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Chapter 3: Forms of Ownership 1Copyright 2003 Prentice Hall Publishing Company
Choosing a Form of Ownership
Choosing a Form of Ownership
There is no one “best” form of ownership.There is no one “best” form of ownership. The best form of ownership depends on an The best form of ownership depends on an
entrepreneur’s particular situation.entrepreneur’s particular situation. The key to choosing a form of ownership The key to choosing a form of ownership
is understanding how each form’s is understanding how each form’s characteristics affect an entrepreneur’s characteristics affect an entrepreneur’s specific business and personal specific business and personal circumstances. circumstances.
Choosing a Form of Choosing a Form of OwnershipOwnership
Chapter 3: Forms of Ownership 3Copyright 2003 Prentice Hall Publishing Company
Factors to ConsiderFactors to Consider
Tax considerationsTax considerations Liability exposureLiability exposure Start-up capital requirementsStart-up capital requirements ControlControl Managerial abilityManagerial ability Business goalsBusiness goals Management succession plansManagement succession plans Cost of formationCost of formation
Chapter 3: Forms of Ownership 4Copyright 2003 Prentice Hall Publishing Company
Forms of OwnershipForms of Ownership
Sole ProprietorshipSole Proprietorship PartnershipPartnership CorporationCorporation
Forms of OwnershipPercent of Businesses
Corporation20.1%
Partnership7.7%
Sole Proprietorship72.2%
Forms of OwnershipPercent of Sales
Corporation87.1%
Partnership8.1%
Sole Proprietorship4.8%
Forms of OwnershipPercent of Income
Corporation69%
Partnership15%
Sole Proprietorship16%
Chapter 3: Forms of Ownership 8Copyright 2003 Prentice Hall Publishing Company
Advantages of the Sole Advantages of the Sole ProprietorshipProprietorship
Simple to createSimple to create Least costly form to beginLeast costly form to begin Profit incentiveProfit incentive Total decision making authorityTotal decision making authority No special legal restrictionsNo special legal restrictions Easy to discontinueEasy to discontinue
Chapter 3: Forms of Ownership 9Copyright 2003 Prentice Hall Publishing Company
Disadvantages of the Sole Disadvantages of the Sole ProprietorshipProprietorship
Unlimited personal liabilityUnlimited personal liability
Liability Features of the Basic Forms of OwnershipLiability Features of the Basic Forms of Ownership
Sole ProprietorshipSole Proprietorship
Claims of Sole Proprietor’s CreditorsClaims of Sole Proprietor’s Creditors
Sole Proprietor’s Personal AssetsSole Proprietor’s Personal Assets
Chapter 3: Forms of Ownership 11Copyright 2003 Prentice Hall Publishing Company
Disadvantages of the Sole Disadvantages of the Sole ProprietorshipProprietorship
Limited access to capitalLimited access to capital Limited skills and capabilitiesLimited skills and capabilities Feelings of isolationFeelings of isolation Lack of continuityLack of continuity
Unlimited personal liabilityUnlimited personal liability
Chapter 3: Forms of Ownership 12Copyright 2003 Prentice Hall Publishing Company
PartnershipPartnership
An association of two or more people who An association of two or more people who co-own a business for the purpose of co-own a business for the purpose of making a profit.making a profit.
Take the time to create a written Take the time to create a written partnership agreement!partnership agreement!
