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McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved
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Chapter 3Chapter 3
Forms of Forms of Ownership Ownership
of Small of Small BusinessBusiness
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McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved
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Forms OfBusiness Ownership
Primary Legal FormsPrimary Legal Forms
Advantages & Disadvantages Advantages & Disadvantages Of Each FormOf Each Form
Other Legal FormsOther Legal Forms
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apte
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McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Right Legal Form:Right Legal Form:Business Factors To ConsiderBusiness Factors To Consider
Future SizeFuture Size NatureNature Desired ControlDesired Control Legal VulnerabilityLegal Vulnerability Tax ImplicationsTax Implications Expected Profit (Loss)Expected Profit (Loss) Re-investmentRe-investment Personal Cash NeedsPersonal Cash Needs
PhotoLink/Getty Images
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RelativeRelativePositions Of Legal FormsPositions Of Legal Forms
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Legal Form By IndustryLegal Form By Industry
0%
10%
20%
30%
40%
50%
60%
70%
80%
Services Trade Construction Finance/Ins. &Real Estate
Manufacturing
Proprietorship Partnership Corporation
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Legal FormLegal FormBy Industry’s ReceiptsBy Industry’s Receipts
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Services Trade Construction Finance/Ins. &Real Estate
Manufacturing
Proprietorship Partnership Corporation
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ProprietorshipProprietorshipAdvantages/DisadvantagesAdvantages/Disadvantages
Insert Insert Figure 3.2Figure 3.2
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Partial List Of FederalPartial List Of FederalTax Forms: Sole ProprietorshipTax Forms: Sole Proprietorship
Form 1040: Form 1040: IndividualIndividual Income Tax Income Tax ReturnReturn
Schedule C: Schedule C: BusinessBusiness Profit (Loss) Profit (Loss) Schedule SE: Self-Employment TaxSchedule SE: Self-Employment Tax Form 1040EZ: Estimated Tax For Form 1040EZ: Estimated Tax For
IndividualsIndividuals Form 4562: Depreciation & AmortizationForm 4562: Depreciation & Amortization Form 8829: Expenses For Business Use Form 8829: Expenses For Business Use
Of Your HomeOf Your Home Employment Tax Forms Employment Tax Forms
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Schedule CSchedule C
FrontFront
BackBack
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PartnershipPartnershipAdvantages/DisadvantagesAdvantages/Disadvantages
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Operation ofOperation ofGeneral PartnershipGeneral Partnership
Uniform Partnership ActUniform Partnership Act Partners Responsible Partners Responsible
For Other Partners’ For Other Partners’ ActionsActions
Liability:Liability: Personal Property At RiskPersonal Property At Risk All Debts Of FirmAll Debts Of Firm
Resolve Disputes Resolve Disputes Among Partners(?)Among Partners(?)
