Assignment 226
Chapter Three
Forms of Ownership
of Small Businesses
Copyright © 2018 by McGraw-Hill Education. All rights reserved.
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Learning Objectives
Name the legal forms of ownership a small business can have.
Explain the reasons for and against forming a proprietorship.
Explain the reasons for and against forming a partnership.
Explain the reasons for and against forming a corporation.
Discuss some other legal forms a business can take.
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Factors to Consider in Choosing the Proper Legal Form
Your vision regarding the size of your business.
The nature of your business.
The level of control you desire.
The level of structure desired.
Business vulnerability to lawsuits.
Tax implications of other ownership structures.
Expected profit (or loss).
Earnings reinvestments.
Personal cash needs. www.sba.gov
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Factors to Consider in Choosing the Proper Legal Form
1. To what extent is your family able to endure the physical psychological , and emotional strains associated with running the business?
2. How easy is it to start, operate, and transfer to others your interest in the company?
3. To what extent are your family willing to accept financial risks involved, being responsible for all losses?
4. How much information about yourself, your family and your economic status are you willing to make public?
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Relative Position of U.S. Proprietorships, Partnerships, and Corporations Figure 3.1
Compare the above figures from 2011 to the ones from 2015: no changes in partnerships and corporations, but in proprietorships: partnerships went from 24% to 14%, proprietorships went from 10% to 13% and corporations from 66% to 82%.
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Relative Importance of Each Form
Proprietorships appear to be the most profitable form and received 13 percent of profits on only about 4 percent of revenues.
Partnerships accounted for 6 percent of revenues and 14 percent of profits.
Corporations received 82 percent of the profits on about 82 percent of the sales
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Why Form a Proprietorship?
Proprietorship
Business that is owned by one person.
Preferred because it is simple to enter, operate, and terminate and provides for relative freedom of action and control.
Has a favorable tax status, as it is taxed at owner’s personal tax rate.
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Weighing the Advantages and
Disadvantages of a Proprietorship
Figure 3.2
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Why Form a Partnership?
Partnership
Shared responsibilities.
Financial resources from more than one person.
Skills of more than one person.
Better access to credit.
Profits taxed once per person.
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Weighing the Advantages and
Disadvantages of a Partnership
Figure 3.3
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Types of Partnerships
General partnership:
Each partner actively participates as an equal in managing the business and being liable for the acts of other partners.
Limited Partnership:
One or more general partners conduct the business, while one or more limited partners contribute capital but do not participate in management and are not held liable for debts of the general partners.
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Rights of Partners
Articles of copartnership
Should be agreed upon during the pre-operating period and should spell out the authority, duties and rights of each partner.
a. Each general partner has an equal voice in running the business.
b. Each partner make may business decisions.
c. Consent of each partner is required to make fundamental changes in the structure itself.
d. Partners’ share of profits is presumed to be their only compensation; in absence of any agreement otherwise, profits and losses are distributed equally.
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Why Form a Corporation?
Corporation
A business formed and owned by a group of people, called stockholders, given special rights, privileges, and limited liabilities by law.
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Why Form a Corporation?
The corporate form offers several advantages. Because the corporation is separate and distinct from the owners as individuals, the death of one stockholder does not affect its life. Also, each owner's liability for the firm's debts is limited to the amount invested, so personal property cannot be taken to pay the debts of the business (with certain limited restrictions, such as loan guarantees, nonpayment of taxes, and malfeasance). Finally, because the owners are not required to help run the firm's operations, large amounts of capital can be raised relatively easily.
The main problem is double taxation, as the corporation pays taxes on its profit, and then individual owners pay taxes on their dividends. The area of operations is limited by the corporation's charter, and the process of incorporation is complex and costly.
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Weighing the Advantages and
Disadvantages of a Corporation
Figure 3.4