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Ownership (1 of 2)
Proprietorship:
Owner is the individual who starts the business. Has full responsibility for the operations.
Partnership:
General partnership owners and limited partnership owners.
Corporation:
Ownership is reflected by ownership of shares of stock. No limit to the number of shareholders.
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Liability of Owners
Sole proprietorship:
Individual is liable for business liabilities.
Partnership-general:
General partners share the amount of personal liability equally- regardless of their capital contribution Liable for all aspects of the business.
Partnership-limited:
Limited partners liable for amount of capital contribution.
By law must be registered at local court house
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Partnership-limited:
More complex than a general partnership- Must comply statutory requirements
Corporation:
Created by statute, articles of incorporation, filing fees, taxes, fees for states in which corporation registers to do business
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Continuity of Business
Sole proprietorship
Death of owner results in the termination of the business.
Partnership-general:
Death or withdrawal of one of the partners results in partnership termination, unless stipulated otherwise.
Partnership-limited:
Death or withdrawal has no effect on continuity of business- replace partner depending on the agreement
Corporation:
Death or withdrawal has no impact on continuation of business.
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Partnership-general:
Cannot sell their interest without first refusal from the remaining general partners.
Partnership-limited:
Can sell their interest at any time without consent of the general partners.
Corporation:
Shareholders may transfer their shares at any time without consent from the other shareholders. Disadvantage: It can affect the ownership control
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Capital Requirements
Sole proprietorship:
From loans or by additional personal contributions by the entrepreneur. Borrow from bank- B may need collateral to support loan
Partnership:
Loans can be obtained from banks but may require change in partnership agreement. Additional funds contributed by each of the partners wil also require a new partnership agreement
Management Control (1 of 2)
E in new venture will want to retain as much as control over the Business Each of the forms of Business offers different opportunities & problems as to Control |& responsibility for making business decisions
Sole proprietorship:
Entrepreneur is responsible for and has sole authority over all business decisions.
Partnership-general:
Can present problems if partnership agreement is not concise. Usually majority rules unless agreement states otherwise.
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Management Control (2 of 2)
Partnership-limited
Separation of ownership and control. Limited partners have no control over business decisions. Rights of all partners are clearly defined in the agreement.
Corporation:
Management has control over day-to-day business Majority stockholders control major long-term decisions through vote. Stockholders can indirectly affect operation by electing someone to the board of directors.
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Partnership-general:
Distribution of profits and losses depends on the agreement. Sharing of profits and losses likely to be a function of the partners investments.
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Corporation:
Distribute profits through dividends to stockholders. Losses will often result in no dividends.
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Partnership-general:
Depends on capability of partners and success of business.
Corporation:
Most attractive for raising capital. Shares of stock, bonds, and/or debt are all opportunities for raising capital with limited liability.
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Partnership-general:
Tax advantages and disadvantages similar sole proprietorship.
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Corporation:
Can take many deductions and expenses not available to proprietorship or partnership. Distribution of dividends is taxed twice. Double taxation can be avoided if income is distributed to entrepreneur(s) in the form of salary.
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Growth rate of the formation of S corporations has leveled off primarily because of the wide acceptance of LLCs.
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S Corporation
Combines the tax advantages of the partnership and the corporation. Passage of the 1996 law loosened some of the restrictions. In 2004, Congress responded to criticisms of the restrictions on S corporations as compared to LLCs.
Intent was to make the S corporation as advantageous as the LLC.
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S Corporation- Advantages
Gains/losses = ersonal income/loss. Limited Liability Protection. No minimum tax. Stock transferable. Stock = Voting or non-voting. Cash method of accounting. Long-term capital gains/losses deductible to shareholders.
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S Corporation- Disadvantages
Some restrictions for qualification. Potential tax disadvantages. Most fringe benefits not deductible for shareholders. Must have calendar tax year. One class of stock. Net loss limited to shareholders stock plus loans to business. No more than 75 shareholders.
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Advantages of LLC
LLC liabilities added to partnership interest. Most States do not tax LLCs. Ownership not limited to individuals. Members share income, profit, expense, etc., among themselves.
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Rewards.
Promotions-bonuses-praise so on (E responsible for these rewards)
Org evolves- E decision roles becomes critical Adapt to changes in the environment role of adaptor Pressure of unsatisfied customers-supplier-key employee threatening to quit Allocate resources-Negotiator (salaries, contracts, prices of raw material)
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Board of Directors (1 of 2)
Functions of the board of directors:
Reviewing operating and capital budgets. Developing longer-term strategic plans for growth and expansion. Supporting day-to-day activities. Resolving conflicts among owners or shareholders. Ensuring the proper use of assets.
BOD- important expertise & also add prestige(venture) Valuable for obtaining investors-supply relationships- identifying potential customers Criteria to select these BOD ( Read Book) Compensation for BOD- stock options (its important otherwise if members were only volunteers-take the role lightly)
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Board of Directors (2 of 2)
They must be chosen to meet the requirements of the Sarbanes-Oxley Act and the following criteria:
Individuals who can work with a diverse group and will commit to the ventures mission. Candidates who understand the market environment. Candidates who can contribute important skills to the new ventures achievement of planning goals. Candidates who will show good judgment in business decision making.
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Board of Advisors
More loosely tied to the organization. Serve the venture only in an advisory capacity. Has no legal status, unlike the board of directors. Likely to meet less frequently or depending on the need to discuss important venture decisions. Useful in a family business. Selection process for advisors can be similar to the process for selecting a board of directors. Compensated on a per meeting basis or with stock
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