FORM A BUSINESS

Basic Forms of Business Ownership

◦ Three major forms of business ownerships:

1. Sole Proprietorship: A business owned, and usually managed,

by one person.

2. Partnership: When two or more people legally agree to

become co-owners of a business.

3. Corporation: A legal entity with authority to act and have

liability apart from its owners.
Advantages of Sole Proprietorships

◦ Ease of starting and ending the business

◦ Being your own boss
◦ Pride of ownership
◦ Leaving a legacy
◦ Retention of company proftis
◦ No special taxes
Disadvantages of Sole Proprietorships

◦ Unlimited liability – the risk of personal losses

◦ Limited financial resources
◦ Management difficulties
◦ Overwhelming time commitment
◦ Few fringe benefits
◦ Limited growth
◦ Limited life span
Partnerships
◦ A partnership is a legal form of business with two or more owners.
◦ There are several types:
1. General Partnership: All owners share in operating the business and in assuming liability for the
business’s debts.
2. Limited Partnership: Has one or more general partners and one or more limited partners
3. Master Limited Partnership: Looks much like a corp, but is taxed like a partnership and thus
avoids the corporate income tax.
◦ General Partner: an owner (partner) who has unlimited liability and is active in
managing the firm.
◦ Limited Partner: an owner who invests money in the business but does not have any
management responsibility or liability for loses beyond the investment.
◦ Limited Liability Partnership: a partnership that limits partners’ risk of losing their personal
assets to only their own acts and omissions and to the acts and omissions of people
under their supervision.
Advantages of Partnerships

◦ More financial resources

◦ Shared management and complementary skills and knowledge
◦ Longer survival
◦ No special taxes
Disadvantages of Partnerships

◦ Unlimited liability
◦ Division of profits
◦ Disagreement among partners
◦ Difficulty of termination
Corporations
◦ Corporate types:
1. Alien corps: does business in the US but is chartered in another country.
2. Domestic corps: does business in the state in which it’s chartered.
3. Foreign corps: does business in one state, but is chartered in another.
4. Closed/Private corps: one whose stock is held by a few people and isn’t available to the
general public.
5. Open/Public corps: sells stock to the general public.
6. Quasi-public corps: chartered by the government as an approved monopoly to perform
services to the general public.
7. Professional corps: one whose owners offer professional services (doctors, lawyers, etc).
8. Nonprofit corps: one that doesn’t seek personal profit for its owners.
9. Multinational corps: a firm that operates in several countries.
Advantages of Corporations
◦ Limited liability
◦ Ability to raise more money for investment
◦ Size
◦ Perpetual life
◦ Ease of ownership change
◦ Ease of attracting talented employees
◦ Separation of ownership from management
Disadvantages of Corporations
◦ Initial cost
◦ Extensive paperwork
◦ Double taxation
◦ Two tax returns
◦ Size
◦ Difficulty of termination
◦ Possible conflict with stockholders and board of directors
S Corporations
◦ A unique government creation that looks like a corporation but is taxed like sole
proprietorships and partnerships.
◦ The paperwork and details of S Corps are similar to those of conventional (C) corps.
◦ S Corporations have the advantages of limited liability (like a corporation) and simpler
taxes (like partnership).
◦ In order to qualify for S Corporation status, a company must:
1. Have no more than 100 stakeholders
2. Have shareholders that are individuals or estates
3. Have only one class of stock
4. Derive no more than 25 percent of income passive sources
◦ An S Corporation that loses its S status may not operate under it again for at lwast five
years.
Limited Liability Company

◦ Similar to an S Corporation, but without the special eligibility

requirements.
◦ LLCs were introduced in Wyoming in 1977, and were recognized
by the Internal Revenue Service as a partnership for federal
income tax purposes in1988.
Advantages of LLC

◦ Limited liability
◦ Choice of taxation
◦ Flexible ownership rules
◦ Flexible distribution of profits and losses
◦ Operating flexibility
Disadvantages of LLC

◦ No stock
◦ Limited life span
◦ Fewer incentives
◦ Taxes
◦ Paperwork
Corporate Expansion: Mergers and Acquisitions
◦ Merger: the result of two firms forming one company.
◦ Acquisition: one company’s purchase of the property and obligations of another
company
◦ Vertical Merger: the joining of two companies involved in different stages of related
businesses.
 Ex: A soft drink company buys an artificial sweeter company.
◦ Horizontal Merger: the joining of two firms in the same industry.
 Ex: A soft drink company buys a mineral water company.
◦ Conglomerate Merger: the joining of firms in completely unrelated industries.
 Ex: A soft drink company buys a snack food company.
◦ Leveraged Buyout (LBO): an attempt by employees, management, or a group of
private investors to buy out the stockholders in a company, primarily by borrowing the
necessary funds.
Franchises
◦ Franchise agreement: an agreement whereby someone with a good idea for
a business (the franchisor) sells the rights to use the business name and sell a
product or service (the franchise) to others (the franchisees) in a given
territory.
◦ Franchisor: a company that develops a product concept and sells others the
rights to make and sell the products.
◦ Franchise: the right to use a specific business’ name and sell its products or
services in a given territory.
◦ Franchisee: a person who buys a franchise.
Advantages of Franchises

◦ Management and marketing assistance

◦ Personal ownership
◦ Nationally recognized name
◦ Financial advice and assistance
◦ Lower failure rate
Disadvantages of Franchises

◦ Large start-up costs

◦ Shared profit
◦ Management regulation
◦ Coattail effects
◦ Restrictions on selling
◦ Fraudulent franchisors
Cooperatives

◦ Cooperative (co-op): owned and controlled by the people who

use it – producers, consumers, or workers with similar needs who
pool their resources for mutual gain.
◦ Some people form cooperatives to acquire more economic
power than they would have as individuals.
◦ Small businesses often form cooperatives to gain more
purchasing, marketing, or product development strength.
THANK YOU