QUESTIONS OF OWNERSHIP

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2 QUESTIONS OF OWNERSHIP Ownership will affect your business legally, financially, and personally throughout life of business Things to consider: Do you want to go into business by yourself? Do you want to establish a business with one or more people? Do you want a business in which many people share ownership? All have own advantages and disadvantages Three major types: Sole proprietorship Partnership Corporation

3 SOLE PROPRIETORSHIP Business established, owned, and controlled by a single person Can be all sizes Majority of businesses in the U.S. function as this Characteristics: Easiest to create Minimal government control Immediate start-up if prepared Must register your name and/or logo with state government so no one else can use this in the state

4 SOLE PROPRIETORSHIP Operation: Owner makes all of the decisions Must pay taxes an acquire necessary funds on your own Owner s debts may be paid off by their personal assets Report income/loss on personal tax form

5 SOLE PROPRIETORSHIP Advantages: Easy to start No formal set up needed Immediate start Owner controls everything Owner receives all profits Business pays no income tax Disadvantages: Unlimited liabilities Owner must make all decisions Owner is only one who can arrange financing Business ends if owner dies Assets of entrepreneurs are not separate assets of the business, i.e. if you cannot pay back business debt, personal assets will be used

6 PARTNERSHIP Uniform Partnership Act defines a partnership as two or more persons who carry on as co-owners of a business in order to make a profit Choose individuals who have skills/knowledge to compliment your own

7 PARTNERSHIP AGREEMENT Official document forming the contract between partners Use this document to avoid future conflicts

8 PARTNERSHIP AGREEMENT Parts to the agreement: Name of business or partnership Names of partners Type of investment of each partner: Cash Equipment Real estate Managerial responsibilities of each partner Parts to the agreement continued: Accounting methods to be used Division of profits and losses Money to be withdrawn by partners Duration of partnership Dissolution of partnership Distribution of assets upon dissolution Procedure if partner dies

9 TYPES OF PARTNERSHIPS General: Made up of general partner: Partner who actively engages in day-to-day management of business and is fully liable for any actions for, by, and against business Referred to as ordinary or regular

10 TYPE OF PARTNERSHIP Limited: Made up of both general and limited partners Limited partner: one who does not actively engage in the day-to-day management of the business and has limited liability to extent of their investment in the business They are investors Must have at least one general partner

11 TERMINATION OF A PARTNERSHIP Happens whenever someone enters or leaves the partnership Can happen through: Expelling: agreement may offer method of expulsion of a partner under stated circumstances (i.e. misuse of funds) Adding: bring in a new person to help with the business; new agreement must be created to include the new individual Termination: partners agree to end partnership Other legal terminations: Death Bankruptcy Insanity Illegal practices

12 PARTNERSHIP Advantages: Start-up can be simple Partnership pays no income taxes Share responsibilities of business Share all liabilities Liability is limited in limited partnership Disadvantages: High percentage of breakups Unlimited financial liability in general partnership Carry liabilities for errors of other partners Have less control individually Must share profits Termination will disrupt business

13 CORPORATIONS Legal entity created by law; often considered an invisible/artificial person Can do everything a real person can do: Pay taxes Accrue debt Enter contracts Be held liable for negligence Make a profit

14 CORPORATIONS Types of corporations: General: has unlimited number of stockholders who are protected from creditors of the business and liability is limited to their investment in the company Closed: shares of stock are owned by a few individuals associated with the business and not publicly traded; provides liability protection to a partnership without changing business structure S Corporation: profits pass to the owners and are only taxed at the individual level C Corporation: income is taxed at the corporate level and the individual level but can reinvest profits back into the company at a lower corporate tax rate LLC-Limited Liability Corporation: considered a hybrid of all major types of business ownership; members of company are not held liable for debts and liabilities of the business, but it must be dissolved if a member dies or goes bankrupt and should not be used if founder wants to eventually trade publicly

15 STARTING A CORPORATION Promoters: person(s) who create a corporation File Articles of Incorporation with the state in which they want to be incorporated Must include: Name of corporation Name and addresses of promoters Address of corporate office Explanation of why corporation will be formed Length of time desired for operation of corporation Names and addresses of those who will direct corporation

16 CORPORATIONS Must pay taxes Must receive charter (Certificate of Incorporation) in order to run legally Ownership is then determined by possession of stocks Shares of stocks are split by promoters to owners/shareholders The more shares you own, the more control you have Shareholders must then determine board of directors (group of individuals who make decisions about the running of the company)

17 CORPORATIONS Classifications: Domestic : when you engage in activities within the state in which you are incorporated Foreign: when employees do business in states outside of the incorporated state; may need permission to conduct business in the foreign state Public: owned by government entities (i.e. utilities) Private: owned by one or more individuals with fewer regulations than a public corporation Closely Held: similar to private but stocks are sold in small amounts to other people besides promoters or the promoters may choose to hold all of the stocks themselves

18 CORPORATIONS Advantages: Limited liability except for CEO of company Ability to raise capital through stocks Continuity of business Transferable ownership through purchase and sale of stocks Disadvantages: Double taxation: corporate level and individual level Charter costs of fees of attorneys and state requirements Regulations Lack of control: just because you own stock does not mean you have a say in day-to-day operations of business