‫الجامعة السعودية االلكترونية‬

‫الجامعة السعودية االلكترونية‬

‫‪26/12/2021‬‬
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College of Computing and Informatics
Bachelor of Science in Information Technology
IT364
IT Entrepreneurship and Innovation

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 Module 3
Choosing a Form of Ownership

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 1. Choosing a Form of Ownership
2. The Sole Proprietorship

Contents 3.
4.
The Partnership and The Corporation
Alternative Forms of Ownership

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 1. Discuss the issues that entrepreneurs should consider when
evaluating different forms of ownership. Describe the
advantages and disadvantages of the sole proprietorship,
Weekly partnership, and corporation.
2. Describe the features of the alternative forms of ownership,
Learning such as the corporation, the limited liability company, and
the joint venture.
Outcomes

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1. Choosing a Form of Ownership

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 Choosing a Form of Ownership
• There is no one “best” form of ownership
• The best form of ownership depends on an entrepreneur’s
particular situation
• The key to choosing a form of ownership is understanding how
each form’s characteristics affect an entrepreneur’s specific
business and personal circumstances

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 Choosing a Form of Ownership
Following are most important issues an entrepreneur should consider in choosing a form
of Ownership :
• Tax considerations
• Liability exposure
• Start-up and future capital requirements
• Control
• Managerial ability
• Business goals
• Management succession plans
• Cost of formation

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 Choosing a Form of Ownership

• Figure 3.1 (a) Forms of

Business Ownership by
Percentage of Business

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 Choosing a Form of Ownership

• Figure 3.1 (b) Forms of

Business Ownership by
Percentage of Net Income

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
2. The Sole Proprietorship

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 The Sole Proprietorship
• Sole proprietorship: The simplest and most popular form
of ownership
• The sole proprietor is the only owner and ultimate
decision maker for the business.
• Its simplicity and ease of formation make the sole
proprietorship the most popular form of ownership,
comprising nearly 72 percent of all businesses in the
United States.

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 The Sole Proprietorship
• Advantages of a Sole • Disadvantages of a Sole
Proprietorship: Proprietorship:
• Simple to create • Unlimited personal liability
• Least costly form to establish • Failure of the business can ruin a sole
• Profit incentive proprietor financially
• Total decision-making • Limited access to capital
authority • Limited skills and abilities
• No special legal restrictions • Feelings of isolation
• Easy to discontinue • Lack of continuity for the business

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
3. The Partnership and The Corporation

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 The Partnership
Partnership: an association of two or more people who
co-own a business for the purpose of making a profit
• Take the time to create a written partnership agreement: a
document that states all of the terms of operating the
partnership for the protection of each partner involved
• Addresses in advance potential conflicts

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 The Partnership
• A partnership agreement contains:
1. Name of the partnership
2. Purpose of the business
3. Location of the business
4. Duration of the partnership
5. Names of the partners and their legal addresses
6. Contributions of each partner to the business, at the creation of the
business and later
7. Agreement on how the profits or losses will be distributed
8. Agreement on salaries or drawing rights against profits for each
partner
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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 The Partnership
9. Procedure for expansion through the addition of new partners
10.Distribution of the partnership’s assets if the partners voluntarily dissolve
the partnership
11.Sale of the partnership interest
12.Absence or disability of one of the partners
13.Voting rights
14.Decision-making authority
15.Financial authority
16.Handing tax matters
17.Alterations or modifications of the partnership agreement
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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 The Partnership
• The Uniform Partnership Act
• Uniform Partnership Act: codifies the body of law dealing with partnerships in the
United States
• Three key elements:
1. Common ownership interest in a business
2. Sharing the business’s profits and losses
3. Right to participate in managing the partnership
• Partners must abide by:
• Duty of loyalty
• Duty of obedience
• Duty of care
• Duty to inform

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 The Partnership
• Advantages of the Partnership • Disadvantages of the Partnership
• Easy to establish • Unlimited liability of at least one partner
• Complementary skills • Capital accumulation
• Division of profits • Difficulty in disposing of partnership
• Larger pool of capital interest
• Ability to attract limited partners • Potential for personality and authority
• Little government regulation conflicts
• Flexibility • Partners are bound by the law of the
agency
• Taxation

