5: Chapter Choosing a form of business ownership I. forms of business ownership a. sole proprietorship a.i. a business that is owned, and usually managed, by one person b. partnership b.i. when two or more people legally agree to become co-owners of a business c. corporations c.i. a legal entity with authority to act and have liability separate from its owners d. franchises d.i. the right ot use a specific business's name and sell its products or services in a given territory e. cooperatives e.i. a business owned and controlled by the people who use it producers, consumers, or workers with similar needs who pool their resources for mutual gain Percentages a. Numbers a.i. Sole proprietorships (74%) a.ii. Corporations 19% a.iii. Partnerships 7% b. Sales b.i. Coporations (89%) b.ii. Partnerships 5% b.iii. Sole proprietorships 6% Sole proprietorships a. Advantages SIX a.i. Ease of starting and ending the business a.i.1. easy to get in: just buy/leases equipment and announce you're starting a business a.i.2. easy to get out: just stop--no one to consult or disagree with a.ii. Being yoru own boss a.iii. Pride of ownership a.iii.1. deserve all of the credit a.iv. Leaving a legacy a.v. Retain Profit a.vi. No special taxes b. Disadvantages (SEVEN) b.i. Unlimited liability--the risk fo personal losses b.i.1. any debts incurred by the business are your debts and you must pay them no matter what b.ii. Limited financial resources
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b.ii.1. funds available to the business are limited to the funds that the sole owner can gather b.iii. Management difficulties b.iii.1. often find it hard to attract good, qualified employees to help run the business sbeause they can't compete with the salary & fringe benefits offered by larger companies b.iv. Overwhelming time commitment b.v. Few fringe benefits b.v.1. no paid health insurance, no paid disaibility insurance, no sick leave, ad no vacation pay b.vi. limited growth b.vii. limited life span b.vii.1. can last no longer than the life of the sole owner Partnerships a. Types of partnershps a.i. general partnership a.i.1. a partnership in which all owners share in operating the business and in assuming liability for the businesse's debts a.ii. limited partnership a.ii.1. a partnership with one or more general partners and one or more limited partners a.ii.1.a. general partner: has unlimited liability and is acive in managing ht efirm a.ii.1.b. limited partner: invests money int eh business but doesn't have any management responsibility or liability for losses beyond investment a.ii.1.b.i. Limited liability a.ii.1.b.i.1. limited partners are not responsible for the debts of the business beyond the amount of their investment--their liability is limited to the amount they put into the company a.iii. Master Limited partnership (MLP) a.iii.1. looks like ac orproatoin in that it acts like a corporation & is traded on the stock exchanges likea corporation, but is taxed likea partnership and thus avoids the corporate income tax b. Advantages of partnerships b.i. More financial resources b.i.1. two or more people pool their money and credit--limite dpartnership especially invests mone in the business but doesn't have management responsibility) b.ii. shared management and pooled/completeentary skills and knowledge b.ii.1. parterres give each other gfree time and provide different skills/perspectives b.iii. Longer survival b.iii.1. four tiems as likelyt o succeed as sole proprietorships
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b.iv. no special taxes b.iv.1. just like sole proprietorships c. Disadvantages of partnerships c.i. Unlimited liability c.i.1. each general partner is liable fo rhte debts, but also liabile for your partners' mistakes as well as your ownb c.ii. Division of profits c.ii.1. may not even be divided evenly c.iii. Disagreements among partners c.iv. Difficult to terminate Corporations a. Conventional corporation: a.i. A state-chartered legal entity with authority to act and have liability separate from its owners (stockholders) a.ii. Not liable for the debts or any other problems of the corporation beyond the money they invest a.iii. Don't have tow orry about losing personal belongings b. Advantages of corporations b.i. Limited liability b.i.1. most significant advantage of corporations--owenrs are only responsible for loosses up to the amount they invest b.ii. More money for investment b.ii.1. to raise money, a corporation can sell ownership (stock) to anyone who is interested b.iii. separation of ownership from management b.iii.1. able to raise money from many different investors without getting them involved in management b.iv. Ease of owernship change b.iv.1. all that is necessary is to sell the stock to someone else b.v. Perpetual life b.v.1. the death f one or more owners doesn't terminate the corporation because they are separate from the owners b.vi. Size b.vi.1. huuuge c. Disadvantages of corporations c.i. Extensive paperwork to start the corporation c.i.1. tax records require it to prove that all its expnesvs and deductions are legitimiate c.ii. Initial cost c.ii.1. may cost thousndas of dollars and require expensive lawyers and accounts c.iii. Two tax returns c.iii.1. if an individual incorporates, eh/she must ifle both a corporate tax return & an individual tax return may require a CPA c.iii.2. Terminatoin difficult c.iii.2.a. Once a corporation is started, it's hard to end
