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Forms of Business
Ownership
Its just paper. All I own is a pickup
truck and a little Walmart stock...Sam Walton
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Evaluation Criteria
Tax consideration
Liability exposure
Start-up and future
capitalrequirement
Control
Managerial ability
Business goals
Managementsuccession plans
Cost of formation
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Sole Proprietorship
A business owned and managed by oneindividual; the business and
the ownerare one and the same in the eyes ofthe law
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Sole Proprietorship
Advantages
Simple to create
Least costly form Profit incentive
Total decision-making
No special legalrestrictions
Easy to discontinue
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Sole ProprietorshipDisadvantages
Unlimited personalliability
Limited skills andabilities
Feelings of isolation
Limited access tocapital
Lack of continuity ofbusiness
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Partnership
An association oftwo or more
people who co-own a businessfor the purpose of
making a profit
A partnership agreement or the Uniform Partnership Act
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PartnershipAdvantages
Easy to establish
Complementary skills
Division of profits Larger pool of capital
Ability to attractlimited partners
Little governmentalregulation
Flexibility
Taxation
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PartnershipDisadvantages Unlimited liability
of at least one Difficulty in
disposing ofinterest
Lack of continuity Potential for
personality andauthority conflicts
Partners bound bylaw of agency
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Special Partnerships
Limited partnership-composed of at leastone general partner and
at least one
limited partner Limited liability partnership-a special type
of limited partnership, in which allpartners are limited
partners
Master limited partnership-a partnershipwhose shares are traded
on stockexchanges, just like corporations
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Corporations
A separate legal entity apart from itsowners which receives the
right toexist from the state in which in whichit is
incorporated
Domestic Foreign Alien Publicly held Closely held
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Corporations
Advantages
Limited liability of
stockholders Ability to attract
capital
Ability to continue
indefinitely Transferable
ownership
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CorporationsDisadvantages
Cost and time inincorporating
Double taxation Potential for
diminishedincentives
Legal requirementsand red tape
Potential loss of
control
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An S Corporation
A corporation that retains the legalcharacteristics of a regular
Ccorporation but has the advantage of
being taxed as a partnership if itmeets certain criteria:
Domestic US corporation
No nonresident alien stockholder
One class of common stock
Limit shareholders
No more than 100 shareholders
Less than 25% of gross revenues passive
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S Corporation
Advantages
All of advantages of a regular C
corporation Single taxation
Avoids tax on appreciation of asset sold
Pay SSS for employees Different lines of businesses as
subsidiaries, simpler tax filing
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S Corporation
Highly profitable service companies withlarge number of
shareholders for whomprofits are compensation or retirement
benefits Fast-growing companies that must retain
earnings to finance growth Corporations in which the loss of
benefits
exceed tax savings Corporations with sizable net operating
losses
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S Corporation
Liquidating
Pay all taxes and debts
Obtain written approval ofshareholders to dissolve company
File statement of intent to dissolvewith secretary of state
Distribute all remaining assets
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Limited Liability Company
A relatively new form of ownership that, like an Scorporation,
is a cross between a partnershipand a corporation; it is not
subject to many ofthe restrictions imposed on S corporations; only2
of the following:
Limited liability
Continuity of lifeFree transferability of interest
Centralized management
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Limited Liability Corporation
Articles of organization-name andaddress, method of
management,duration, names and addresses ofeach organizer
Operating agreement-no more than 2of: limited liability,
continuity of life,
free transferability of interest,
centralized management
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Limited Liability Corporation
Limited personal liability
No limit on number of shareholders
No ban on nonresident alien No restriction on a members ability
to manage
the company
Avoids double taxation
Flexibility to divide income as owners see fit Not subject to
self-employment tax except for
managing member
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