© 2008 Cengage Learning All rights reserved

© 2008 Cengage Learning All rights reserved.© 2008 Cengage Learning All rights reserved.

PowerPoint Presentation by Charlie CookThe University of West Alabama

PowerPoint Presentation by Charlie CookThe University of West Alabama

chapter 4

Part 1: An Enterprising Framework

What is an Enterprise?

What is an Enterprise?

© 2008 Cengage Learning. All rights reserved. 4–2

Key Concepts

1.1. The choice of a business’s legal entity affects how the The choice of a business’s legal entity affects how the business will be run, managed, and perceived in the business will be run, managed, and perceived in the world.world.

2.2. The three major legal forms for an enterprise are sole-The three major legal forms for an enterprise are sole-proprietorship, partnership, and corporation. Other proprietorship, partnership, and corporation. Other legal forms include limited liability companies, legal forms include limited liability companies, franchises, joint ventures, cooperatives, and not-for-franchises, joint ventures, cooperatives, and not-for-profit organizations.profit organizations.

3.3. Each form has benefits and liabilities that can Each form has benefits and liabilities that can significantly affect how the enterprise is controlled and significantly affect how the enterprise is controlled and owned.owned.


What Is an Enterprise?What Is an Enterprise?

Sole Proprietorship

Nonprofits

Partnership

Corporations

Basic Legal Forms of Enterprise


What Is an Enterprise?What Is an Enterprise?

•Questions Related to Choosing the Legal Questions Related to Choosing the Legal Form of the Enterprise:Form of the Enterprise: Who will be in control of the enterprise?Who will be in control of the enterprise?

How will enterprise benefits be shared/distributed?How will enterprise benefits be shared/distributed?

Who is liable for the actions of the enterprise?Who is liable for the actions of the enterprise?

Who is responsible for taxes the enterprise must pay?Who is responsible for taxes the enterprise must pay?

What are legal and administrative cost differences?What are legal and administrative cost differences?

What is the desired lifespan of the business?What is the desired lifespan of the business?

Is capital to be raised from outside investors?Is capital to be raised from outside investors?

How can owners transfer their investment to others?How can owners transfer their investment to others?


exhibit 4.1 Comparison of Forms of Business Organization

Source: Internal Revenue Service, as reported in Table 725, U.S. Bureau of the Census, Statistical Abstract of the United States, 2006, 125th ed. (Washington, DC: Government Printing Office, 2005), p. 503.


The Sole-Proprietorship: A Solo ActThe Sole-Proprietorship: A Solo Act

•Sole-Proprietorship Sole-Proprietorship A business that is established, owned, operated, and A business that is established, owned, operated, and

often financed by one person.often financed by one person.

•Why Go the Solo Route?Why Go the Solo Route? It’s easy to start.It’s easy to start. All benefits of the enterprise go to the owner.All benefits of the enterprise go to the owner. Complete control of the business.Complete control of the business. Fewer governmental regulations.Fewer governmental regulations. Taxed at the individual rate.Taxed at the individual rate. Easy to stopEasy to stop


The Sole-Proprietorship: A Solo Act (cont’d)The Sole-Proprietorship: A Solo Act (cont’d)

•Drawbacks to Going It AloneDrawbacks to Going It Alone Unlimited liabilityUnlimited liability Business losses are considered individual’s losses.Business losses are considered individual’s losses.


Partnerships: Teaming UpPartnerships: Teaming Up

•PartnershipPartnership An association of two or more persons who agree to An association of two or more persons who agree to

operate a business together for profit.operate a business together for profit.

•General PartnershipGeneral Partnership All individuals share in the profits and the All individuals share in the profits and the

management responsibilities of the business, as well management responsibilities of the business, as well as any liabilities that the business might generate.as any liabilities that the business might generate.

•Limited PartnershipLimited Partnership There are two types of partners: general partners, There are two types of partners: general partners,

who share in profits, management responsibilities, who share in profits, management responsibilities, and all liabilities; and limited partners, who do not and all liabilities; and limited partners, who do not share in the management of the business.share in the management of the business.


