CHAPTER FOUR

ASSESSING THE FEASIBILITY OF

A NEW VENTURE AND LEGAL
OWNERSHIP
Course out line
Legal ownership
Choose the Legal Form of Your Business
Sole Proprietorship
Partnership
Corporation
• Assessing an idea’s potential to become a good
business opportunity is absolutely necessary to
avoid the unnecessary allocation of scarce
resources, including the entrepreneur’s time
and effort.
• Opportunity identification process begins by
determining the unique needs of the industry
and market place, including what customers
expect and demand that the new venture can
provide.
 Four Primary Areas for Assessment:

1) The people behind the idea: the background,

talents, and experience of the entrepreneur
and the management team, employees, and
advisers.
2) Entrepreneur and the management team,
including the equity and debt sources of capital that
are available and accessible, additional assistance
from people with expertise needed by the firm, and
the technology required to support the idea.
3 The knowledge and information possessed by
the entrepreneur, including knowledge of the
new venture concept, the industry, and market
research.
4.The idea’s ability to generate revenue. How
great the potential to sell something that will
generate actual revenues? One of the mistakes
would-be entrepreneurs make is to assume that
everyone will love the idea and that people will
be standing in line to buy it, once the business
opens.
 Business ownership
There are several ways of going into business
and becoming an entrepreneur. You can:-
1. Purchase an existing business
2. Enter a family business
3. Purchase a franchise
4. Start your own business
Legal Forms of Business Organization

There is no one “best” form of ownership.

The best form of ownership depends on an
entrepreneur’s particular situation.
Key: Understanding the characteristics of each
form of ownership and how well they match an
entrepreneur’s business and personal
circumstances.
Generally, the most attractive form of business
ownership meets the specific needs of the business
and its owners in these eight areas:-
1. Tax considerations
2. Liability exposure
3. Start-up and future capital requirements
4. Control
5. Managerial ability
6. Business goals
7. Management succession plans
8. Cost of formation
Most common Forms of Business
Organization
 Sole Proprietorships
 A sole proprietorship is a business that is owned and
operated by one person. This form is known also as
individual or single proprietorship, sole ownership or
individual enterprise.
 The enterprise has no existence apart from its owner.
 The owner has a right to all of the profits and bears
all of the liability for the debts and obligations of the
business.
Advantages of Sole proprietorships
Ease and low cost of formation and dissolution:
Direct motivation and personal care
Freedom and promptness of action:-The sole
proprietor can take his own decision and there is
none to question his authority.
Business Secrecy maintain
Social Desirability; From the social point of view,
the sole proprietorship is desirable as it ensures
that too much wealth does not concentrate in a
few hands.
 Ease of formation. Less formality and fewer restrictions
are associated with establishing a sole proprietorship.
 Sole ownership of profits. The proprietor is not required
to share profits with anyone.
 Decision making and control vested in one owner. No
Co-owners or partners must be consulted in the running
of the operation.
 Flexibility. Management is able to respond quickly to
business needs.
 Relative freedom from governmental control. Except
for requiring the necessary licenses, very little
governmental interference occurs.
 Freedom from corporate business taxes.
 Disadvantages of Sole Proprietorships
 Unlimited liability. The proprietor is personally responsible for all
business debts.
 Lack of continuity. The enterprise may be terminated of if the owner
becomes ill or dies.
 Less available capital. Limited resources and size: Ordinarily,
proprietorships have less available capital that other types of
business organizations.
 Relative difficulty obtaining long-term financing.
Because the business rests on one person, it often has
difficulty raising long- term capital.
 Relatively limited viewpoint and experience. The operation depends
on one person, and this individual’s ability will limit its directions
and scope.
 Limited Managerial Skill and
 Few fringe benefits: If you are your own boss, you lose many of the
fringe benefits that come from working for others.
 Partnerships
 A partnership is an association of two or more persons acting as co-owners
of a business for profit.
 Each partner contributes money, property, labor, or skills, and each shares
in the profits or the losses of the business.
Types of Partners
 General partners
 Take an active role in managing a business.
 Have unlimited liability for the partnership’s debts.
 Every partnership must have at least one general partner. Most partners
are general partners.
 If the assets available in the business are not sufficient, debt coverage
goes to the extent of their personal assets. The partner faces the risk of
implied authority. i.e. the partner is liable for the wrongful acts of a
copartner in the operation of the business.
 Limited partners
 Cannot participate in the day-to-day management of a company.
 Have limited liability for the partnership’s debts
 Basically limited partners are needed to increase the capital of the
business.
 Advantages of Partnerships
 Ease of formation. Legal formalities and expenses are few
compared with those for creating a corporation.
 Direct rewards. Partners are motivated. To put forth their best
efforts by direct sharing of the profits.
 Growth and performance facilitated. It is possible to obtain more
capital and a better range of skills than in a sole proprietorship.
 Flexibility. Responds quickly to business needs in the form of
day-to-day decisions.
 Relative freedom from governmental control and regulation. Very
little gov’t interference occurs in the operation of a partnership.
 Possible tax advantage. Most partnerships pay taxes as
individuals, thus escaping the higher rate assessed against
corporations
 Disadvantages of Partnerships
 Unlimited liability of at least one partner. Although some
partners can have limited liability, at least one must be a
general partner who assumes unlimited liability.
 Lack of continuity. If any partner dies, the partnership
arrangement ceases. However, operation of the business, can
continue based on the right of survivorship.
 Relative difficulty obtaining large sums of capital. Most
partnerships have some problems raisings a great deal of
capital, especially when long-term financing is involved.
 Bound by the acts of just one partner. A general partner can
commit the enterprise to contracts and obligations that may
prove disastrous.
 Difficulty of disposing of partnership interest. The buying out
of a partner may be difficult unless specifically arranged for in
the written agreement.
 Corporations

