Transcript Forms of Business Organization (Week 1)

FORMS OF
BUSINESS
ORGANIZATION
FORMS OF BUSINESS ORGANIZATION
Introduction and Understanding of
 Three Principal Forms of Business
Organization
 Essential Attributes and Characteristics
 Analyzing Business Needs and
Selecting Appropriate Business Form
Organizational Form: Questions to Ask
How many “Owners” will there be today?
In the future?
Costs to Form and Operate?
Taxes: Will there be any Income to tax?
All taxes come due eventually!
Is Limiting Liability Important? What kinds
of Liability: Contractual or Tort
(Express and Implied Warranties)?
Obtaining Future Financial Capital?
FORMS OF BUSINESS ORGANIZATION
Organizational Forms determined by
 Owner’s Objectives: Liability, Profit
Distribution, Taxation and Capital Structure
 Dealings with Outside World: Other Owners,

Heirs, Employees, Customers and Future
Owners of Business
Legislative Goals: Special-Purpose Entities to
encourage investments, in, for example,
Small Businesses or Affordable Housing
FORMS OF BUSINESS ORGANIZATION
Three Organizational Forms
developed by Business Owners
 Sole Proprietorship
 General Partnership
 Corporation
FORMS OF BUSINESS ORGANIZATION
DEFINITIONS
Sole Proprietorship
Any Business Owned
and Operated by an
Individual
General
Partnership
Corporation
Two or More
Persons
Operating a
Business for a
Profit
Legislatively
Created and
Regulated
Governance,
Ownership and
Financial
Structure
FORMS OF BUSINESS ORGANIZATION
FORMATION
Sole
Proprietorship
No Formalities or
Legal
Documentation;
May be Implied
from Conduct or
Actions
General
Partnership
Corporation
Filing of Articles
Written or Oral
of Incorporation
Agreement or
with Secretary of
May be Implied
State and
from Conduct or
Payment of
Actions
Fees
FORMS OF BUSINESS ORGANIZATION
GOVERNING DOCUMENTS
Sole
Proprietorship
General
Partnership
Corporation
None Required
None Required;
Most have
Agreement
specifying Rights,
Duties and
Obligations
Articles of
Incorporation
create Corporation;
Bylaws prescribe
its Operation
Articles of
Incorporation
FORMS OF BUSINESS ORGANIZATION
NATURE OF OWNERSHIP
Sole
Proprietorship
General
Partnership
For Contribution,
Partner receives
Wholly Owned by
Proportionate Share
Single Individual
of Profits/Losses and
Partnership Property
Corporation
Residual
Claim on Corporate
Equity and Right to
Vote for Directors
and Essential
Governance
FORMS OF BUSINESS ORGANIZATION
LIABILITY
Sole
Proprietorship
General
Partnership
Sole Proprietor Partners are Jointly
Personally
and Severally Liable
Liable for All
for all Partnership
Debts and
Obligations, in
Obligations
Contract and in Tort
Corporation
Shareholder’s
Liability limited to
Extent of Capital
Contribution
[Limited Liability]
FORMS OF BUSINESS ORGANIZATION
TAXATION
Sole
Proprietorship
General
Partnership
Not a Taxable
Entity; Income
(Loss) passes
through to Sole
Proprietor
Partnership not a
Taxable Entity;
Allocations of
Income and Loss
allowed within
Partnership before
Pass-Through
Corporation
Corporation
taxed as Separate
Entity and
Dividends/Capital
Gains also Taxed
[Double Taxation]
FORMS OF BUSINESS ORGANIZATION
MANAGEMENT
Sole
Proprietorship
General
Partnership
Sole Proprietor
has Complete
Management
Control
All Partners have
Equal Rights in
Partnership’s
Management and
Conduct
Corporation
Managed by
Board of Directors
elected by
Shareholders; Board
may Delegate
Authority to
Appointed Officers
FORMS OF BUSINESS ORGANIZATION
TRANSFER OWNERSHIP INTERESTS
Sole
Proprietorship
Sole
Proprietorship not
Transferable;
Property and
Products are
Transferable
General
Partnership
Corporation
Limited Right of
Transfer subject
to Consent by all
Partners
Freely
Transferable
through Formal
(NYSE) and
Informal (Private
Equity) Capital
Markets
FORMS OF BUSINESS ORGANIZATION
WITHDRAWAL OF OWNER
Sole
Proprietorship
General
Partnership
Corporation
Terminates
Sole
Proprietorship
Partner Death or
Withdrawal may
Terminate
Partnership
Corporation has
Unlimited Life
THE AGENCY PROBLEM
Occurs when (1) Goals of Principal and Agent Conflict and
(2) Principal cannot Verify what Agent is doing
Corporate Shareholders
(Principal)
Corporate Management
(Agent)
 Investor: Maximum Returns
 Manager: Stable Returns
(High-Risk/High-Return)
(Low-Risk/Low-Return)
 Cannot operate Business
 Liability is Limited: Can
 Can operate Business
 Unlimited Liability: Lose
Lose only Investment
Job and Income
FIXES FOR AGENCY PROBLEM
Align Manager’s Interests with Shareholders with Incentivebased Compensation (Bonuses) and Stock Options linked
to Corporation’s Performance
Improve Corporate Governance with Shareholder Activism:
Change Rules for Nominating Directors
For Small Businesses: Shareholders and Managers required
by Lenders to personally guarantee Loan Repayment
SPECIAL PURPOSE ENTITIES (SPE)
Limited
Partnership
Limited Liability
Corporation
(LLC)
General Partner
(Manager with
Hybrid with Corporate
Unlimited Liability) and Liability Protections
Limited Partner
and Partnership Tax
(Investors with Limited
Treatment
Liability)
Subchapter-S
Corporation
Identical to
“Subchapter-C”
Corporation except
Income/Losses Pass
Through to
Shareholders