Partnerships: Teaming UpPartnerships: Teaming Up

•Advantages of Sharing the LoadAdvantages of Sharing the Load Ease of formation.Ease of formation. Fewer government regulations.Fewer government regulations. Taxation of profits at the individual rate.Taxation of profits at the individual rate.

•Problems with PartnershipsProblems with Partnerships Unlimited liability for general partners.Unlimited liability for general partners. Partnership conflicts.Partnership conflicts.

•Limited Liability Partnerships (LLPs)Limited Liability Partnerships (LLPs) Liability of each partner is limited to the actions of that Liability of each partner is limited to the actions of that

partner.partner.


exhibit 4.2 Picking the Perfect Partner

Here are some questions for potential partners to ask themselves and each other:

1. What are you looking for in a partner?

2. What do you bring to a partnership?

3. Why are you willing to begin an enterprise with partners? What advantages do you see to such an arrangement? What disadvantages do you see to such an arrangement?

4. How will important decisions in the business be made? If one partner wants to invest the profits of the enterprise while the other partner wants to pay these profits to the partners as salaries, how will this conflict be resolved?

5. How will conflicts among the partners be resolved? Remember, in any enterprise, there must be someone who is ultimately in charge, and who can make the final decision for the business. Unresolved decisions in an enterprise will cause a business to flounder.

6. How can partners leave the enterprise, whether for personal reasons or due to conflicts that cannot be resolved? How will each partner’s share of the business be valued? If the partnership’s assets are tied up in inventory, plant and equipment, how will a partner who wants to leave be paid?

7. Finally, since many partnerships are begun between spouses or “significant others,” both partners should ask themselves whether they really want to be with this partner 24 hours a day, sharing not only the partnership of the enterprise, but the family partnership as well.


Corporations: Structured for GrowthCorporations: Structured for Growth

•CorporationCorporation A legal entity with an existence and life separate from A legal entity with an existence and life separate from

its owners who are not personally liable for the its owners who are not personally liable for the entity’s debts.entity’s debts. Chartered by the state in which it is formed.Chartered by the state in which it is formed. Can own property, enter into contracts, sue and be sued, Can own property, enter into contracts, sue and be sued,

and engage in business operations under the terms of its and engage in business operations under the terms of its charter.charter.

•StockholdersStockholders The owners of a corporation who hold shares of stock The owners of a corporation who hold shares of stock

that provide certain rights; also known as that provide certain rights; also known as shareholders.shareholders.


Corporations: Structured for Growth Corporations: Structured for Growth (cont’d)(cont’d)•Board of DirectorsBoard of Directors

A group of people elected by the stockholders to act A group of people elected by the stockholders to act as fiduciary agents in handling the overall as fiduciary agents in handling the overall management of a corporationmanagement of a corporation Setting corporate goals and policiesSetting corporate goals and policies Hiring corporate officersHiring corporate officers Overseeing the firm’s operations and finances.Overseeing the firm’s operations and finances.

•OfficersOfficers Top management hired by the board and responsible Top management hired by the board and responsible

for achieving corporate goals and policies.for achieving corporate goals and policies. The president and chief executive officer (CEO), vice-The president and chief executive officer (CEO), vice-

presidents, treasurer, and secretary.presidents, treasurer, and secretary.


Corporations: Structured for Growth Corporations: Structured for Growth (cont’d)(cont’d)•The Incorporation ProcessThe Incorporation Process

Choosing the company’s nameChoosing the company’s name Writing the articles of incorporation (also called a Writing the articles of incorporation (also called a

charter or certificate of incorporation)charter or certificate of incorporation) Filing the articles of incorporation at the appropriate Filing the articles of incorporation at the appropriate

state office, usually the secretary of state’s officestate office, usually the secretary of state’s office Paying required fees and taxesPaying required fees and taxes Holding an organizational meetingHolding an organizational meeting Adopting bylaws, electing directors, and passing the Adopting bylaws, electing directors, and passing the

first operating resolutions.first operating resolutions.


