Legal Forms of Business Ownership

7/30/2019 Legal Forms of Business Ownership

1/15

LEGAL FORMS OF BUSINESSOWNERSHIP

SOLE PROPRIETORSHIP a form of businessownership owned and managed by only oneperson.

PARTNERSHIP a business organization where

two or more persons contribution money,property, or talent to carry on a business.

CORPORATION is an artificial being created

by the operation of law, having the rights ofsuccession and the powers, attributes, andproperties expressly authorized by law orincident to its existence.


2/15

Advantages Disadvantages

of Sole Proprietorship

Ease of starting and ending the business unlimited liability (risk of losses)

Being your own boss limited financial resources

Pride of ownership difficulty in management

Retention of profit overwhelming time commitment

No special taxes few fringe benefits

Simple and flexible limited growth

Independent decision making limited lifespan

Change organization or business and owner are a

operation quickly and easily single entity

Relatively low initial capital requirement restriction of expansion potential

Fewer government regulations owner assumes all risk

Owner in control owner is often tide to the business andmaybe unable to spend time away withoutclosing it

Offers opportunity for personal advancement


3/15

PARTNERSHIP

Advantages

More financial resources Shared management and pooled knowledge

Longer survival

Special skills of the partner

Legal aspects of forming a partnership are relatively simple

Pay no taxes as a business May be ended anytime partners agree

Limited government regulations

Greater management base than with one power

Partners, like sole proprietors, often feel pride in owning andoperating their own company


4/15

Disadvantages

unlimited liability

division of profits disagreements among

difficult to terminate

dissolved when a partner dies or leaves the partnership

size is limited by resources

difficult to manage if there are too many partners lack of continuity

divided management authority

with one power

Partners, like sole proprietors, often feel pride in

owning and operating their own company


5/15

Types of Partnership

a. General Partnership an association of twoor more people who, as owners, manage the businesstogether. It contains certain recognizable factors. Anagreement should be formalized explaining the termsof the partnership and outlining who is to contributewhat, how decisions are to be made, and how profitsare to be split. It is dissolved by death, agreement orbankruptcy.


6/15

b. Limited Partnership some partners are not completelyliable for their partners debts. To be a limited partner, onemust invest in the business but may not participate in the

management phase.

The limited partners name cannot even appear in thepartnership name. It is for investment purposes only. Eachpartner are only liable for partnership obligations only up tothe amount of their investment in the partnership and maynot be held personally liable. This provides incentive forinvesting in a business without the fear of losing personal orother business assets. However, this partnership can nolonger deduct a partnership loss from other personal income.To be safe, limited partners should have legal documentation

of their limited relationship in the business to protect themshould creditors question their responsibility for businessdebts.


7/15

CORPORATION

Advantages

More money for investments Limited liability personal assets are protected

The right size to do needed work

Perpetual life

Ease of ownership change

Separation of ownership in management Corporation is a legal entity

Combine resources of shareholders

Stable level of production

Owners (stockholders) do not have to devote time

to the company to make money to their investment


8/15

Disadvantages

initial cost

paper work

two tax return

size causes slow response time to market changes

difficulty of termination

double taxation

possible conflict with the board of directors complicated to establish

must follow state laws

complex organization

owners have limited control of the business


9/15

Characteristics of Corporationsa. legal entity separate from the people who own it or workfor it.b. increasing number of partners and importancec. corporate charter a license to operate from a certain state.

Types of Corporation Subchapter C (Regular Corporation) the original owners sell stocks to

investors to raise capital. The investors, who also become owners, buy thestocks in hopes that the company will do well. If the company does well, itmay pay dividends on their shares of stock. Money paid to a shareholderon a share of stock is called a dividend. The amount of dividend is set bythe board of directors and is based by the amount of profit made by the

corporation.


10/15

Subchapter S (Small Business or Family Corporation) aunique government creation that has the characteristicsof a corporation but is taxed like sole proprietorships. It

has the benefit of limited liability. The paperwork anddetails of this type are similar to those of regularcorporations. They have shareholders, directors andemployees, but the profits are taxed as the personalincome of shareholders thus avoiding the double

taxation encountered by regular corporations.

Subchapter T (Cooperatives) form to provide goods

and services to members either at cost or as near to costas possible. It is a nonprofit type of corporation that isvery popular to the agriculture industry. It is formed toserve the people who own shares in the organization


11/15

Kinds of Cooperatives

Supply (Purchasing) Cooperatives mostly as purchasing

associations inputs. Supplies for production agriculturistsare bought in quantity for resale to members. The bigadvantage is that by buying in large quantities,cooperative members are usually able to save moneyover what they would have paid individually. In somecases, the supply cooperative can manufacture its ownsupplies instead of buying from private company.

Market Cooperative mostly assist the farmers in

marketing agricultural products by finding buyers whowill pay the highest price. Some marketing cooperativesprocess agricultural products such as milk and vegetablesand sell them directly to consumers and retailers.


12/15

Service Cooperative provide its members with specific service ratherthan a product, that members cannot afford to provide individually. Itis not as numerous as marketing and supply cooperatives, but they doprovide valuable services to many farmers. Examples are farm creditservices, banks for cooperatives, rural credit unions, mutual irrigationcooperatives, dairy herd improvement associations and artificialbreeding cooperatives.

Cooperatives and Members

Some co-ops serve the general public; others serve members only.Common stock gives a person the right to vote on business matters ofthe business. Preferred stocks or investment stock only gives a personthe opportunity to invest in the business and, it is hoped, to receive areasonable return on investment.

Cooperatives and Control

Most coop use a democratic system of control where each membershas one vote only, regardless of how much business the member doeswith the co-op or how much investment stock he or she holds.


13/15

A franchise is a contract in which a franchisor sellsto another business the right to use its name andsell its product. The franchisee (the person

purchasing the franchise) buys a system ofoperation that has proven successful.

Characteristics of Franchise

The parent company (franchisor) prepackages allthe business planning. It generally includesmanagement training and assistance withadvertising, selling and day-to-day operations. It

could be formed as a sole proprietorship,partnership or corporation.


14/15

Two Types of Franchises

Product or Trade Name Franchising - The product andtrade name franchising system has evolved from suppliersor manufacturers creating sales contracts with dealers tobuy or sell their products or product lines. In thisrelationship the dealer (franchisee) requires the tradename, trademark, and/or product from the supplier ormanufacturer. The franchisee identifies with the supplierthrough the product line. This method of franchisingconsists primarily of distribution by a single supplier ofmanufactured products to dealers who then in turn resellthis to the end consumer. This franchising approach has

been used extensively in the auto and truck industry, thesoft drink bottling industry, and the tire and gasolineservice station industries.


15/15

Business Format Franchising - method of franchisingwhich permits the franchisee to use the franchisor'sproducts and services, trade name, trademark, and most

importantly, the prescribed business format. The business format provides the franchisee with great

depth of knowledge and information concerning a greatbreadth of business activities including: marketing,promotion, site selection, price suggestions, grand openingplans, management, operations, training, financing,

accounting systems, and legal support or information. Thismethod or business opportunity allows an individualwithout prior experience an opportunity to be completelytrained and informed about how to operate a new anddifferent business. This also requires the franchisor to takethe franchisee through a fairly extensive training program

and to provide continuous training for the franchisee evenafter the franchising unit has been started.

Documents

Legal Forms of Business Ownership