Chapter 5 I Basic forms of business ownership A Sole proprietorship a business owned and usually managed by one a Benefits i Ease of starting and ending because there is no one else to consult ii Being your own boss Pride of ownership iii iv Leaving a legacy v Retention of full company profit vi Pay normal income tax as personal income b Drawbacks a Risk loss of personal property unlimited liability which means all of your personal assets are at stake including your home b Limited financial resources to ones that the owner can gather c Difficulty attracting employees management difficulties d Overwhelming time commitment e No paid health insurance or other benefits pension sick leave vacation pay f Slow expansion and limited growth g Limited life span if sole proprietor passes away B Partnership two or more people legally agree to become co owners sometimes due to lack of money or time a General partnership all owners share in operating an din assuming b Limited partnership one or more general partners and one or more c Master limited partnership looks the most similar to a corporation only liability of debts limited partners it is taxed like a partnership i Sunoco d Limited liability LLC limits partners risk of losing their personal assets due to outcomes of only their own acts and omissions i Advantages a More financial resources being that money of more people is involved b Shared management skills and knowledge c Longer survival d No special taxes like sole proprietors ii Disadvantages the firm no matter who was responsible b Shared profits amongst all partners c Disagreements amongst partners d Difficulty of termination a Unlimited liability each general partner is liable for the debts of C Corporation separate and distinct from owners and a legal entity with authority to act and have liability apart from its owners It is a stater chartered legal entity with authority to act and have liability separate from its owners stockholders who are not liable for debts a Advantages i Limited liability which means that owners are responsible for losses only up to the amount that they choose to invest in it ii Ability to raise money for investment share stocks which means other people can own a part of your company a Borrow money from investors by issuing bonds and promise to repay them or from financial institutions iii Large corporations with numerous resources can take advantage of opportunities anywhere in the world The business will not terminate if one managing member dies iv v Can attract skilled employees with incentives like stock benefits at a fixed price b Disadvantages vi Separation of ownership from management and the stockholders and owners have a say in who runs the corporation i Initial cost is high and requires lawyers and accountants ii Extensive paperwork iii Double taxation corporate income is taxed twice coporation and stockholders require a CPA iv Two tax returns corporate and individual sometimes v Size can make the company become inflexible and tied down vi vii Difficulty of termination Conflict may arise with stockholders who disagree with management II S corporations A A unique government creation that looks like a corporation but is taxed like sole proprietorship and partnerships a Similar paperwork to conventional corporations b Shareholders directors and employees and the benefit of LLC c BUT profits are taxed only as the personal income of the shareholders thus avoiding double taxation B Qualifications a No more than 100 shareholders b Have shareholders that are individuals or estates and who are citizens or permanent residents of the US c Have only one class of stock d Derive no more than 25 of income from passive sources rents royalties and interest C If you lose your S status you may not operate under it again for at least 5years III LLC D Benefits change every time tax rules change A Similar to an S corporation without the special eligibility requirements a Advantages i Limited liability personal assets are protected ii Chose whether to be taxed as a partnership or corporation iii iv v Operating flexibility they have to submit articles of organization and Flexible ownership rules person partnership or corporation Flexible distribution of profits and losses partners can agree have a written operating agreement b Disadvantages i No stock ownership is not transferrable and need approval of other members in order to sell their interests in the companies unlike S corps ii Limited life span dissolution dates but they can reconstitute it iii iv v Paperwork not as much as corporations Fewer incentives can t use stock options Pay self employment taxes IV Corporate expansion mergers and acquisitions A Merger is the result of two firs joining to form on company a Vertical joins two firms operating in different stages of related business i Soft drink company and an artificial sweetener company b Horizontal joins two firms in the same industry allowing them to diversify or expand their products i Soft drink company and a mineral water company c Conglomerate unites firms in completely unrelated industries in order to diversify operations and investments B Acquisition is one company s purchase of the property and obligations from another company C Leveraged buyout is an attempt by employees management or a group of investors to buy out the stockholders in a company by borrowing necessary funds V Franchises A Franchise agreement is an agreement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory a Service franchise b Person who buys franchise franchisee c McDonalds B Advantages a Management and marketing assistance provide training for employees assistance in all phases of work b Personal ownership you are still your own boss c Nationally recognized name d Financial advice and assistance e Lower failure rate C Disadvantages a Large start up cost b Shared profit c Management regulation many company rules and regulations coattail d Coattail effects if one fails others may need to look out for other effects branches e Restrictions on selling need to approve new owner f Fraudulent franchisors VI Diversity in franchising A As franchise costs increase women ownership decreases a More needs to be done to educate women VII Home based franchises A Relief from stress and commuting B Extra time for family C Low overhead expenses VIII Cooperatives resources for mutual gain a
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