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Business Organization

Before you run in double harness,look well to the other horse -

Ovid

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Factors of

Ownership

q Tax considerations

q Liability exposure

q Start-up capital requirementsq Control

q Managerial ability

q Business goalsq Management succession

q Cost of formation

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Major Forms of

Ownership

Sole Proprietorship

Partnership

Corporation

Limited Liability Company

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Hybrid Forms of Ownership

Limited Partnership

S Corporation

Cooperative

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Forms of Ownership

Partnership

72%

20%

8%

Proprietorship

Corporation

Forms of Ownership

(% of business)Source: Statistical Abstract

of the United States,2004-05, Table 716.

Proprietorship

11%

84%

4%

Corporation

Partnership

Forms of Ownership

(% of sales)Source: Statistical Abstract

of the United States, 2004-05, Table 716.

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Forms of Ownership

Non-Employers Only

Partnership

87%

6%

7%

Proprietorship

Corporation

Forms of Ownership

(% of business)Source: Statistical Abstract

of the United States,2004-05, Table 716.

Proprietorship20%

63%

17%Corporation

Partnership

Forms of Ownership

(% of sales receipts)Source: Statistical Abstract

of the United States, 2004-05, Table 716.

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Sole Proprietorship

q

Simple to create*q Low cost to start-up*

q Owner has control

q Few legalities

q Easy to dissolve

q

Single taxation

q Unlimited liability*q Limited skills & abilities

q Limited access to capital

q Lack of continuity

A business owned/managed by one individual

Advantages Disadvantages

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Partnerships

q

Easy to establish*q Complementary skills

q Pooling of resources

Ability, Capital, etc.

q Few legalitiesq Single taxation

q

Unlimited liability*q Dissolution

q Lack of continuity

q Potential for conflict

An association of 2 or more people (or groups)

who co-own a business

Advantages Disadvantages

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Types of Partners

q General Partners Share in the ownership and management of the business

Active role in the management of the business

Unlimited personal liability

All partnerships must have at least one general partner

q Limited Partners

Investors who do not participate in the day-to-daymanagement

Liability is limited to the amount they have invested

Any number of limited partners are allowed

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25 Attributes the Ideal Partner

Should Possess

1. Is a good team player

2. Does the job competently and skillfully

3. If a genuinely likable person

4. Is good at giving feedback

5. Is a good listener

6. Is open and receptive to feedback from

others

7. Treats people with dignity and respect

8. Looks for win-win solutions to

disagreements

9. Is good at facing tough problems10. Is a person you can trust

11. Will go to bat for other people

12. Gets along well with almost everybody

Source: Robert A Morris. Partner Wars. Inc., June 1994, p 38.

13. Uses time efficiently and effectively

14. Will admit it or apologize when wrong

15. Has what it takes to be a good manager

16. Is a good problem solver

17. Speaks his/her mind, even when its

unpopular18. Is well organized

19. Treats people fairly and equitably

20. Is good at giving compliments or

positive feedback

21. Is enjoyable to be around

22. Is open to others ideas and opinions

23. Is level-headed, even under stress24. Presents ideas clearly and articulately

25. Has good people skills

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Standard Partnership

Agreement

q Name of Partnership

q Purpose of Business

q Names/Legal Addresses of Partners

q Contributions of Each Partner to the Business

q How Profits/Losses are Distributed

q Salaries or Drawing Rights

q Procedure for Expansion Through Addition of New Partners

q How Assets Are to be Distributed

q Sale of Partnership Interest

q Absence or Disability of a Partner

q Alterations/Modifications of Partnership Agreement

q Dissolution of the Partnership

NEVER operate

a partnership

without a written

agreement!!

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The Seven Best Ways to Pester Your

Partner

1. Great minds think alike - but its your mind your partner should bethinking like.

2. Just because your partner tries to make a point doesnt mean you have toacknowledge it. Doodling and gazing out the window are effectivediversions.

3. Why risk unpleasant encounters? If ignored long enough, conflicts settlethemselves.

4. Your partner sees your company as maturing and in need of broadertalents. You see it as still your baby and in need only of you.

5. Handing out positions to offspring is a prerogative of ownership, but

must you put up with your partners kid when yours is so much smarter?

6. The irksome shortcoming your partner exhibits cant have been inspiredby you, insofar as you have no irksome shortcomings.

7. Business is business. Admiration, respect, and loyalty your partner canget from a pet.

Source: Robert A. Mamis, Two Who Made Good, Inc., June 1994, p.44.

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Corporations

q Limited liability of

stockholders*

q Ability to attract capital*

q Indefinite continuityq Ease of transfer

q Start-up costs and procedures

q Double taxation*

q Agency costs

q Legal requirements

q Potential loss of control by

the founder(s)

A separate entity, apart from its owners; may engage in

business, make contracts, sue, be sued, and pay taxes

Advantages Disadvantages

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Types of Corporations

q C Corporations

Typical corporate structure

Corporate tax rates; benefits are tax-advantaged

q S Corporations

Closely-held corporation (less than 75 shareholders)

Taxed at personal rates; benefits arent as tax-adv.

q Cooperatives

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Limited Liability

Companies (LLC)

q Limited liability*q Taxed at personal rates

q No double taxation

q Flexibility

Can act like corporation or

partnership

q Red-Tape can beconfusing to create

q Relatively expensive to create

q Relatively new form of

organization Not many legal precedents

Hybrid of a partnership and a corporation

Advantages Disadvantages

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So which is it gonna be?

q Main determinants:

Tax implications

Ease & cost of starting & maintaining

Liability (but not a substitute for liability insurance!)

Transferability

q

You can make one form look almost identical to anyother form

Get legal assistance*