fails financially
Chapter 2 Page 37 PARTNERSHIP Advantages Shared responsibilities and capital Shared investment – easier to obtain financing Shared risk Fewer government regulations than a corporation Disadvantages Unlimited liability Can be held legally liable for the errors of their partners. Sharing responsibilities and profits with others (disagreements).
Chapter 7 Page 37 Outline the rights and responsibilities of the owners business name names of partners investment by each partner delegation of management duties accounting method used rights to audit accounting documents profit distribution salaries length of partnership conditions under which partnership can be dissolved asset distribution upon dissolution of partnership PARTNERSHIP AGREEMENTS ClickClick for sample
Chapter 2 Page 39 CORPORATION Terms and Concepts A corporation is a separate being, like a person. It is treated separately from its owners. Owners cannot lose more than their investment. The individual or group that owns most shares maintains control of the company. Share of stock – a unit of ownership in a corporation Shareholder – owner of stock (includes voting rights) Board of directors – group of people who meet several times a year to make important decisions affecting the company including dividend payments; not responsible for day-to-day operations. Dividends – distributions of profits to shareholders by corporations.
Chapter 2 Page 40 CORPORATION Advantages and Disadvantages Advantages Limited liability; personal assets are protected Financing options: businesses can raise money by selling more stock. Lenders are also more willing to lend money to corporations than to sole proprietorships or partnerships. Shareholders do not affect the management of a corporation Disadvantages Most complicated form of ownership to establish. Costly Subject to much more government regulations (paperwork) Double Taxation: Business pays taxes on its income, and shareholders pay taxes on the dividends received (taxed as corporate income and again as individual income).
Chapter 2 Page 40 S CORPORATION An S corporation is a corporation organized under subchapter S of the Internal Revenue Code Income is taxed as a partnership. If the business looses money, owners can use the losses to offset other sources of personal income. Individual shareholders are taxed on the profit they earn – no double taxation.
Chapter 7 Not in text LIMITED LIABILITY COMPANY Limited Liability Company (LLC) offers the limited liability protections of a corporation to its owners not subjected to the rules of an S corporation provides the benefits of partnership taxation and limited personal liability may be limited to a business life of 30 years
Chapter 2 Not in Text CHARACTERISTICS OF THE LEGAL FORMS OF BUSINESS Simple to start Decisions made by one person Low initial cost Limited liability Limited government regulation Ability to raise capital Double taxation of profits Sole ProprietorshipPartnershipCorporationS Corporation FEATURE