Chapter 3: Forms of Ownership 13Copyright 2003 Prentice Hall Publishing Company
Advantages of the PartnershipAdvantages of the Partnership
Easy to establishEasy to establish Complementary skills of partnersComplementary skills of partners Division of profitsDivision of profits Larger pool of capitalLarger pool of capital Ability to attract limited partnersAbility to attract limited partners Little government regulationLittle government regulation FlexibilityFlexibility TaxationTaxation
Chapter 3: Forms of Ownership 14Copyright 2003 Prentice Hall Publishing Company
Disadvantages of the PartnershipDisadvantages of the Partnership
Unlimited liability of at least one partnerUnlimited liability of at least one partner
Liability Features of the Basic Forms of OwnershipLiability Features of the Basic Forms of Ownership
PartnershipPartnership
Claims of Partnership’s CreditorsClaims of Partnership’s Creditors
Partnership’s AssetsPartnership’s AssetsGeneralPartner’sPersonalAssets
GeneralPartner’sPersonalAssets
GeneralPartner’sPersonalAssets
GeneralPartner’sPersonalAssets
Chapter 3: Forms of Ownership 16Copyright 2003 Prentice Hall Publishing Company
Disadvantages of the PartnershipDisadvantages of the Partnership
Capital accumulationCapital accumulation Difficulty in disposing of partnership Difficulty in disposing of partnership
interestinterest Lack of continuityLack of continuity Potential for personality and authority Potential for personality and authority
conflictsconflicts Partners bound by the law of agencyPartners bound by the law of agency
Unlimited liability of at least one partnerUnlimited liability of at least one partner
Chapter 3: Forms of Ownership 17Copyright 2003 Prentice Hall Publishing Company
Limited PartnershipLimited Partnership
A partnership composed of at least one A partnership composed of at least one general partner and one or more limited general partner and one or more limited partners.partners.
The general partner in this partnership is The general partner in this partnership is treated exactly as in a general partnership.treated exactly as in a general partnership.
The limited partner has limited liability The limited partner has limited liability and is treated as an investor in the and is treated as an investor in the business. business.
Liability Features of the Basic Forms of OwnershipLiability Features of the Basic Forms of Ownership
Limited PartnershipLimited PartnershipClaims of Partnership’s CreditorsClaims of Partnership’s Creditors
Partnership’s AssetsPartnership’s AssetsGeneralPartner’sPersonalAssets
GeneralPartner’sPersonalAssets
LimitedPartner’sPersonalAssets
LimitedPartner’sPersonalAssets
BarrierBarrier
Chapter 3: Forms of Ownership 19Copyright 2003 Prentice Hall Publishing Company
The CorporationThe Corporation
A separate legal entity from its owners. A separate legal entity from its owners. Types of corporations:Types of corporations:
DomesticDomestic - a corporation doing business in the - a corporation doing business in the state in which it is incorporated. state in which it is incorporated.
ForeignForeign - a corporation chartered in one state - a corporation chartered in one state and doing business in another state.and doing business in another state.
AlienAlien - a corporation formed in another - a corporation formed in another country, but doing business in the United States. country, but doing business in the United States.
Chapter 3: Forms of Ownership 20Copyright 2003 Prentice Hall Publishing Company
The CorporationThe Corporation
Types of corporations:Types of corporations: Publicly held Publicly held - a corporation that has a large - a corporation that has a large
number of shareholders and whose stock number of shareholders and whose stock usually is traded on one of the large stock usually is traded on one of the large stock exchanges.exchanges.
Closely held Closely held - a corporation whose shares are in - a corporation whose shares are in the control of a relatively small number of the control of a relatively small number of people, often family members, relatives, or people, often family members, relatives, or friends. friends.
Chapter 3: Forms of Ownership 21Copyright 2003 Prentice Hall Publishing Company
Advantages of theAdvantages of theCorporationCorporation
Limited liability of the stockholdersLimited liability of the stockholders
Liability Features of the Basic Forms of OwnershipLiability Features of the Basic Forms of Ownership
CorporationCorporationClaims of Corporation’s CreditorsClaims of Corporation’s Creditors
Corporation’s AssetsCorporation’s Assets
Shareholder’sPersonal AssetsShareholder’sPersonal Assets
Shareholder’sPersonal AssetsShareholder’sPersonal Assets
BarrierBarrierBarrier
Barrier
Chapter 3: Forms of Ownership 23Copyright 2003 Prentice Hall Publishing Company
Advantages of theAdvantages of theCorporationCorporation
Ability to attract capitalAbility to attract capital Ability to continue indefinitelyAbility to continue indefinitely Transferable ownershipTransferable ownership
Limited liability of stockholdersLimited liability of stockholders
Chapter 3: Forms of Ownership 24Copyright 2003 Prentice Hall Publishing Company
Disadvantages of the CorporationDisadvantages of the Corporation
Cost and time of incorporatingCost and time of incorporating ““Double taxation”Double taxation” Potential for diminished managerial Potential for diminished managerial
incentivesincentives Legal requirements and regulatory “red Legal requirements and regulatory “red
tape”tape” Potential loss of control by founder(s)Potential loss of control by founder(s)