Legal forms of business

In a beginning a business, person may to choose what form of busines they want to establish. It is important because this form of business will determines which income tax return form. There is three types of legal form of business :

i. ii. iii.

Proprietorship Partnership Corporation (C corporation)

Table 1 : shows the three form of business formation Factors Ownership Proprietorship Single owner, individual Partnership Two or more individual Corporation No limitation on number of stockholder Liability of owners Individual liable for busines liabilities All individuals liable for Amount contribution of is capital limit of

business liabilities. Limited partners amount contribution. are of liable for

shareholder liability.

capital

Costs of starting business

None, other than filing fees for trade name

Partnership

agreement,

Created only by statute. Articles of incorporation, filing fees, taxes, and fees for states in which

legal costs and minor filing fees for trade name.

corporation registers to do business. Continuity of business Death dissolves the business Death or witdrawal of one partners partnership partnership terminates unless agreement Greatest continuity. Death or withdrawal of owner will not affect form of

stipulates otherwise. Death or withdrawal of one limited partner has no effect on continuity

existence of business.

Transferability of interest

Complete freedom to sell or transfer any part of business.

Partner can transfer his/her interest only with consent of all other general partners. Limited partner can sell interest without consent of

Flexible. Stockholder can selll or buy stock at will. Some stocks transfers may be restricted by agreement.

general partners.

In S corporation, stock may be transferred only to an individual.

Capital

Raised only by loan or increased contribution by proprietor

Loans or new contributions by partner require a change in partnership agreement.

New capital raised by sale of stock or bonds or by borrowing corporation. in name of

Management control

Individual makes all decisions and can act immediately.

All general partners have equal control., and majority rules. Limited partners have

Majority

stockholders

have most control from legal point of view. Day to day control in hands of management,

limited control.

who may or may not be major stockholder. Profits and losses Individual responsible and receive all profit and losses. Depends on partnership Shareholders can share in profits by receipt of

agreement and investment by partners.

dividends. With limited liability for owners, more attractive as an investment

Attractiveness for raising capital

Depends on capability of proprietor and success of business.

Depends on capability of partners and success of business.

opportunity.
*based on Entreprenuership eight edition, Mc Graw Hill, Robert D.Hisrich, Michael P.Peters, Dean A. Shepherd

Advantages
Sole proprietorship EASE OF STARTING AND ENDING THE BUSINESS. - All you need is a permit from the local government. PRIDE OF OWNERSHIP. - Sole proprietors have taken the risk and deserve the credit. LEAVING A LEGACY behind for future generations. RETENTION OF COMPANY PROFITS. - You dont have to share profits with anyone. NO SPECIAL TAXES. - Profits of the business are taxed as the personal income of the owner. MORE FINANCIAL RESOURCES. - Two or more people pool their money and credit. SHARED MANAGEMENT AND POOLED/COMPLEMENTARY KNOWLEDGE. - Partners provide different skills and perspectives LONGER SURVIVAL. - Partners are four times as likely to succeed as sole proprietorships. NO SPECIAL TAXES. - All profits of partners are taxed as personal income of the owners. LIMITED Liabilities - Limited liability is probably the most significant advantage of corporations. - Limited liability means that the owners of a business are responsible for losses only up to the amount they invest. MORE MONEY FOR INVESTMENT. - To raise money, a corporation sells OWNERSHIP (STOCK) to anyone interested. - Corporations may also find it easier to obtain loans. - Corporations can also raise money from investors through issuing bonds. SIZE. - Corporations have the ability to raise large amounts of money. - They can also hire experts in all areas of operation. - They can buy other corporations in other fields to diversity their risk. - Corporations have the size and resources to take advantage of opportunities anywhere in the world.

Partnership

Corporation

 PERPETUAL LIFE - The death of one or more owners does not terminate the corporation. EASE OF OWNERSHIP CHANGE. - Selling stock changes ownership. EASE OF DRAWING TALENTED EMPLOYEES. Corporations can offer benefits such as stock options. SEPARATION OF OWNERSHIP FROM MANAGEMENT. - Corporations can raise money from investors without getting them involved in management.