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 The Partnership
• Limited Partnerships • Limited Liability Partnerships
• Limited partnership: a partnership • Limited liability partnership: a
composed of at least one general partnership in which all partners in the
partner and one or more limited business are limited partners, having
partners only limited liability for the debts and
• The general partner in a limited obligations of the partnership
partnership is treated exactly as • Usually restricted to professionals –
in a general partnership attorneys, physicians, dentists,
• The limited partner has limited accountants, etc.
liability and is treated as an
investor in the business
• The limited partner does not take
an active role in managing the
business
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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 The Corporation
• Corporation: an artificial legal entity created by the state that can sue or be sued in its
own name, enter into and enforce contracts, hold the title to and transfer property, and
be found civilly and criminally liable for violations of the law.
• C-corporations: creations of the state
• Domestic corporation: a corporation doing business in the state in which it is
incorporated
• Foreign corporation: a corporation chartered in one state and doing business in another
state
• Alien corporation: a corporation formed in another country but doing business in the
United States
• Publicly held corporation: a corporation that has a large number of shareholders and
whose stock usually is traded on one of the large stock exchanges
• Closely held corporation: a corporation in which shares are controlled by a relatively
small number of people, often family members, relatives, or friends
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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 The Corporation
• Requirements for incorporation:
1. The corporation’s name
2. The corporation’s statement of purpose
3. The company’s time horizon
4. Names and addresses of the incorporators
5. Place of business
6. Capital stock authorization
7. Capital required at the time of incorporation’
8. Provision for preemptive rights, if any, that are granted to stockholders
9. Restrictions on transferring shares
• Treasury stock
• Right of first refusal
10. Names and addresses of the officers and directors of the corporation
11. Rules under which the corporation will operate
• Bylaws
• Corporate charter: approved articles of incorporation
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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 The Corporation
• Advantages of the Corporation: • Disadvantages of the Corporation:
• Limited liability of stockholders • Cost and time involved in the
• Ability to attract capital incorporation process
• Private placement • Double taxation
• Public offering • Potential for diminished managerial
• Ability to continue indefinitely incentives
• Transferable ownership • Stock option
• Stock ownership plan
• Legal requirements and regulatory red
tape
• Potential loss of control by the founders

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
4. Alternative Forms of Ownership

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 The S Corporation
• S corporation: a distinction that is made only for federal
income tax purposes
• No different from any other corporation from a legal perspective
• For tax purposes, however, an S- corporation is taxed like a
partnership, passing all of its profits (or losses) through to the
individual shareholders
• To elect “S” status, all shareholders must consent, and the
corporation must file with the IRS within the first 75 days of its tax
year

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 The S Corporation
• S-corporations must meet the following criteria:
• Must be a U.S.-based corporation
• No nonresident alien shareholders
• Only one class of common stock
• No more than 100 shareholders (increased from 75)
• No more than 25% of corporate income from passive
investment sources
• Corporations and partnerships cannot be shareholders

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
 The S Corporation
• Advantages of an S Corporation:
• All of the advantages of a regular
corporation
• Passes all of its profits or losses
through to individual shareholders
• Income is only taxed once at the
individual tax rate
• Avoids the double taxation disadvantage
of the C corporation
• Avoids the tax C corporations pay
on assets that have appreciated in
value and are sold
This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
• Disadvantages of an S Corporation:
• Tax advantages may not be permanent
• When is an S Corporation a Wise
Choice?
• Beneficial to start-up companies that
anticipate net losses and to highly
profitable firms with substantial
dividends to pay to shareholders
• Also attractive to companies that plan to
reinvest most of their earnings to
finance growth
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 The Limited Liability Corporation
• Resembles an S-Corporation but is not subject to the same
restrictions
• Two documents:
• Articles of organization
• Operating agreement
• An LLC cannot have more than two of these four corporate
characteristics:
• Limited liability
• Continuity of life
• Free transferability of interest
• Centralized management

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This Presentation is mainly dependent on the textbook: effective SMALL BUSINESS management, AN ENTREPRENEURIAL APPROACH, 10 th
This Presentation is mainly dependent on
the textbook:
Chapter 3: Choosing a form of ownership

(Effective Small Business management, AN

ENTREPRENEURIAL APPROACH, 10th
Edition by Norman M. Scarborough)

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Thank You

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