Forms of Business Ownership

Its just paper. All I own is a pickup truck and a little Walmart stock. ..Sam Walton

Evaluation Criteria

Tax consideration Liability exposure Start-up and future capital requirement Control Managerial ability Business goals Management succession plans Cost of formation

Sole Proprietorship

A business owned and managed by one individual; the business and the owner are one and the same in the eyes of the law

Sole Proprietorship
Advantages Simple to create Least costly form Profit incentive Total decisionmaking No special legal restrictions Easy to discontinue

Sole Proprietorship
Disadvantages Unlimited personal liability Limited skills and abilities Feelings of isolation Limited access to capital Lack of continuity of business

Partnership
An association of two or more people who coown a business for the purpose of making a profit
A partnership agreement or the Uniform Partnership Act

Partnership
Advantages Easy to establish Complementary skills Division of profits Larger pool of capital Ability to attract limited partners Little governmental regulation Flexibility Taxation

Partnership
Disadvantages Unlimited liability of at least one Difficulty in disposing of interest Lack of continuity Potential for personality and authority conflicts Partners bound by law of agency

Special Partnerships

Limited partnership-composed of at least one general partner and at least one limited partner Limited liability partnership-a special type of limited partnership, in which all partners are limited partners Master limited partnership-a partnership whose shares are traded on stock exchanges, just like corporations

Corporations
A separate legal entity apart from its owners which receives the right to exist from the state in which in which it is incorporated

Domestic Foreign Alien Publicly held Closely held

Corporations
Certificate of Incorporation Name Statement of purpose Time horizon Names and addresses of incorporators Place of business Capital stock authorization Capital required at time of incorporation Provisions for preemptive rights Restrictions on transfering shares Names and addresses of officers By-laws

Corporations
Advantages Limited liability of stockholders Ability to attract capital Ability to continue indefinitely Transferable ownership

Corporations
Disadvantages Cost and time in incorporating Double taxation Potential for diminished incentives Legal requirements and red tape Potential loss of control

An S Corporation
A corporation that retains the legal characteristics of a regular C corporation but has the advantage of being taxed as a partnership if it meets 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

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

S Corporation

Highly profitable service companies with large number of shareholders for whom profits 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

S Corporation
Liquidating Pay all taxes and debts Obtain written approval of shareholders to dissolve company File statement of intent to dissolve with secretary of state Distribute all remaining assets

Limited Liability Company

A relatively new form of ownership that, like an S corporation, is a cross between a partnership and a corporation; it is not subject to many of the restrictions imposed on S corporations; only 2 of the following: Limited liability Continuity of life Free transferability of interest Centralized management

Limited Liability Corporation

Articles of organization-name and address, method of management, duration, names and addresses of each organizer Operating agreement-no more than 2 of: limited liability, continuity of life, free transferability of interest, centralized management

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

 Professional

Corporationlawyers, accountants, doctors, dentists, etc. Joint Venture-partnership formed for a specific purpose