exhibit 4.3 Articles of Incorporation

A company’s articles of incorporation are prepared on a form authorized or supplied by the state of incorporation. Articles of incorporation usually include the following key items:

• Name of the corporation

• The company’s purpose/type of business

• Types of stock and number of shares of each type to issue

• Life of the corporation (usually “perpetual,” meaning with no time limit)

• Initial capital investment by stockholder

• Methods for transferring share of stock

• Address of the corporate office

• Names and addresses of the first board of directors

• Name and addresses of the incorporators

• Other public information the incorporators wish to include


Corporations: Structured for Growth Corporations: Structured for Growth (cont’d)(cont’d)•Types of CorporationsTypes of Corporations

C CorporationC Corporation A conventional or basic corporate form of organization.A conventional or basic corporate form of organization.

S corporationS corporation A hybrid entity that is organized like a corporation, with A hybrid entity that is organized like a corporation, with

stockholders, directors, and officers, but taxed like a stockholders, directors, and officers, but taxed like a partnership, with income and losses flowing through to the partnership, with income and losses flowing through to the stockholders and taxed as their personal income.stockholders and taxed as their personal income.


Corporations: Structured for Growth Corporations: Structured for Growth (cont’d)(cont’d)•Qualifications for an S Corporation:Qualifications for an S Corporation:

Be an eligible entity (a domestic corporation, a Be an eligible entity (a domestic corporation, a partnership, or a single-member partnership, or a single-member or multiple-or multiple-member limited liability company).member limited liability company).

Have fewer than 100 shareholders.Have fewer than 100 shareholders. Limit shareholders to individuals who are U.S. citizens Limit shareholders to individuals who are U.S. citizens

or residents; no corporate shareholders are allowed.or residents; no corporate shareholders are allowed. Have only one class of stock.Have only one class of stock. Must allocate profits and losses to shareholders Must allocate profits and losses to shareholders

proportionate to each one’s interest in the business.proportionate to each one’s interest in the business. Use the calendar year as its fiscal year.Use the calendar year as its fiscal year.


Corporations: Structured for Growth Corporations: Structured for Growth (cont’d)(cont’d)• The Corporate The Corporate

AdvantageAdvantage Shareholders are not Shareholders are not

liable for corporate debts.liable for corporate debts. Credibility and stability.Credibility and stability. Tax advantages.Tax advantages. Perpetual life.Perpetual life. Greater access to Greater access to

capital.capital. Ease of ownership Ease of ownership

transfer.transfer. Ability to be anonymous.Ability to be anonymous. Management Management

advantages.advantages.

• Drawbacks to Drawbacks to IncorporatingIncorporating More difficult and More difficult and

costly to form.costly to form. More formalities and More formalities and

regulations.regulations. Double taxation.Double taxation.


Specialized Organizational FormsSpecialized Organizational Forms

•Limited Liability Company (LLC)Limited Liability Company (LLC) A hybrid organization that offers the same liability A hybrid organization that offers the same liability

protection as a corporation but may be taxed as either protection as a corporation but may be taxed as either a partnership or a corporation.a partnership or a corporation. Does not issue stock.Does not issue stock. Profits and losses taxed as personal income.Profits and losses taxed as personal income. Has no required structure.Has no required structure. Income can be distributed as it chooses.Income can be distributed as it chooses. Can have unrestricted number of shareholdersCan have unrestricted number of shareholders

Professional corporation (PC)Professional corporation (PC) Profession limited liability company (PLLC)Profession limited liability company (PLLC)


Specialized Organizational Forms (cont’d)Specialized Organizational Forms (cont’d)

•FranchisingFranchising A contractual arrangement where a parent business A contractual arrangement where a parent business

(the franchisor) provides an investor (the franchisee) (the franchisor) provides an investor (the franchisee) with the rights to sell products or services in with the rights to sell products or services in exchange for fees and/or royalty payments.exchange for fees and/or royalty payments.

