ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT 6E

Chapter 5: Forms of Business Organization

CHAPTER

Choosing a Form of Ownership

Forms of
Business Ownership

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Ch, 5: Forms of Business Ownership

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The best form of ownership depends on

an entrepreneurs particular situation.

Key: Understanding the characteristics of

each form of ownership and how well they
match an entrepreneurs business and
personal circumstances.

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Major Forms of Ownership

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

Ch, 5: Forms of Business Ownership

There is no one best form of ownership.

Ch, 5: Forms of Business Ownership

Factors Affecting the Choice

Sole Proprietorship

Partnership

Corporation

S Corporation

Limited Liability Company

Joint Venture

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FIGURE 5.1 (A)

FIGURE 5.1 (B)

Forms of Business
Ownership
Percentage of Business

Forms of Business
Ownership Percentage of Sales

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Ch, 5: Forms of Business Ownership

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ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT 6E

Chapter 5: Forms of Business Organization

Advantages of the
Sole Proprietorship

Ch, 5: Forms of Business Ownership

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Simple to create

Least costly form to begin

Profit incentive

Total decision making authority

FIGURE 5.1 (C)

No special legal restrictions

Forms of Business
Ownership Percentage of Sales

Easy to discontinue

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Ch, 5: Forms of Business Ownership

Disadvantages of the
Sole Proprietorship

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Liability Features of the Basic

Forms of Ownership

Sole Proprietorship

Unlimited personal liability

Claims of Sole Proprietors Creditors

Sole Proprietors Personal Assets

Ch, 5: Forms of Business Ownership

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Ch, 5: Forms of Business Ownership

Disadvantages of the
Sole Proprietorship

Unlimited personal liability

Limited skills and capabilities

Feelings of isolation

Limited access to capital

Lack of continuity of the business

Ch, 5: Forms of Business Ownership

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Partnership

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An association of two or more people

who co-own a business for the
purpose of making a profit.

Always wise to create a partnership

agreement.

The best partnerships are

built on trust and respect.

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ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT 6E

Chapter 5: Forms of Business Organization

Types of Partners

Advantages of the Partnership

General partners

Easy to establish

Complementary skills of partners

Division of profits

Larger pool of capital

Ability to attract limited partners

Ch, 5: Forms of Business Ownership

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Take an active role in managing a business.

Have unlimited liability for the partnerships
debts.
Every partnership must have at least one
general partner.

Cannot participate in the day-to-day

management of a company.
Have limited liability for the partnerships
debts.

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Limited partners

Ch, 5: Forms of Business Ownership

Easy to establish
Complementary skills of partners
Division of profits
Larger pool of capital
Ability to attract limited partners
Minimal government regulation
Flexibility
Taxation

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Claims of Partnerships Creditors

Ch, 5: Forms of Business Ownership

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Disadvantages of the
Partnership

Partnership

Partnerships Assets

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Unlimited liability of at least one

partner

Ch, 5: Forms of Business Ownership

Liability Features of the Basic

Forms of Ownership

General
Partners
Personal
Assets

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Disadvantages of the
Partnership

Advantages of the Partnership

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General
Partners
Personal
Assets

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Unlimited liability of at least one partner

Capital accumulation
Difficulty in disposing of partnership
interest without dissolving the partnership
Lack of continuity
Potential for personality and authority
conflicts
Partners bound by law of agency

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ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT 6E

Chapter 5: Forms of Business Organization

Corporation

Limited Partnership

A partnership composed of at least

one general partner and one or more
limited partners.
A general partner in this partnership
is treated exactly as in a general
partnership.
A limited partner has limited
liability and is treated as an
investor in the business.

Ch, 5: Forms of Business Ownership

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A separate legal entity from its owners.

Types of corporations:
Domestic a corporation doing business
in the state in which it is incorporated.
Foreign a corporation doing business in
a state other than the state in which it is
incorporated.
Alien a corporation formed in another
country but doing business in the United
States.

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Corporation

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Advantages of the Corporation

Types of corporations:

Publicly held a corporation that has

a large number of shareholders and
whose stock usually is traded on one
of the large stock exchanges.
Closely held a corporation in which
shares are controlled by a relatively
small number of people, often family
members, relatives, or friends.

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Liability Features of the Basic

Forms of Ownership

Ch, 5: Forms of Business Ownership

Claims of Corporations Creditors

Corporations Assets

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Advantages of the Corporation

Corporation

Shareholders
Personal Assets

Limited liability of stockholders

Limited liability of stockholders

Ability to attract capital

Ability to continue indefinitely

Transferable ownership

Shareholders
Personal Assets

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ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT 6E

Chapter 5: Forms of Business Organization

Disadvantages of the
Corporation

Cost and time of incorporation process

Double taxation

Potential for diminished managerial

incentives

Legal requirements and regulatory red

tape

Potential loss of control by founder(s)

Ch, 5: Forms of Business Ownership

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S Corporation

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No different from any other corporation

from a legal perspective.

An S corporation is taxed like a partnership,

passing all of its profits (or losses) through
to 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.

Ch, 5: Forms of Business Ownership

S-Corporation
Claims of S-Corporations Creditors

S-Corporations Assets

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Limited Liability Company

(LLC)

Liability Features of the Basic

Forms of Ownership

Shareholders
Personal Assets

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Resembles an S Corporation but is

not subject to the same restrictions.

Two documents required:

Articles of organization

Operating agreement

Shareholders
Personal Assets

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Ch, 5: Forms of Business Ownership

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Limited Liability Company

(LLC)

Liability Features of the Basic

Forms of Ownership

An LLC cannot have more than two of

Limited Liability Company - LLC

these four corporate characteristics:

Claims of LLCs Creditors

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1. Limited liability
2. Continuity of life
LLCs Assets

3. Free transferability of interest

4. Centralized management

Ch, 5: Forms of Business Ownership

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Members
Personal Assets
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Ch, 5: Forms of Business Ownership

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Members
Personal Assets

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ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT 6E

Chapter 5: Forms of Business Organization

The Professional Corporation

The Joint Venture

Designed for professions lawyers,

doctors, dentists, accountants and other
professionals

Much like a partnership, but it:

Is formed for a specific purpose

Created in the same manner as a

corporation

Has a beginning and an end

Identified by the abbreviations:

P.C. Professional Corporation
P.A. Professional Association
S.C. Service Corporation
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Ch, 5: Forms of Business Ownership

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Conclusion
The right choice of the form of
ownership is unique to every
entrepreneur and their business.

Each form has advantages and

disadvantages.

The entrepreneur must be thoughtful

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and strategic about this important

decision.

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Ch, 5: Forms of Business Ownership

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