The Entrepreneur’s Options

Chapter 19

Introduction

• Entrepreneurs wishing to start a new business must be aware of advantages and disadvantages of various business entities for their endeavor. Consider:– Ease of creation.– Owners’ liability.– Tax considerations.– Need for Capital.

Sole Proprietorship• Owned by a single person.• Owner reports business income and

expenses on personal income tax return.• Owner is legally responsible for all debts

and obligations without limitation.

General Partnership• Agreement by two or more parties.• Purpose is for profit.• Not necessarily in writing.• Partnership informational tax return - taxes

assumed by partners directly.• Partners have unlimited liability.

Limited Partnership (Ltd. or L.P.)• Separate, artificial legal entity• At least one General Partner and at least one

Limited Partner.• Tax liability and benefits assumed by

partners directly.• General Partner has unlimited liability.• Limited Partner has limited liability.

Corporation (Inc. or Corp.)• Separate, artificial legal entity.• Formed in compliance with law.• Managed by Directors & Officers.• Shareholders have limited liability.• Taxed as a separate legal entity (unless an S

corporation)

“S” Corporations• Closely-held corporation (less than 100

Shareholders)• Owners generally must be natural persons

who are US citizens or residents• Taxed like a partnership• Limited liability of a corporation.

Limited Liability Company (“LLC”)

• Separate, artificial legal entity.• Formed in compliance with law.• Shareholders have limited liability.• Taxed as a partnership.• No limits as to who can be shareholders.

Limited Liability Partnership (“LLP”)

• General Partnership designed for professionals (lawyers, accountants, etc.)

• Formed in compliance with law.• Partners have limited liability for other than

their own professional malpractice.• Taxed as a partnership.

Franchises• Owner of trademark, trade name, copyright,

license or trade secret licenses its use to another by an agreement in exchange for a fee.

• Franchisor - grantor of franchise• Franchisee - recipient who provides capital

and develops business.

Franchises• Franchisor can control:

– location of business– source of materials and supplies– type of business organization of

franchisee–nature of advertising

Franchises• Payments to Franchisor

– Initial Deposit or Purchase–Percentage of Gross Revenues’–Required Purchases of Materials,

Supplies and Advertising

Franchises• Price Controls

– Franchisor may suggest prices at which products will be sold.

– Franchisor may not mandate prices (violation of antitrust laws).

Franchises• Termination generally only “for cause”• Reasonable notice required• Examples include death of franchisee,

bankruptcy, default under franchise agreement

The Entrepreneur’s Options

End of Chapter 19