Disadvantages
Sole proprietorship UNLIMITED LIABILITY - the responsibility of business owners for all of the debts of the business. LIMITED FINANCIAL RESOURCES. - Funds available are limited to the funds that the sole owner can gather. MANAGEMENT DIFFICULTIES. - Many owners are not skilled at record keeping. OVERWHELMING TIME COMMITMENT. - The owner has no one with whom to share the burden. FEW FRINGE BENEFITS. - Fringe benefits can add up to 30% of a worker=s income. LIMITED GROWTH. LIMITED LIFE SPAN. If the sole proprietor dies or leaves, the business ends. UNLIMITED LIABILITY. - Each general partner is liable for the debts of the firm, no matter who was responsible for causing those debts. - You are liable for your partners' mistakes as well as your own. DIVISION OF PROFITS. Sharing profits can cause conflicts. DISAGREEMENTS AMONG PARTNERS. - Disagreements can arise over division of authority, purchasing decisions, and so on. - all terms of partnership should be spelled out IN WRITING to

Partnership

protect all parties. DIFFICULT TO TERMINATE. - For example: Who gets what and what happens next? Corporation EXTENSIVE PAPERWORK. - A corporation must prove all its expenses and deductions are legitimate. - A corporation must keep detailed records. DOUBLE TAXATION. - Corporate income is taxed twice. The CORPORATION PAYS TAX on income before it can distribute any to stockholders. The STOCKHOLDERS PAY TAX on the income they receive from the corporation. - States often tax corporations more harshly than other enterprises. TWO TAX RETURNS: A corporate owner must file both a corporate tax return and an individual tax return. SIZE - Large corporations sometimes become inflexible and too tied down in red tape. DIFFICULTY OF TERMINATION. POSSIBLE CONFLICT WITH STOCKHOLDERS AND BOARD OF DIRECTORS. - an entrepreneur can be forced out of the very company he or she founded. INITIAL COST. - Incorporation may cost thousands of dollars and involve expensive lawyers and accountants.

Business licenses and permit Licenses

Definition : Contractual agreement giving rights to others to use intellectual property in return for a royalty or fee. Licensing has significant value to holders of patents, trademarks or copyrights to grow their business in new markets when they lack resources in markets. Also important to new entreprenuer to start their business but need permission to copy the patent, trademarks or copyright with their ideas. For example, the licensor may still manufacture the product but give licensee the right to market it under their label in a noncompetitive market.

Generally involves a franchising agreement. The entrepreneur operates a business using the trademark and agrees to pay a fixed cost, royalty based on sales volume or buy supplies from franchisor. For examples, maybe Coca Cola bottlers. Licensing is an option to entrepreneur to increase their revenue, without the risk and costly start up investment. Licensing can be a way to start a new venture when the idea may infringe on someone else patent, trademark or copyright.

Permit
Permit is defined as an official document that allows you to do or have something. It is proof that person business follows certain laws and ordinances. Requirements vary by jurisdiction, and failure to comply often results in fines or even having your business shut down. Research the permits that needed before start any work, set-up or property purchase. That way, individual can make sure compliance is in order and avoid the additional expenses and delays of fixing things later.

Letter of authority
A letter of authority is a letter that an individual writes to an institution or person to authorise a third party to conduct business on their behalf. It legally allows access to information and resources meant for one person to be handled by another person.

Things to watch out for when signing a Letter of Authority: i. The letter should state the Third Parties name

ii. The letter should be dated and stated valid for (normally 1 year)

iii. The letter should not allow the Energy Broker to sign contracts on your behalf iv. The letter should be printed on your businesses letter headed paper

Sample

SAMPLE LETTER OF AUTHORIZATION

Type the following letter on your company letterhead:

DATE

To whom it may concern: We the undersigned, hereby authorize _____________ to act on our behalf in all manners relating to application for equipment authorization, including signing of all documents relating to these matters. Any and all acts carried out by ___________ on our behalf shall have the same affect as acts of our own. This authorization is valid until further written notice from (YOUR COMPANY NAME). Sincerely,

(Company counsel or company officer signature) (Name and Title)

Business Right and Protection

An entrepreneur needs to be aware of any regulation that may affect a venture. They have to understand a right and protection when establish a new business. Protection for idea in business are something that very important. To protect these idea, organization may implement: i. Patent : contract between the government and inventor. In other meaning, grants holder protection from others making, using and using similar idea. Contains of :

Utility patents : grants the owner protection from anyone else making, using, or selling the identified invention and generally reflects rotection of new, useful, and unobvious processes such as film developing, machine, compositions of matter and articles of manufacture.

Design patents : covering new, original, ornamental and unobvious design for articles of manufacture, a design patent reflects the appreances of an object.

ii.

Plant patents : limited area of interest and very few of these types of patents are issued.

Trademarks : may be a word, symbol, design or some combination, or can be slogan that used to identify a product.

iii.

Copyright : right given to prevent others from printing copying or publishing any original works of authorship.

iv.

Trade secret : provides protection against others revealing or dislosing information that could be damaging to business.

v.

Licensing : a contractual agreement giving right to others to use intellectual property in return for royalty or fee.

vi. vii.

Insurance : it provides a means of managing risk in the new business. Sarbanes-Oxley Act : provides a mechanism for greater control over the financial activities of public companies.