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Double taxation c.iii.3.a. Corporate income is taxed twice c.iii.3.b. First coporation pays tax on income before it can distribute any to stockholders c.iii.3.c. Then stockholders pay tax on income they receive from the corporation c.iii.4. Corporate governance c.iii.4.a. The relationship of a company to its shareholders, and more broadly, to society
Type of Business Sole proprietorship Advantages Ease of starting/ending the business Being your own boss Pride of ownership-- deserve all the credit Leaving a legacy Retain a profit No special taxes Franchises More financial resources Shared management & pooled/complementary skillsy & knowledge Longer survival No special taxes **limited liability More money for investment Separation of ownership from investment Ease of ownership change Perpetual life Size Limited liability choice of taxation flexible ownership rules flexible distribution of profit and losses operating flexibility Management and marketing assistance Personal ownership nationally recognized name Financial advice and assistance Lower failure rate Disadvantages Unlimited liability Limited financial resources Management difficulties Overwhelming time commitment Few fringe benefits Limited growth Limited life span Unlimited liability Division of profits Disagreement among partners Difficult to terminate Extensive paperwork Initial cost Two tax returns Double taxes Termination difficult Corporate governance
Partnership
Corporations
Limited liability companies
No stock limited life span fewer incentives Taxes Paperwork
High start-up costs shared profit management regulation Coattail effects Restrictions on selling fraudulent franchisors
Individuals can also incorporate, such as doctors, truckers, lawyers, plumbers, etc.-don't usually issue stock to outsiders o Major advantage again is limited liability Partnership-Coporation a. Hybrids Limited partnerships: a.i. a partnership with general partners ( fully liable, own and manae), and limited partners who contribute money and run only the risk of that investment b. S Corporations b.i. A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships b.ii. Have shareholders, directors, and employees and venefit of limited liability, but profits are taxed as the personal income of the shareholders-- so avoids double taxation of C corporations (conventional corporations) b.iii. Qualificaitons for an S corporatoi b.iii.1. must have no more than 100 shareholders b.iii.2. have shareholders that are individuals or estates & are citizens or permanent residents of the US b.iii.3. have only one class of outstanding stock b.iii.4. not have more than 25% of income derived from passive sources (rents, royalties, interest, etc.) c. Limited liability companies c.i. Partnership-like ownership structure that avoids unlimited liability and double taxation d. Limited liability partnership d.i. Partnership-owernship sturcutre that avoids unlimited liability Limited liability companies a. Similar to an S corporation but without the special eligibility requirements b. Advantages b.i. Limited liability b.i.1. personal assets are protected b.ii. choice of taxation b.ii.1. can choose to be taxed as partnerships or as corporations b.iii. flexible ownership rules b.iii.1. do not have to comply with ownership restrictions s S corporations do b.iii.2. owners can be a erson, partnership, or corporation b.iv. flexible distribution of profit and losses b.iv.1. don't have to be distributed in proportion to the money each person invets b.iv.2. members agree on the percentage to be distributed to each member b.v. operating flexibility b.v.1. not required to keep minutes, file written resolutions, or hold annual meetings
