Forms of Business Ownership

Choosing a form of ownership

• There's no best form of ownership.
• The best form of ownership depends on the entrepreneurs situation.
• Evaluation of the characteristics weighing pros and cons.
• Then deciding which form suits you as an owner.
Factors to consider
• Your skills
• Access to capital
• Control of business
• Managerial ability
• Cost of formation
• Willingness to assume liability exposure
• Tax consideration
• Length of time you expect to own the business
The forms of ownership
• Sole proprietorship
• Partnership
• Corporate Corporation
• Companies:
• Public company
• Private company
• Not for Profit
• Hybrid form of Companies
• LLC / LLP
Characteristics of Sole proprietorship
• One individual.
• Simple to start and end.
• Owner is liable for all the debts of the business.
• Capital provided by sole owner.
• Business managed by owner.
Advantages - Sole Proprietorship
• Easy and inexpensive to create
• Unless you need certification or local permits, government intervention is
minimal
• No restrictions limits to capital
• Owner makes all business decisions & has control over all aspects of
the business
• Few legal requirements
• All profits belong to owner
• Privacy – owner is the only one who knows details of the business
• Secret ideas, formulas, or recipes
Advantages - Sole Proprietorship
• Ability to act quickly in making decisions – no checking with others
• Flexibility in scheduling to meet owner’s needs
• Tax advantages
• Business itself pays no taxes
• Taxes are paid as personal income of owner which is usually lower than corporate
taxes
• Many business expenses are deductible
• Easy to close/dissolve
• Pay employees and creditors
• Sell your equipment
• Notify customers if possible
Disadvantages - Sole Proprietorship
• Owner has unlimited liability for all debts and actions of the business.
• Unlimited liability: The debts of the business may be paid from the personal assets of the owner.
• If you cannot pay business debt with business income, bill collectors can take your personal assets
(home, car)
• Difficult to raise capital.
• Banks/lenders consider sole proprietorships to be a high-risk investment
• Needs include paying employees, purchasing equipment & inventory, & running the business
• Expansions can be delayed or halted causing you to lose business to your competition
• Sole proprietorship is limited by his/her skills and abilities.
• Uncertain life - Lack of continuity
• You are “it” – illness or injury that prevents you from working may cause you to close
• Bankruptcy or incarceration will dissolve your business
• The death of the owner automatically dissolves the business.
• No legal personality
• Feeling of isolation
Characteristics of Partnership
A form of business ownership in which two or more people share the
assets, liabilities, and profits
• Ownership 2 or more people
• Legal requirements
• Each partner must make a contribution to the Partnership.
• Life of the Partnership is not separate from the lives of the
partners
• Partners are jointly and severally liable for debts on the business
Types of partnerships
• General partnership: A partnership in which all partners have
unlimited personal liability and take full responsibility for the
management of the business.
• Limited partnership: A partnership in which the partners’ liability is
limited to their investment.
• Joint venture: A partnership in which two companies join to complete
a specific project. The partnership ends after a specified period of
time.
• Strategic alliance: A partnership in which two businesses work
together for mutual benefit
Articles of Partnership
Should address the following:
• legal name of the partnership
• nature of the business
• duration of the partnership
• contributions
• sales, loans and leases
• withdrawals and salaries
• responsibility and authority
• dissolution
• arbitration
Advantages of partnerships
•Fairly easy & inexpensive to start
• May pay attorney if you develop a partnership agreement
•Combined resources
• Team with partners with different skills, experience, contacts, & capital
• Sharing responsibilities makes business run more efficiently & smoothly
• Increase the amount of capital to run the business. Lenders may be more
willing to lend or extend credit
•Decreased Competition
• Combining like businesses will decrease or eliminate competition
Advantages of partnerships
•Reduced expenses
• When two or more businesses combine expenses are no longer being
duplicated
• Ex. promotion, office space, supplies, utilities
•Business losses are shared by all partners.
•The partnership does not pay income tax on profits.
• Each partner pays income tax on her/his individual share of the profit
Disadvantages of partnerships
• Not a separate legal entity
• Liable for the actions of the other partners
• Unlimited liability
• Each owner in a general partnership has unlimited liability.
• Each partner can lose personal assets to pay business debt
• In a limited partnership, the liability is limited to the amount invested in the business
• Limited Capital
• Although partners may bring more capital to the business than sole proprietors, it is still
limited to what each can contribute
• Some lenders may still be reluctant to lend large amounts
• Difficulty in ending
• Withdrawing can be complicated if there is no written partnership agreement
• By law profits must be divided equally if no agreement
• Discussion between partners can slow down decision making.
Disadvantages of partnerships
• Partnerships may lead to disagreements.
• May disagree on business goals, finances, responsibilities, & division of profits
• Can affect the efficiency of the business, morale of employees, & success or
failure of the venture
• Developing a detailed partnership agreement often helps resolve the conflict
because it addresses many issues that cause potential disagreements
• Uncertain life/Transferability
• Unless specified in a detailed partnership agreement, bankruptcy, death & the
withdrawal or admittance of a new partner dissolves the partnership
• Remaining partners may start a new partnership if they have the money to
buy the former partner’s share
Corporations
• Incorporate: to form a corporation.
• Charter: a document granted by the state giving a corporation the
right to do business
• Stock: shares of ownership in the corporation
• Stockholders (shareholders): owners of stock.
Advantages of Corporations
• Ease of raising financial capital (main advantage)
• Selling stock to investors
• Selling bonds: a written promise to repay a loan on a specific date
• Principal: the amount borrowed
• Interest: the price paid for the use of another’s money
• Borrowing money from banks.
• Ability to hire
• Limited liability
• Unlimited life
• May exist indefinitely
• The death or withdrawal of an owner/stockholder does not affect the life span of the
corporation
• Ease of transferring ownership: Buying and selling stock is easy and is done
millions of times a day
Disadvantages of Corporations
• Start up expenses are high.
• Double taxation
• Income
• Stock holder dividends
• Profits are taxed
• Corporations are subject to more government regulations than sole proprietors
or partners
• Separate owners & managers
• Stockholders are not generally involved in the day-to-day operation of the corporation
• Stockholders form a board of directors to make decisions about the business & managers
carry out these decisions
• Separation of ownership & management provides more opportunity for irregularities or
misunderstandings
Types of companies
• Profit Companies - A company incorporated for the purpose of
financial gain for its shareholders.
• Private company
• Public company
• Non-Profit Companies to be reflected as NPC / NGO’s
Characteristics of private company
• One or more persons may incorporate a private company.
• One director (1 or more directors) or any other prohibited by MOI
from offering its shares to the public and the transferability of its
shares is restricted.
• The name of a private company must end with the expression
“Private Limited”
• Limited number of shareholders and its life span is perpetual or it has
continual life span.
• Has a separate legal personality. Shareholders have limited liability
Advantages & Disadvantages - Private company