A corporation is a separate legal entity apart

from the individuals who own it.
 A corporation is created by the authority of
state laws and is usually formed when a
transfer of money or property by shareholders
(owners) takes place in exchange for capital
stock (ownership certificates).
 Types of corporations:
 Domestic – a corporation doing business in the
region in which it is incorporated.
 Foreign – a corporation doing business in a region
other than the region in which it is incorporated
 Alien – a corporation formed in country but doing
business in another country.
 Publicly held – a corporation that has a large
number of shareholders and whose stock
usually is traded on one of the large stock
exchanges.
 Closely held – a corporation in which shares
are controlled by a relatively small number of
people, often family members, relatives, or
friends
 Characteristics of Corporation
 Separate legal entity
 It can sue or be sued.
 It has the right to manage its own affairs.
 Shareholders cannot be liable for the acts of the
corporation.
 Limited liability
Since the corporation has separate legal entity its
debts are its own. The assets and liabilities, rights
and obligations incidental to the company’s
activities are of the company and not of its
members.
 Transferability of shares
 It is easy to transfer ownership in a corporation. A
stockholder may sell stock to another person and
transfer the membership and membership
interest freely without consulting other
stockholders.
 Perpetual existence
 Death, insanity, retirement and withdrawal of
shareholders will not affect the company.
 Common seal
 A corporation has a common seal with the name
of the company engraved on it, which is used as a
substitute for its signature through its agents.
Separation of ownership from
management
 All
shareholders, large in numbers, do not
have the opportunity of managing the
day-to-day activity of the corporation.
 Supervision
A company is created by the legal
process of incorporation. While it exists, it
is subject to detailed regulation
 It has a written constitution
 Advantages of Corporations
 Limited liability. Liability is limited to the individual’s
investment. This is the most money the person can lose
 Transfer of ownership. Ownership can be transferred
through the sale of stock to interested buyers.
 Unlimited life. The company has a life separate and distinct
from that of its owners and can continue for an indefinite
period of time.
 Relative ease of securing capital in large amounts. Capital
can be acquired through the issuance of bonds and shares of
stock.
 Increased ability and expertise. The corporation is able to
draw on the expertise and skills of a number of individuals.
 Disadvantages of Corporations
 Activity restrictions. Corporate activities are limited by the
charter and by various laws.
 Lack of representation. Minority stockholders are
sometimes outvoted by the majority, who force their will on
the others.
 Regulation. Governmental regulations and reports required
by state, and federal agencies often result in a great deal of
paperwork and red tape.
 Organizing expenses. A multitude of expenses are involved
in forming a corporation.
 Double taxation. Income taxes are levied both on corporate
profits and on individual salaries and dividends.
 Cooperative
 Is a business owned and operated by its users.
 Owners, managers, workers and customers are all the
same people.

 Are formed to give members more economic power as

a group than they would have as individuals
 Principles
Registered and have limited liability for its members
Members have an equal vote in decisions
Membership is open to everyone who fulfills
specified conditions
Assets controlled and usually owned jointly by
members
Profit shared equally b/n members with limited
interest payable on loans made by members
Share capital remains at its original value Members
benefit from participation, not investment
Brief summary of the common
business forms of ownership
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attention !!!