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Choosing The Right Form of Business

Choosing The Right Form of Business. Entrepreneurship Mr Farrar. Objectives:. Describe the different forms of business Analyze and propose the best form of business for a desired business opportunity. What Are Your Choices. How many types of business forms can you name?

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Choosing The Right Form of Business

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  1. Choosing The Right Form of Business Entrepreneurship Mr Farrar

  2. Objectives: • Describe the different forms of business • Analyze and propose the best form of business for a desired business opportunity

  3. What Are Your Choices • How many types of business forms can you name? • sole proprietorship • Partnership • Corporation • S Corporation • “Sub S” Corporation • Limited Liability Corporation • Limited Liability Partnership

  4. Sole Proprietorship • A business owned and operated by one person • 70% of US businesses are operated by sole proprietors • ADVANTAGES • Relatively easy to start • All decisions made by owner • Taxed less than other forms of business • More freedom from government regulation

  5. Sole Proprietorship • DISADVANTAGES • Responsible for all debts or legal judgements • If debts exceed assets, creditors can claim all personal assets (home, car, savings) – called unlimited liability

  6. Partnership • Legal agreement between two or more people • Least common – about 10% of businesses • Profits usually divided in equal proportions according to the amount of time and money invested • Examples: real estate agencies, law offices, medical offices • TWO TYPES – General & Limited • Limited – Each limited partner is liable for any debts ONLY up to the amount of his/her investment in the company • Every limited partnership must have at least one partner with unlimited liability • Limited partners have no voice in management

  7. Partnership Advantages & Disadvantages ADVANTAGES • Less regulation and taxing than a corporation • Fairly easy to establish • Combination of skills & capital DISADVANTAGES • Unlimited liability • Profits taxed as personal income • Disagreements – responsible for partner’s acts • Death/Withdrawal ends partnership

  8. Corporation • Chartered by a state and legally operates apart from the owner(s) • Any size – but usually larger • People who work for corporation are not necessarily owners – stockholders are owners • Governed by boards who hire directors and officers to manage the business in the interest of the stockholders

  9. Corporation (cont) • Stockholders have limited liability – only liable to the extent of his/her investment • DISADVANTAGES • Greater government regulation • Complexity of forming it • Higher taxes on profits and stockholders • Intricate accounting/record keeping • ADVANTAGES • Easier to raise money for expansion • People can easily buy/sell stock to enter or leave organization • Can hire experts in management

  10. S Corporation • Separate and distinct from the corporation’s owners (stockholders) • Can only issue one class of stock • Maximum number of eligible stockholders is 75

  11. Subchapter S CorporationAKA “Sub S” Corporation • Small business taxed like a partnership or proprietorship • Provisions: no more than 35 shareholders • Must be incorporated in the US • No more than 20% of its gross revenues from investment income • No more than 80% of its gross revenues from foreign sources

  12. LLC – Limited Liability Corporation • Can be a sole proprietorship, partnership or corporation • A form of business ownership where the liability is limited to an investor's original capital investment, as opposed to a general partnership under which the partner or owner has unlimited liability.

  13. LLP – Limited Liability Partnership • A form of organization in which the individual partners are protected from the liabilities of the other partners. • Generally, the partners are not responsible for the debts, obligations, or liabilities of the partnership resulting from the actions or negligence of another partner.

  14. What to Consider When Deciding • Three things to keep in mind when choosing a legal form are: • Liability • Taxes • Ownership

  15. 1. Liability • Liability: Legally, corporations are individual entities. As such, the corporation -- not individual shareholders -- are responsible for the actions of the business. In other words, if something goes very wrong, and a corporation is sued, only the assets of the corporation are at stake -- not the owners' personal assets. (There are some exceptions to this rule, but generally, your personal liability is GREATLY limited.)

  16. 2. Taxes • Double taxation: No one likes paying taxes, and you certainly don't want to pay taxes twice -- once on income for the business and then again when that income is distributed as profits to you. Instead, look for a legal form that allows for the profits of the company to "pass through" to the owners, without having to pay corporate taxes first.

  17. Ownership • Ownership: Certain legal business forms limit the number or type of people who can invest in your company. If you're seeking a large number of investors or international investors, find a corporate structure that permits such stockholders.

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