Ch. 35- Forms of Business Organizations

major forms of business organizations

Sole proprietorship

General partnership

Limited partnership

Limited liability partnership

Corporation

Limited liability company

Joint venture

Franchise

GP

general partnership

LP

limited partnership

LLP

limited liability partnership

2 types of corporations

C-Corporation and S Corporation

LLC

limited liability company

JV

joint venture

types of franchises

chain-style

distributorship

manufacturing arrangement

sole proprietorship definition

unincorporated business owned by one person

sole proprietorship owner benefits

Total control

Unlimited personal liability

Profits taxed directly as income to sole proprietor

sole proprietorship advantages

Ease of creation (start-up)

Owner has total managerial control

Owner retains all profits

sole proprietorship disadvantages

Personal liability for all business debts/obligations

Funding limited to personal contributions and loans

what % of US business are owned and operated by ______

over 70%

sole proprietors

a sole proprietor does not have what to protect himself?

a legal shield, as the owner of a corporation or member of an LLC does

general partnership definition

unincorporated business owned and operated by two or more persons who carry on the business for profit

general partnership partner obligations

Each partner has equal control of the business

Each partner has unlimited, personal liability for business debts/obligations

Business is not a separate legal entity so profits taxed as income to partners

general partnership advantages

Ease of creation (start-up); no written partnership agreement or incorporation required

Partnership income is partner income

Business losses qualify for individuals' tax deduction

general partnership disadvantages

Individual joint and several liability for all business debts/obligations, including those created by partners on behalf of partnership

Limited partnership (LP) definition

incorporated business with at least one general partner and one limited partner

what does a Limited partnership (LP) require

filings with the relevant state to form (incorporate)

general partner in Limited partnership (LP)

has managerial/operational control over business and unlimited personal liability

limited partner's liability

liability limited to extent of his or her capital contributions

limited partner has no what?

managerial or operational control over the business

Limited liability partnership (LLP) definition

no general partners- all limited partners assume liability for the business and for each other, but only to the extent of the partnership's assets

Limited liability partnership (LLP) liability for negligence...

liability for negligence is limited only to personal negligence and negligent supervision

what does Limited liability partnership (LLP) require

filing with the state to form (incorporation)

Limited liability partnership (LLP) legal entity information

not a separate legal entity; each partner pays taxes on his/her share of the business' income

Corporation (C-Corp) definition

state-sanctioned business with legal identity separate and apart from its owners (shareholders) that can sue or be sued on its own

Corporation (C-Corp) owners

(shareholders') liability limited to amount of personal investment in corporation

Corporation (C-Corp) profits

profits taxed as income to corporation at entity level, as well as income to owners/shareholders via dividends, distributions, or payouts (double taxation)

Corporation (C-Corp) officers

board of directors hires officers who run day-to-day business operations

Corporation (C-Corp) advantages

- Separation of "ownership" and "control" as defining hallmark of corporation

- Limited liability for shareholders and officers

- Ease of raising capital by issuing (selling) additional stock

- Generally unlimited transferability of ownership

Corporation (C-Corp) disadvantages

- Double taxation

- Significant formalities required in establishing and maintaining corporate form

- Limited control over transferability of ownership

S Corporation Definition

business organization formed under federal tax law; considered corporation yet taxed like a partnership - avoids double taxation

S Corporation requirements

-cannot have more than 100 shareholders

-must have only one class of stock

-shareholders must be domestic individuals (no partnerships, corporations, or non-residents)

-shareholders must report income on their personal income tax forms

Limited Liability Company (LLC) definition

hybrid business organization with limited liability of a corporation yet taxed like partnership

how is Limited Liability Company (LLC) formed

under state law by filing articles of incorporation

Limited Liability Company (LLC) written

written operating agreement common but not required

Limited Liability Company (LLC) owners

- No limitation on number of owners permitted in LLC

- Owners of LLC (members) pay personal income taxes on shares they receive and report

- Individual liability generally limited to members' capital contributions

- Generally unlimited transferability of ownership unless operating agreement says otherwise

joint venture

relationship between 2 or more persons or corporations created for a specific business undertaking

what is joint venture often subject to

antitrust scrutiny when competitors agree to collaborate for specific projects or goals

franchise

agreement between franchisor and franchisee

franchisor

owner of trade name/trademark

franchisee

person who, by specific terms of agreement, sells goods/services under trade name/trademark

franchise document (Hallmark)

Hallmark creation is the franchise agreement document, which is a contract that creates/defines the franchising relationship (ex. Taco Bell)

franchise to franchisee advantages

- Franchisee receives significant assistance from franchisor in starting franchise

- Immediate trade name/trademark recognition and strength of brand

- Franchisor directs company-wide advertising campaigns

franchise to franchisee disadvantages

- Must meet contractual requirements or possibly lose franchise

- Little/no creative control over business strategy; franchisor retains significant control over business operations

franchise to franchisee regulations

many states have special franchise laws that differ from state to state and can make widespread growth more difficult

franchise to franchisor advantages

Low risk in starting a franchise because franchisees bear significant risk

Increased income from franchises through passive management and oversight

franchise to franchisor disadvantages

Little control (except contractually) over individual franchisees

Can become liable for franchisee liability if franchisor exerts too much control

Regulations: many states have special franchise laws that make widespread expansion more cumbersome

chain-style business operation

Franchise operates under franchisor's business name and is required to follow franchisor's standards and methods of business operation

distributorship

Franchisor manufactures product and licenses with a dealer to sell in an exclusive geographic territory

manufacturing agreement

Franchisor provides franchisee with technical knowledge and license to manufacture franchisor's product