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Forms of Business Ownership

Forms of Business Ownership. Making Informed Decisions. Sole Proprietorship General Partnership Limited Partnership Limited Liability Partnership. Limited Liability Company C Corporation S Corporation Franchise. Entrepreneurial Forms of Conducting Business.

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Forms of Business Ownership

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  1. Forms of Business Ownership Making Informed Decisions BCS-BE 16-19

  2. Sole Proprietorship General Partnership Limited Partnership Limited Liability Partnership Limited Liability Company C Corporation S Corporation Franchise Entrepreneurial Forms of Conducting Business BCS-BE 16-19

  3. Personal Liability of a Sole Proprietor (1 of 2) Sole proprietor bears risk of loss of the business Owner loses entire capital contribution if the business fails Sole proprietor has unlimited personal liability BCS-BE 16-19

  4. Personal Liability of a Sole Proprietor(2 of 2) Creditors may recover claims against the business from the sole proprietor’s personal assets The law holds that a sole proprietorship is not a distinct legal entity The sole proprietorship and the sole proprietor are one and the same BCS-BE 16-19

  5. Creation of a Sole Proprietorship(1 of 2) No federal or state government approval is required Owner may be required to obtain a license to do business within the city by some local governments Can operate under the name of the sole proprietor or a trade name BCS-BE 16-19

  6. Creation of a Sole Proprietorship(2 of 2) A sole proprietorship is not a separate tax-paying entity for federal income tax purposes A sole proprietor need not file an informational return with the Internal Revenue Service (IRS) Income and losses are reported on the sole proprietor’s personal income tax return BCS-BE 16-19

  7. Advantages Complete control & decision-making powers for owner Sale & transfer possible at any time No corporate tax payments Minimal legal costs to form/start-up Few formal business requirements Disadvantages Owner can be held liable for actions of employees, debts, & obligations Owner has all decision-making responsibilities Investors afraid to invest in sole proprietorships Sole ProprietorshipsAdvantages & Disadvantages BCS-BE 16-19

  8. Liability of Incoming Partners A new partner who is admitted to the partnership is liable for the existing debts and obligations (antecedent debts) of the partnership only to the extent of their capital contribution The new partner is personally liable for debts and obligations incurred by the partnership after becoming a partner BCS-BE 16-19

  9. Formation of Limited Liability Partnerships (1 of 2) The creation of limited partnerships is formal and requires public disclosure The entity must comply with the statutory requirements of the Revised Uniform Limited Partnership Act (RULPA) or other state statute Certificate of Limited Partnership – document signed by two or more persons that makes the limited partnership legal and binding BCS-BE 16-19

  10. Formation of Limited Liability Partnerships (2 of 2) Limited Partnership Agreement -document that sets forth: The rights and duties of the general and limited partners; and The terms and conditions regarding the operation, dissolution, and termination of the limited partnership BCS-BE 16-19

  11. Summary: Liability of Limited Partners BCS-BE 16-19

  12. Advantages Shared financial commitment Pooled resources, expertise, and strengths Limited startup costs Few formalities (mostly applicable licenses) Disadvantages Different visions or goals for the business Unequal commitment in terms of time and finances Partners liable for personal business debts, as well as other partners’ debts, decisions, & actions PartnershipsAdvantages & Disadvantages BCS-BE 16-19

  13. Corporations • Corporation • a legal entity that is separate and distinct from its owners; an association of individuals • Corporations May: • Sue and be sued • Buy, hold, and sell property • Make and sell products • Commit crimes and be tried and punished for them BCS-BE 16-19

  14. Types of Corporations (1 of 2) • C Corporation • Separately taxable entity with taxes filed on profits/losses at corporate level • Shareholders also pay taxes on same profits/losses at individual level (double-taxation) • S Corporation • Pass-through tax entities with no taxes filed on profits/losses at corporate level • Only shareholders pay taxes on profits/losses at individual level (Pass-through taxation, not double-taxation) BCS-BE 16-19

  15. Types of Corporations (2 of 2) • Limited Liability Company (LLC) • Owners/Members may be individuals, corporations, or other LLCs; Banks and insurance companies cannot be LLCs • Similar corporations because owners have limited personal liability for the debts and actions of the LLC • Like a partnerships because they provide management flexibility and the benefit of pass-through taxation BCS-BE 16-19

  16. Stockholders: Owners of Corporations • Stock: A share of ownership in a corporation • Dividends: Profits distributed among stockholders BCS-BE 16-19

  17. Advantages Limited liability: the debts the owners are responsible for are limited to their value of their investment Continuity Stronger fundraising capability Disadvantages Double taxation of dividends Fluid control Complicated and expensive to form Paperwork can be burdensome to owners CorporationsAdvantages & Disadvantages BCS-BE 16-19

  18. Franchise • Established when the franchisor licenses the use of a franchise’s trade name, trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods and services to the franchisee • The franchisor and the franchisee are established as separate corporations BCS-BE 16-19

  19. Advantages of Franchising • Franchisor can reach lucrative new markets • Franchisee has access to franchisor’s knowledge and resources while running an independent business • Consumers are assured of uniform product quality BCS-BE 16-19

  20. Disadvantages of Franchising • Costs may be higher than expected • Restrictions on business operation may not be suitable for your local market • Franchisor might go out of business • All profits must be shared with franchisor BCS-BE 16-19

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