Advantages Disadvantages
• Limited liabilities • The company is subjected to
• Directors not compelled to double taxation
attend (AGM) • Transferability of its shares is
• Audited financial statements are restricted.
optional. • Compelled to prepare annual
• Information only available to financial statements
shareholders. • Many legal requirements
Characteristics of public company
• No limit on number of shareholders, Unlimited number of
shareholders.
• Must have at least three directors. 3 or more for a public (Ltd)
company
• Shares of the public company are freely transferable.
• Financial statement of a public company requires to be audited
• A separate legal personality
• Compelled to attend a annual general meeting (AGM).
Advantages & Disadvantages - Public company

Advantages
• Separate legal entity
• Operated by only one
shareholder and 3 directors
• Easier to attract capital
investment
• Shareholders have voting rights
Disadvantages
• Complicated and expensive to
establish
• Shareholder may be allowed
little or no input
• Expensive procedures to comply
with reporting regulations.
NON-PROFIT CORPORATIONS
A legal entity that makes money for reasons other than the owner’s
profit; it can make a profit, but the profit must remain within the
company

• A nonprofit corporation must fall within one of four categories:

• religion
• charity
• public benefit
• mutual benefit
Hybrid forms of Business Ownership
• Limited Liability Company (LLC) - a company whose owners and managers have
limited liability and some tax benefits, but which avoids some restrictions
associated with Corporations
• LLC is simpler to set up than a corporation
• LLC allows for the flexibility of a partnership structure
• LLC protects its owners with the limited liability of a corporation, its members are not liable
for the company’s debts.
• LLC is not subject to double taxation. Provides the pass-through tax advantages of
partnership. Profits are taxed personally, and shareholders are taxed only once.

• Limited Liability Partnership (LLP)