•Franchise License AgreementFranchise License Agreement The principal legal document that defines the terms of The principal legal document that defines the terms of

the relationship between the franchisor and the relationship between the franchisor and franchisee, including the license to use the franchisee, including the license to use the franchisor’s brand for a specified time period, franchisor’s brand for a specified time period, payment terms, and operating restrictions.payment terms, and operating restrictions.



•FranchisorFranchisor Parent company that owns and controls the rights to Parent company that owns and controls the rights to

offer the franchise’s product concept to the offer the franchise’s product concept to the franchisee.franchisee.

•FranchiseeFranchisee The individual or company that owns one or more The individual or company that owns one or more

franchises and sells goods or services in accordance franchises and sells goods or services in accordance with the terms set by the franchisor.with the terms set by the franchisor.



• Why Buy a Franchise?Why Buy a Franchise? Proven product with Proven product with

nationally recognized nationally recognized name.name.

Marketing support.Marketing support. Standardized operating Standardized operating

concept and procedures.concept and procedures. Management training and Management training and

assistance.assistance. Financial assistance.Financial assistance. Expansion opportunities.Expansion opportunities.

• Disadvantages of a Disadvantages of a FranchiseeFranchisee Loss of control and Loss of control and

operating flexibility.operating flexibility. High start-up and ongoing High start-up and ongoing

costs.costs. Success tied to the larger Success tied to the larger

franchise organization.franchise organization.



•Joint VentureJoint Venture An alliance between two or more companies to An alliance between two or more companies to

pursue a specific project for a specified time period.pursue a specific project for a specified time period.

•Reasons for Forming a Joint VentureReasons for Forming a Joint Venture Access to new markets, products, or technologyAccess to new markets, products, or technology Take on larger projectsTake on larger projects—s—shared risks and assetshared risks and assets



•CooperativeCooperative Legal entities typically formed by people with similar Legal entities typically formed by people with similar

interests, such as customers or suppliers, to reduce interests, such as customers or suppliers, to reduce costs and gain economic power.costs and gain economic power. Has limited liabilityHas limited liability Has an unlimited life spanHas an unlimited life span Has an elected board of directors, and an administrative staffHas an elected board of directors, and an administrative staff Profits are distributed to member-owners in proportion to Profits are distributed to member-owners in proportion to

their contributions.their contributions.

•Types of CooperativesTypes of Cooperatives Seller, or producer-owned cooperativesSeller, or producer-owned cooperatives Buyer cooperativesBuyer cooperatives Worker-ownedWorker-owned


Not-for-Profit OrganizationsNot-for-Profit Organizations

•Not-for-Profit OrganizationNot-for-Profit Organization An organization that is exempt from most state and An organization that is exempt from most state and

federal income taxes and has a purpose that that will federal income taxes and has a purpose that that will benefit others.benefit others.

•Not-for-Profit AdvantagesNot-for-Profit Advantages Can receive contributions, gifts, donations that are Can receive contributions, gifts, donations that are

tax-deductible to the giver.tax-deductible to the giver. Can receive money and grants from other not-for-Can receive money and grants from other not-for-

profits and governmental sources.profits and governmental sources. Are exempt from federal and state taxes.Are exempt from federal and state taxes. Have same limited liability as corporations.Have same limited liability as corporations. Other financial benefitsOther financial benefits


Not-for-Profit Organizations (cont’d)Not-for-Profit Organizations (cont’d)

•Not-for-Profit DisadvantagesNot-for-Profit Disadvantages No contributions to political campaigns.No contributions to political campaigns. Limitations on lobbying activities.Limitations on lobbying activities. No distributions of profits.No distributions of profits. Must pay taxes on “unrelated activities.”Must pay taxes on “unrelated activities.” Prohibition on earning substantial profits from Prohibition on earning substantial profits from

unrelated activities.unrelated activities. Assets must be distributed to another non-profit if Assets must be distributed to another non-profit if

dissolved.dissolved.

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© 2008 Cengage Learning All rights reserved