Chapter 9

1. Chapter 9 Business formation

2. What is Business Formation ? • What is the legal formation of a business? • Why the legal business formation is important?

3. Types of Business Formation • Sole Proprietorship • Partnership a. General Partnership b. Limited Partnership • Limited Liability Corporation • Corporation a. S Corporation b. Professional Corporation 4. Joint venture

4. Sole/Single Proprietorship • the meaning of sole Proprietorship • The simplest and least expensive form of business ownership • The company and the owner are one and the same and it can be used to name the company • Example: Mary Jane Smith Interior Design Services • The decision making process • The advantages • The disadvantages • The legal and financial responsibilities of the owner • The continuity of the business

5. Advantages Of Sole Proprietorship • Simplest to start. All that is necessary is to establish a location, obtain any local business license, required and begin operation. • The owner may want to open a bank account in the firm’s name, prepare the appropriate business Stationery, and begin to establish credit with trade sources. • Great freedom in management • All profits go to the proprietor minimal formal actions to create the proprietorship. • No required filings with the federal government to begin the business, unless employees are hired.

6. Disadvantages Of Sole Proprietorship • Personal liability for all debts and taxes • Personal liability for legal claims from lawsuits • Illness or death of the owner result in failure of the business • Difficult for the sole proprietor to take vacations • Owner could experience tax problems since business & personal income are easily mixed • It requires multiple management skills • Difficult to sell business. Interior design businesses often flourish because of the personal reputation of the owner.

7. Partnerships • Why partnerships are formed? • The meaning of partnership: • When two or more individuals agree to start a business • The owners and there legal responsibilities • Partners are co-owners unless some other agreement about the level of ownership has been made. • They act on each others behalf, depending on the type of partnership they formed. • The action of any one of them bind the company to agreements. • Types of Partnership: • General Partnership • Limited Partnership

8. Two Types of Partnerships1. General Partnerships • Definition • Why to create a general partnership? • The owners and there legal/financial responsibilities • The decision making process • Naming of the firm • maybe a trade-name • Example: Creative Interior Designs; Interior Design Associates • name may consist of the partner’s names or any other legal business names • The continuity of the business • Advantages and disadvantages • Example (s)

9. 2. Limited Partnership • Definition • A type of business formation in which a business is formed with at least one general partner, and other partners who invest as limited partners. • Why to create a limited partnership? • The owners and there legal/financial responsibilities • General partners have responsibility for the management of the firm • They assume the same kind of personal financial and liability responsibility that is true for members of a regular partnership • The role of limited partner is as an investor • Limited partner contribute assets toward the operation of the partnership and receives a portion of the profits. • The decision making process • The continuity of the business • Advantages: • Limited partners have financial responsibility for only the losses & debts of the partnership to the Amount of each limited partner’s investment in the firm. Thus provide them with ability to protect their personal assets and money. • A limited partnership used to be a good option for designers who are looking for people to invest in their company. • Disadvantages • More expensive to start than a general partnership. • Example (s)

10. Limited Liability Company (LLC) • Definition • Why to create a Limited Liability Company (LLC)? • The owners and there legal/financial responsibilities • The decision making process • Naming of the firm • The continuity of the business • Advantages and disadvantages • Example (s)

11. Corporation • The Definition • An association of individuals created by statutory requirements of law and is a legal entity. • Sometimes referred to as C corporation • It can sue and be sued • legal entity means: Exist independently of its originators or any other member • The owners and their legal responsibilities • Owners are called stockholders or shareholders • The decision making process • The corporation is a legal entity how? • Raising capital • Advantages and disadvantages • The continuity of the business • Survives even after the death of any or all its stockholders • Types of corporations • Example (s)

12. Types of Corporate Structures • Private Corporation • formed for private, profit making interests • General Corporation • formed for private, profit making interests • Public Corporation • those formed by some government agency for the benefit of the public • If a corporation sells its stock on one of the formal stock exchanges, Such as the New York Stock Exchange, American Stock Exchange. • Close Corporation: • Also called/Family/Closely Held Corporation • when all the shares of stock of a corporation are privately held by few individuals, and the stock is not traded on any of the public markets. • Domestic Corporation • a corporation formed in one state and doing business only in that state • Foreign Corporation: • a corporation formed in one state but doing business in another state.

13. S Corporation • Definition • The owners and their legal responsibilities • (formally called a subchapter S Corporation) enjoys all the advantages of the Corporation • Formed in a very similar manner to a corporation, how? • It is also an expected to meet all the same requirements for articles of incorporation. • The difference between the corporation and S Corporation relates to taxes. • Why this business formation is used? • Many interior designers use the S corporation form when they begin their practice in order to have the liability protection of the corporation. • Designers also may wish to elect S Corporation status in the early years of business when it is most likely to experience business losses. These losses are absorbed by the shareholders rather than by the business. • Advantages and disadvantages

14. Professional Corporation/Professional Association • Definition • Naming of the firm • Must include the initials PC/PSC • Professional Corporation/Professional Association- a corporation formed by persons in professions such as law, medicine, dentistry, accounting, or architecture. • In many states, only professional services that are licensed or have other legal authorization by the state may register as professional corporation • Formed in a very similar manner to a corporation • The owners and their legal responsibilities

15. Joint Venture • Definition • a temporarycontractual association of two or more persons or firms that Agree to share in the responsibilities, losses, and profits of a particular project or business venture. • Key to joint venture • Naming of the firm • Treated like a partnership • Does not have a legal entity • Owners and their liabilities • Reasons for creating joint venture • Comparing partnership and joint venture • Example: SONYERICSON