Both combine various elements of sole proprietorships, partnerships, &

corporations into one package
Advantages of Hybrid Businesses
•Cost to start & operate
• Generally less expensive than corporations
• No dual taxation - requires less paperwork & regulation
• LLPs are designed for business professionals such as lawyers & doctors
• Partners might need to carry a required amount of liability insurance
•Limited Liability
• Personal assets cannot be used to pay business debt
• Owners (members) lose only what they have invested in the business if it fails
•Taxation
• LLCs & LLPs pay taxes on personal income-tax returns
• Since they are not considered separate entities (like corporations) they are
not subject to dual taxation
Advantages of Hybrid Businesses
•Combined resources
• Often have more owners & tend to have a wider pool of financial resources,
skills, talents, & contacts
•Life span
• Hybrids are required to dissolve after a specific time period
• Owners can decide if they want to reorganize or let it dissolve
•Flexibility
• Number of members permitted in LLCs are unlimited
• Most states require only one member to establish a business as a hybrid
• Members are permitted to run the company or to allow others to manage it
• Membership changes do not automatically dissolve the company
Disadvantages of Hybrid Businesses
•Requirements & laws to establish & operate hybrids vary
from state to state
• Problematic for businesses that operate in more than one state
• No universal guidelines from state to state
• Verification of each state’s statutes can be costly
Limited Liability Company (LLC)
• Limited liability companies are creatures of state law, not federal law.
• Limited liability companies can only be created pursuant to the laws of the state
in which the LLC is being organized.
• Limited liability company codes regulate the formation, operation, and
dissolution of LLCs.
• Legal Entity – An LLC is a separate legal entity (an artificial person) that can:
• Own property
• Sue and be sued
• Enter into and enforce contracts
• Be found civilly and criminally liable for violations of law
The Uniform Limited Liability Company Act
• A model act that provides comprehensive and uniform
laws for the formation, operation, and dissolution of
LLCs.
• The ULLCA is not law unless a state adopts it as its LLC
statute.
• Many states have adopted all or part of the ULLCA as
their limited liability company law.
Taxation of LLCs
• LLCs are taxed as partnerships unless it elects to be
taxed as a corporation.
• Taxes flow through to individual’s tax returns.
• No taxation at the entity level
Limited Liability Company (LLC)
Debt or obligation
Limited owed
Liability Third Party
Company
(LLC)

Capital investment

Member Member Member Member

Liability limited to capital

contribution
No personal liability for company’s debts
and obligations
Liability of an LLC
• LLC is liable for loss or injury caused by wrongful act or
omission or member, manager, employee, or agent in
course of ordinary business.
• Managers are not personally liable for debts,
obligations, and liabilities of LLC.
• Tortfeasors are still personally liable for injuries they
cause.
Formation of an LLC
• An LLC may be organized to operate businesses and
real estate developments.
• May not be certain professional groups.
• An LLC can be organized in only one state even though
it can conduct business in all other states.
Articles of Organization
• An LLC is formed by delivering articles of organization to the
office of the secretary of state of the state of organization for
filing.
• The existence begins when the articles of organization are filed.
• Articles include name, address of office, name and address
of agent and organizers, type of LLC
Compensation and Reimbursement
• A non-manager member is not entitled to remuneration.
• Except for winding-up the LLC.
• Managers of an LLC are paid compensation and benefits.
• Specified in their employment agreements.
• An LLC is obligated to reimburse members and managers for
payments made on behalf of the LLC.
Dissolution
• The ULLCA gives a member of an LLC the power to
disassociate from the LLC.
• Wrongful disassociation
• Occurs when a member withdraws from a term LLC prior to the
expiration of the term or from an at-will LLC when the operating
agreement eliminates a member’s power to withdraw.
• This could cause the dissolution of the LLC.
Continuation of an LLC
• Members may vote unanimously to continue LLC
before the expiration of the term.
• LLC may be continued as an at-will LLC by simple
majority vote.
Winding-Up an LLC’s Business
• The process of preserving and selling the assets of the LLC
and distributing the money and property to creditors and
members.
• Creditors are paid first.
• Surplus amounts are distributed to members in equal
amounts.
• May be modified by operating agreement.
Articles of Termination
Document that is filed with the secretary of state (of
the state in which the LLC is organized) that terminates
the LLC as of the date of filing or upon a later effective
date specified in the document.
Limited Liability Partnership (LLP)
• A special form of partnership where all partners are
limited partners and there are no general partners.
• No partners are personally liable; all have limited
liability.
• LLPs have flow through tax benefits.
• No taxes at entity level.
Limited Liability Partnership (LLP)
(continued)

Debt or obligation
Limited owed
Liability Third Party
Partnership
(LLP)

Capital investment

Limited Limited Limited Limited

Partner Partner Partner Partner

Liability limited to capital

contribution
No personal liability for partnership’s
debts and obligations
Articles of Partnership
• LLP’s must be created formally by filing articles of
partnership with the secretary of the state in which the LLP is
organized.
• The LLP is a domestic LLP in the state in which it is organized.
• An LLP must register as a foreign LLP in any state in which it
wants to conduct business.
Liability Insurance Required
• Many state laws require LLPs to carry a minimum of $1 million of
liability insurance that covers negligence, wrongful acts, and
misconduct by partners or employees of the LLP.
Alternative approaches to starting a business
• Buy an existing business.
• Enter a family business.
• Own a franchise business