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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*