I Basic Forms of Business Ownership sole proprietorships partnerships and corporations sole proprietorship a business that is owned and usually managed by one person most common form of business partnership a legal form of business with two or more owners corporation a legal entity with authority toast and have liability apart from its owners b Disadvantages of Sole Proprietorships 1 unlimited liability the risk of personal losses unlimited liability the responsibility of business owners for all of the debts of the business legal form of business with 2 or more owners general limited and master limited 1 general partnership all owners share in operating the business and in assuming liability for the business s debts 2 limited partnership one or more general partners and one or more limited partners general partner owner partner who has unlimited liability and is active in managing the firm limited partner an owner who invests money in the business but does not have any management responsibility or liability or losses beyond his or her limited liability the limited partners liability for the debts of the business is limited to the amount they put into the company their personal assets are not at 3 master limited partnership MLP acts like a corporation and is traded on the stock exchanges like a corporation but is taxes like a partnership and avoids the limited liability partnership LLP limits partners risk of losing their personal assets to the outcomes of only their own acts and omissions and those of people all states except Louisiana have adopted Uniform Partnership Act UPA which defines the 3 key elements of any general partnership 3 the right to participate in managing the operations of the business 2 Shared management and pooled complementary skills knowledge II Sole Proprietorships a Advantages of Sole Proprietorships 1 Ease of starting and ending the business 2 Being your own boss 3 Pride of ownership 4 Leaving a legacy 5 Retention of company profits 6 No special taxes 2 Limited financial resources 3 Management difficulties 4 Overwhelming time commitment 5 Few fringe benefits 6 Limited growth 7 Limited life span III Partnerships investment risk corporate income tax normally found in oil and gas industry under their supervision 1 common ownership 2 shared profits and losses a Advantages of Partnerships 1 More financial resources 3 Longer survival 4 No special taxes b Disadvantages of Partnerships 1 Unlimited liability general partners 2 Division of profits 3 Disagreements among partners 3 Double taxation corp pays tax on its income before it can distribute any as dividends to stockholders and then the stockholders pay income tax on the 4 Difficulty of termination IV Corporations conventional C corporation state chartered legal entity with authority to act and have liability separate from its owners its stockholders alien corporation does business in the U S but is chartered incorporated in another country domestic corporation does business in the state in which it s chartered incorporated foreign corporation does business in one state but is chartered in another must register in states where is operates closed private corporation stock is held by a few people and isn t available to the general public open public corporation sells stock to general public ex GM ExxonMobil quasi public corporation chartered by the gov t as an approved monopoly to perform services to general public ex public utilities professional corporation owners offer professional services doctors lawyers etc Shares aren t publicly traded nonprofit not for profit doesn t seek personal profit multinational operates in several countries 1 Limited liability responsible only up to the amount they invest 2 Ability to raise more money for investment a Advantages 3 Size 4 Perpetual life 5 Ease of ownership change 6 Ease of attracting talented employees 7 Separation of ownership from management b Disadvantages 1 Initial cost 2 Extensive paperwork dividends they receive 4 Two tax returns corporate individual 5 Size 6 Difficulty of termination c Individuals Can Incorporate normally they do not issue stock 7 Possible conflict with stockholders and board of directors major advantages are limited liability and possible tax benefits average time is about 30 days from date of application before business is incorporated d S Corporations to qualify a company must S corporation a unique gov t creation that looks like a corporation but is taxed like sole proprietorships and partnerships profits are taxed only as the personal income of the shareholders avoiding the double taxation on C corporations Have no more than 100 shareholders all members of a family count as one shareholder Have shareholders that are individuals or estates and who are citizens or perm residents of the U S Have only one class of stock Derive no more than 25 of income from passive sources rents loyalties interest if S status is lost cannot operate under it again for at least 5 years limited liability company LLC a company similar to an S corporation but without the special eligibility requirements e Limited Liability Companies advantages 1 Limited liability personal assets protected 2 Choice of taxation can choose to be taxed as partnerships or as corporations 3 Flexible ownership rules can be person partnership or corporation 4 Flexible distribution of profits losses members agree on percentage to be distributed to each member 5 Operating flexibility disadvantages 3 Fewer incentives 4 Taxes self employment taxes 5 Paperwork 1 No stock members need approval of other members to sell their interests 2 Limited life span required to identify dissolution dates in articles of organization V Corporate Expansion Mergers and Acquisitions merger the result of two firms forming one company marriage vertical merger joining of two companies involved in different stages of related businesses soft drink artificial sweetener horizontal merger the joining of two firms in the same industry soft drink mineral water conglomerate merger the joining of firms in completely unrelated industries soft drink snack food acquisition one company s purchase of the property and obligations of another company buying a house taking a firm private management or group of stockholders obtain all the firm s stock for themselves by buying it back from other stockholders leveraged buyout LBO an attempt by employees management or a group of investors to purchase an organization primarily