Chapter 3

Forms of Business

Three most common forms of business ownership in the U.S.

Sole Proprietorship (simplest) Partnership Corporation (most complex)

Sole Proprietorship

Is the oldest and simplest form of business. Account for 2/3 of all businesses in the U.S. Most common – retailing, agriculture, and

service industries.

Advantages of Sole Proprietorship

Ease and Low cost of Formation and Dissolution.– No contracts, agreements or legal documents required.– No minimum capital required to start.

Retention of all profits– All profits are the owner’s, to do what he wants with.

Flexibility– Free to make decisions about the firm’s operations.

Possible Tax Advantages– Profits are taxed as personal income of the owner.– Proprietorship does not pay any special state or federal

taxes.

Disadvantages of a Sole Proprietorship

Unlimited Liability– Owner is held responsible for all debts

Lack of Continuity– If the owner dies or is declared legally insane, the business

essentially ceases to exist. Limited Ability to Borrow

– Usually most banks or lending agencies will not lend large amounts of money.

Limited Business Skills and Knowledge– Owner does everything for the business, buyer, accountant,

janitor. Lack of Opportunity for high level employees

– Hard to attract competent help (less likely for advancement)

Partnership

Is an association of two or more persons to act together as a business.– Approximately 1.5 million partnerships– 10.4% of all businesses

Types of partnerships

General Partnership– A person who assumes full co-ownership of a

business. – Responsible for day to day actions.– Each is taxed on owns behalf

Limited Partnership– Contributes Capital to the business

Nominal, Ostensible, Active, Secret, Dormant, or Silent

Nominal – by name only, no actual part of the partnership agreement.

Ostensible – Active and known partner in the partnership

Active – Active in management, but may or may not be know to the public

Secret – active, but not known to public Dormant – inactive, not know to public Silent – inactive, but know to public as partner

Advantage of a partnership

Ease and Low Cost of Formation Availability of Capital and Credit.

– Partners can pool their money and assets for loans Retention of Profits

– Owners receive all profits and debts Higher Personal interest

– All actions can interfere and effect other partners within the business.

Greater Knowledge with partners on how to run a business Tax advantages

– Partners taxed only on their individual income form the business

Disadvantage of Partnership

Unlimited Liability– Responsible for all of the debt

Lack of Continuity– Termination of business if death, withdrawal, or legally

declared insane

Effects of Management Disagreements– Must “Play” with other well.

Frozen Investments– Easy to put money in, but at times difficult to get it out….

The Partnership Agreement

Are you in a partnership? You will need one of these…….

– Articles of Partnership Listing and explaining the terms of the partnership

Parts of the agreement– Identity of partners– Nature of business– Name and location of firm– Duration of partnership– Investments of partners– Sharing profit/loss– How are the books going to be kept– Partner drawings– Duties of partners– Restraints of partners– Termination of Partners

The Corporation

Is an artificial person created by law, with most of the legal rights of a real person– More than 2.9 million in the U.S.– They comprise only about 1/5 of all businesses,

but account for 9/10 of sales and ¾ of all business profits.

Types of Corporations

Close Corporation– A corporation whose stock is owned by relatively

few people and is not traded on the market.

Open Corporation– A corporation whose stock is traded open on the

stock market and can be purchased by individuals

Forming a Corporation

Where to incorporate (three kinds)– Domestic Corporation – any corporation who

does business within its own state.– Foreign Corporation – any corporation who does

business outside of its states borders. – Alien Corporation – any corporation who does

business with another government and conducting business within the U. S. borders.

Forming a Corporation (con’t)Forming a Corporation (con’t)• Corporate charter

– You have to choose a “home state”– The charter is a contract between the

corporation and the state, in which the state recognizes the formation of the artificial person that is the corporation.

• Stockholders rights– Common stockholders – vote on corporate

matters– Preferred – don’t vote, but receive earnings– Proxy – is a legal form that allows someone

else vote for the owner of the stock.

Still forming a corporationStill forming a corporation• Organizational Meeting

– Election of the first board of directors

How is the Corporation How is the Corporation StructuredStructured

• Board of Directors– Is the top governing body of a

corporations and directors are elected by the shareholders.

– Setting company goals– Develop general plans to meeting those

goals• Corporate Officers

– Appointed by the board of directors. – Make the smaller plans, carry out the strategies and

manage day to day operations.

Advantages of a CorporationAdvantages of a Corporation• Limited Liability

– People of the corporation are not responsible for debt.

• Ease of Transfer of ownership• Ease of raising capital• Perpetual Life• Specialized management

– Recruit more skilled people

Disadvantages of Disadvantages of CorporationsCorporations

• Difficulty and expense of Formation• Government Regulations• Double Taxations

– Corporations must pay taxes– Shareholders must pay taxes

• Lack of Secrecy

Types of CorporationsTypes of Corporations• Government-Owned Corporations

– Are owned and operated by local, state, or federal government.

– Usually provides a service that the business sector is reluctant or unable to offer. Nuclear, Department of Revenue

– Quasi-government• Partly private, partly government owned• Boeing,

• Not-for-Profit– A corporation that is organized to

provide a social, educational, religious, or other non-business service rather than to earn a profit.

– Exempt for taxes.

• S- Corporation– Is a corporation that is taxed as thought

it were a partnership. – A firm must meet certain criteria

Corporate GrowthCorporate Growth• Growth from with

– Adding a different section or a new part of a company

• External Growth– Mergers

• Horizontal Merger – is a merger between firms that make and sell similar products in a similar market. AT&T and Cingular

• Vertical Merger – is a merger between firms that operate at different but related levels in the production of marketing of a product. Chevrolet and Mercedes - Diamler-Chrysler

• Conglomerate Merger – is a merger between firms in completely unrelated fields.

Other forms of businessOther forms of business• Cooperatives

– Is an association of individual or firms for the purpose of performing some business function for all its members. Cooperative may be found in all segments of our economy.

– Most prevalent in agriculture.– Farmer and a silo owner

Other forms of businessOther forms of business• Joint Ventures

– A joint venture is a partnership that is formed to achieve a specific goal or to operate for a specific period of time. Once the goal is reached or the period of time elapses the partnership is dissolved.

Other forms of businessOther forms of business• A syndicate

– Is a temporary association of individuals or firms, organized to perform a specific task that requires a large amount of capitals. Syndicates are most commonly used to underwrite large insurance polices, loans and investments.