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c. Disadvantages c.i. No stock c.i.1. ownership is nontransferable c.ii. limited life span c.ii.1. required to identify dissolutoind ates int eh articles of organization c.iii. fewer incentives c.iii.1. can't deduct the cost of fringe benefits c.iii.2. can't use stock options as incentives to employees c.iv. Taxes c.iv.1. members must play self-employment taxes c.v. paperwork c.v.1. it's still more than what's required of sole proprietorships Corporate Expansion: mergers and Acquisitions a. Merger: a.i. Two firms forming one company a.ii. Kind of like a marriage joining to individuals as one b. Acquisition: b.i. one company's purchase of the property and obglications of another company b.ii. more like buying a house than entering a marriage c. Three types of corporate mergers c.i. Vertical merger c.i.1. joining of two firms involved in different states of related business c.i.2. example: merger between a soft drink companyand one that produces artificial sweetener to ensure a constant supply of the sweetener c.ii. Horizontal merger c.ii.1. joins two firms int eh same industry and allows them to diversify or expand their products c.ii.2. example: merger of a soft drink company and a mineral water company c.iii. Conglomerate merger c.iii.1. unites firms in completely unrelated industries c.iii.2. example: merger of a soft drink company and a snack food company d. Leveraged buyout (LBO) d.i. An attempt by cmloyees, management, or a group of investors to purchase an organization primarily through borrowing d.ii. Funds borrowed are used to buy out the stockholders in the company Franchises a. Arrangement whereby someone with a good idea for a business (franchisor) sells the rights to use the business name and to sell a product or service (the franchise) to others (franchisee) b. Can be fored as a sole proprietorship, partnership, or corporation
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c. Female franchise ownership decreases as franchise cost increases d. Advantages of Franchises d.i. Management and marketing assistance d.i.1. has an established product, help choosing location & promotion, and assistance in all phases of operation d.i.2. it's like having full time consultants d.ii. Personal ownership d.ii.1. it's still your store and you still enjoy the incentives nad profit like any sole proprietor d.ii.2. still own boss, but still must follow rules, regulations,a nd procedures more so than if it was your own store d.iii. nationally recognized name d.iii.1. get intant recognition & support d.iv. Financial advice and assistance d.v. Lower failure rate e. Disadvantages e.i. High start-up costs e.i.1. most demand a fee just for the rights to the franchise e.ii. shared profit e.ii.1. ranchisor often demands a large share or a percentage commission based on sales--royalty e.iii. management regulation e.iii.1. "assistance" has way of becoming managerial orders, directives, and limitations e.iii.2. franchisees may feel burdened by ocmpany's rules and regulations e.iv. Coattail effects e.iv.1. if fellow franchisees fail, then you may be forced out of businesses e.iv.2. cations of other franchisees have an impact o your future growth and level of profitability e.iv.3. must also look out for competition from other franchisees e.v. Restrictions on selling e.v.1. face restirciotns in reselling of their franchiesses e.v.2. many franchisors often insist on approving the new owner e.vi. fraudulent frnachisors Cooperatives a. Cooperatives: a business owned and controlled by the people who use it-- producers, consumers, or workers with similar needs who pool their resources for mutual gain a.i. Example: greenstar markets b. over 47,000 cooperatives int eh USA with over 100 million memers b.i. top 3: b.i.1. nationwide mutual insurance) b.i.2. CHS inc (food and agriculture) b.i.3. dairy farmers of America (food and agriculture)
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c. some rask members/customers to work at cooperative fo r a number of hoursa month d. members democratically controlt he business by electing a board of directors that hires professional management e. WHAT TO AVOID: e.i. Uncommitted directors e.ii. "dead-weight" members e.iii. Lack of transparency e.iv. Lack of enough capital Not for profit organizations a. Organization whose primary objective is to suppot some issue or matter of private interest or public concern for non-commercial purposes b. main characteristics b.i. no profits, profit distribution or stock issuance b.ii. does not pay taxes b.iii. monetary ocntributoisn to not for profit organizations are not included in taxable incomeu The board of directors flow chart a. Owners/stockholders (elect board of directors) b. Board of directors (hire officers) c. Officers (set corporate objectives and select managers) d. Managers (supervise meployees) e. Employees The Sarbanes-Oxley Act a. Public company accounting oversight on board b. Prohibit audit firms from doing a variety of non-audit work for their clients c. Independent audit committees d. Forbid company loans to company executives e. Top executives must certify company accounts f. Protect whistleblowers g. Section 404 makes managers responseible for maintaing an "adequate internal control structure and preocedures fo rinancial reporting" and demands that companies' auditors "attest " to the management's assessment of these controls and disclose any "material weaknesses"