Chapter 2 Business Chapter 2 Business Planning and OrganizationPlanning and Organization

BCN 4708 Fall 2008BCN 4708 Fall 2008

Business TypesBusiness Types

Sole ProprietorshipSole ProprietorshipPartnershipPartnership

General Vs LimitedGeneral Vs LimitedJoint VenturesJoint VenturesCorporationCorporationS-Corporation aka Subchapter SS-Corporation aka Subchapter S

Sole ProprietorshipSole Proprietorship

Simplest form of Business organizationSimplest form of Business organization Owner is manager and makes all decisionsOwner is manager and makes all decisions Compliance with state and local business Compliance with state and local business

licensing requirements onlylicensing requirements only Advantages: easy to create, total control by Advantages: easy to create, total control by

owner, transferable, and liquidityowner, transferable, and liquidity Disadvantages: personal liability, death of Disadvantages: personal liability, death of

owner, must use property to secure loans, taxes owner, must use property to secure loans, taxes and benefits not tax deductible. and benefits not tax deductible.

PartnershipPartnership Two or more persons in an agreementTwo or more persons in an agreement Co-ownersCo-owners

liabilityliability Partnership agreement (like a Business Plan)Partnership agreement (like a Business Plan)

General PartnershipGeneral Partnership Pooled resourcesPooled resources

Limited PartnershipLimited Partnership At least one general partner and one or more limited At least one general partner and one or more limited

partnerspartners Limited partner Capital for Return on capitalLimited partner Capital for Return on capital Limited say limited liabilityLimited say limited liability

PartnershipPartnership

Advantages: increased ability to raise Advantages: increased ability to raise capital, pooling of resources, pooling of capital, pooling of resources, pooling of talents, shared responsibility and talents, shared responsibility and minimal administration costs.minimal administration costs.

Disadvantages: General partners have Disadvantages: General partners have unlimited liability, termination upon unlimited liability, termination upon death, bankruptcy or withdrawal, non-death, bankruptcy or withdrawal, non-transferable, benefits not tax-deductibletransferable, benefits not tax-deductible

Joint VenturesJoint Ventures

Special combination of two or more Special combination of two or more persons or entities.persons or entities.

Specific VentureSpecific VentureNo designation as a partnership or No designation as a partnership or

corporationcorporationSame rules as partnershipSame rules as partnershipUsually limited to single transactionsUsually limited to single transactions

CorporationCorporation

Creations of statutesCreations of statutesSeparate legal entity under the laws of Separate legal entity under the laws of

statestateSame rights as individuals haveSame rights as individuals haveMost costly to formMost costly to form Issues StockIssues Stock

ESOPESOP

CorporationCorporation

Advantages: Exemption of liability, Advantages: Exemption of liability, continuity of existence, death has no continuity of existence, death has no effect, high level of management, effect, high level of management, transferable ownership, fringe benefits are transferable ownership, fringe benefits are tax deductible, and able to raise capital. tax deductible, and able to raise capital.

Disadvantages: Lack of centralized Disadvantages: Lack of centralized control, closely regulated, expensive, control, closely regulated, expensive, record keeping, and double taxation.record keeping, and double taxation.

S-CorporationS-Corporation

Shareholders absorb all corp. income or Shareholders absorb all corp. income or losses; report as individual taxpayers.losses; report as individual taxpayers.

Eliminates the problem of double taxation.Eliminates the problem of double taxation. IRS regulationsIRS regulationsHas most of the same advantages and Has most of the same advantages and

disadvantages.disadvantages.

S-CorporationS-Corporation

Must be domesticMust be domestic One class of stockOne class of stock Only individuals and estates can be shareholdersOnly individuals and estates can be shareholders Cannot be part of another organizationCannot be part of another organization Max number of shareholdersMax number of shareholders No non-resident alien shareholdersNo non-resident alien shareholders 20% of revenue must be from domestic sources20% of revenue must be from domestic sources Dividends, interest, royalties, rents, annuities, and Dividends, interest, royalties, rents, annuities, and

securities transactions < 20% of total revenue securities transactions < 20% of total revenue

LLCLLC Owners will be the same from the beginning to the end.  Owners will be the same from the beginning to the end.  There is no stock in an LLC.  There is no stock in an LLC.  The ownership is represented by 100% membership interest.  The ownership is represented by 100% membership interest.  Typically used when you have investment in real estate or a rental Typically used when you have investment in real estate or a rental

property, property, The tenants should have no doubt that the owner is not you, it is a The tenants should have no doubt that the owner is not you, it is a

company.  company.  An LLC is treated like a corporation for tax purposes.  An LLC is treated like a corporation for tax purposes.  It can have the same flow through attribute an S corporation is It can have the same flow through attribute an S corporation is

allowed.  allowed.  It can also have a closed status, like a C corporation.  It can also have a closed status, like a C corporation.  There is no record keeping requirements with an LLC.  There is no record keeping requirements with an LLC.  There is no board of directors.  There is no board of directors.  No requirement to hold board of directors or shareholders No requirement to hold board of directors or shareholders

meetings.  meetings.  Therefore there are no corporate minutes.  Therefore there are no corporate minutes. 

Control of BusinessControl of Business

Sole Proprietorship – absolute power over Sole Proprietorship – absolute power over all decisions.all decisions.

Partnership – Control is shared between Partnership – Control is shared between partners as per the agreementpartners as per the agreement

Corporation- depends on stock ownership, Corporation- depends on stock ownership, exercised through regular board meetings exercised through regular board meetings by the board of directorsby the board of directors