Chapter 4.3Choose the legal form of your Business

Mrs. Leonard

Entrepreneurship

Types of Business Arrangements

There are three main types of ownership arrangements from which to choose: Sole Proprietorship – business that is owned by one

person Partnership – business owned by two or more people Corporation – business with the legal rights of a person

and which may be owned by many people S – Corporation – corporation organized under subchapter S of

the Internal Revenue Code whose income is taxed as a partnership

Sole Proprietorship Enable one person to be in control of all business

aspects Most common type of ownership May be small businesses with just a few

employees, or they may be large businesses with hundreds of employees

Government exercises very little control over sole proprietorships So more will be established and run simply Accurate tax record and certain employment laws must

be met

Disadvantages of a Sole Proprietorship

Difficult to raise money for the sole proprietorship You are the only one contributing money

Face a risk that owners of partnerships or corporations do not If a sole proprietorship fails and debts remain, the

entrepreneurs private assets may be taken to pay what is owed

Partnership

In partnerships, entrepreneurs have someone with whom to share decision-making and management responsibilities

In a partnership one entrepreneur will not have to come up with all of the capital alone

If any losses the business incurs will be shared by all of the partners

Little government regulation

Disadvantages of a Partnership Entrepreneurs may not like sharing

responsibilities and profits All partners are liable for errors of the

partners Can lead to disagreements and end bitterly

Partnership Agreement

When two or more entrepreneurs go into business together, they generally sign a partnership agreement

Purpose of the partnership agreement is to set down in writing the rights and responsibilities of each of the owners

Partnership Identifies1. Name of the business or partnership2. Names of the partners3. Type and value of the investment each partner contributes4. Managerial responsibilities to be handled by each partner5. Accounting methods to be used6. Rights of each partner to review and/or audit accounting documents7. Division of profits and losses among partners8. Salaries to be withdrawn by the partners9. Salaries to be withdrawn by the partners10. Duration of the partnership11. Conditions under which the partnership can be dissolved12. Distribution of assets upon dissolution of the partnership13. Procedure for dealing with the death of a partner

Corporation

A corporation is treated independently of its owners Since a corporation has the legal rights of a person, the

corporation, not the owners, pay taxes, enters into contracts, and may be held liable for negligence

Ownership of a corporation is in the form of shares of stock

Share of stock – a unit of ownership in a corporation People who own stock in the corporation are called shareholders

or stockholders The individual or group that owns the most shares maintains

control of the company

Corporation Board of Directors – every corporation has a group

of people who meet several times a year to make important decisions affecting the company Responsible for electing the corporation’s senior

officers, determining their salaries, and setting the corporations' rules for conduction business

Decides how much the corporation should pay in dividends

Dividends – distributions of profits to shareholders by corporations Company’s officers, not the board of directors, are

responsible for the day-to-day management of the corporation

Disadvantages of a Corporation

Complicated Costly to establish Incorporate – means to set up a business as a

corporation Will need assistance of a lawyer, who will help you file

articles of incorporation with the state official responsible for chartering, or registering, corporations

Articles of incorporation must be written that fully detail the purpose of the business If not written well, the corporations activities can be limited

Disadvantages of a Corporation

Corporations are subject to much more government regulation than sole proprietorships or partnerships Much more paperwork

Double Taxation Corporation pays taxes on its income, and shareholders

pay taxes on the dividends they receive from the corporation

Corporations profits are taxed as corporate income and again as individual income

Why Incorporate? Liability – amount owed to others

Shareholders liability is limited to the amount of money each shareholder invested in the company when he or she purchased stock

Incorporations allows businesses to raise money by selling stock

Lenders are also more willing to lend money to corporations than to sole proprietorships or partnerships

Since shareholders do not affect the management of a corporation, the main shareholder of the company can change through the buying and selling of stock without disrupting the day-to-day business

S Corporation S corporation – corporation organized under

subchapter S of the Internal Revenue Code whose income is taxed as a partnership

Unlike regular corporations, an S corporation is not taxed as a business Individual shareholders are taxed on the profits they

earn Many companies establish themselves as S

corporations because they lose money in the early years Any losses suffered by S corporations can be used to

offset other sources of taxable income

4.3 Assessment

1. On your Chapter 4 assessment page, create a table of advantages and disadvantages of the three legal forms of ownership

2. Think Critically (page 97) #1-3. Type the question and answer in bold.

3. 4.3 T/F and MC worksheet

Advantages Disadvantages

Corporation

Sole Proprietorship

Partnership