S. Wanke/PhotoLink/Getty Images
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Types Of PartnershipsTypes Of Partnerships
GeneralPartner
GeneralGeneralPartnerPartner
GeneralGeneralPartnerPartner
Partners Liable For Partners Liable For Each Others’ ActionsEach Others’ Actions
GeneralGeneralPartnerPartner
LimitedLimitedPartnerPartner
LimitedLimitedPartnerPartner
LimitedLimitedPartnerPartner
Manage With Manage With Unlimited LiabilityUnlimited Liability
Liability = Capital Liability = Capital ContributionContribution
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Partnership:Partnership:Legal/Tax DocumentsLegal/Tax Documents
Articles of Co-PartnershipArticles of Co-PartnershipTax FormsTax Forms
o Form 1065 K-1: Partner’s Share Of Form 1065 K-1: Partner’s Share Of Income, Credit, DeductionsIncome, Credit, Deductions
o Form 4562: DepreciationForm 4562: Depreciation
o Form 1040: Individual Income Tax ReturnForm 1040: Individual Income Tax Return
o Schedule E: Supplemental Income & LossSchedule E: Supplemental Income & Loss
o Schedule SE: Self-Employment TaxSchedule SE: Self-Employment Tax
o Form 1040-ES: Estimated Tax For IndividualForm 1040-ES: Estimated Tax For Individual
o Employment Tax FormsEmployment Tax Forms
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Form 1065 K-1 (Pages 1 & 2)Form 1065 K-1 (Pages 1 & 2)
FrontFront
BackBack
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Form 1065 K-1 (Pages 3 & 4)Form 1065 K-1 (Pages 3 & 4)
FrontFront
BackBack
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CorporationCorporationAdvantages/DisadvantagesAdvantages/Disadvantages
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Form 1120AForm 1120A
FrontFront
BackBack
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Form 1120 (Pages 1 & 2)Form 1120 (Pages 1 & 2)
FrontFront
BackBack
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Form 1120 (Page 3 & 4)Form 1120 (Page 3 & 4)
FrontFront
BackBack
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Formation Of CorporationFormation Of Corporation
Articles Of Incorporation- Articles Of Incorporation- Filed With StateFiled With State
Corporate Charter- Corporate Charter- Comes From StateComes From State
Buy-Sell Agreement- Buy-Sell Agreement- Include In Articles Of Include In Articles Of IncorporationIncorporation
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Corporate GovernanceCorporate Governance
StockholdersStockholders
Board Of Board Of DirectorsDirectors
Corporate Corporate OfficersOfficers
ElectsElects
AppointsAppoints
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S CorporationS CorporationExempt From Multiple TaxationExempt From Multiple TaxationLess Than 100 StockholdersLess Than 100 StockholdersOne Stock Class- CommonOne Stock Class- CommonNo Corporations Or No Corporations Or
Partnerships Can Be Partnerships Can Be StockholdersStockholders
Stockholders = U.S. Citizens Stockholders = U.S. Citizens Or Permanent Residents Or Permanent Residents
Early 1990s Lost Appeal Early 1990s Lost Appeal Because Of Tax Law ChangeBecause Of Tax Law Change
TAXES
Royalty-Free/CORBIS
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Partial List Of FederalPartial List Of FederalTax Forms: S CorporationTax Forms: S Corporation
Form 1120S: Income Tax Return For S Form 1120S: Income Tax Return For S CorporationCorporation
Form 1120S K-1: Shareholder’s Form 1120S K-1: Shareholder’s Share Of Income, Credit, Share Of Income, Credit, Deductions Deductions
Form 4625: DepreciationForm 4625: DepreciationEmployment Tax Forms Employment Tax Forms Form 1040: Individual Tax ReturnForm 1040: Individual Tax ReturnSchedule E: Supplemental Income Schedule E: Supplemental Income
(Loss)(Loss)Schedule SE: Self-Employment TaxSchedule SE: Self-Employment TaxFrom 1040ES: Estimated Tax For From 1040ES: Estimated Tax For
IndividualsIndividualsOther Forms Other Forms
Royalty-Free/CORBIS
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Form 1120S (Page 1 & 2)Form 1120S (Page 1 & 2)
FrontFront
BackBack
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Form 1120S (Page 3)Form 1120S (Page 3)
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LimitedLimitedLiability CompaniesLiability Companies
Since 1977Since 1977Benefits:Benefits:
Limited LiabilityLimited LiabilityTaxed As PartnershipTaxed As Partnership
Similar To S CorporationSimilar To S CorporationOwners = MembersOwners = MembersLifespan- Determined At Lifespan- Determined At
OrganizationOrganization
Emma Lee/Life File/Getty Images
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Other LegalOther LegalForms Of OwnershipForms Of Ownership
Limited Liability PartnershipLimited Liability Partnershipo Protects Individual PartnersProtects Individual Partnerso Not Recognized By Every StateNot Recognized By Every State
Family Limited Liability Family Limited Liability PartnershipPartnershipo Partners RelatedPartners Relatedo Agriculture/Family FarmsAgriculture/Family Farms
Professional Service CorporationProfessional Service Corporationo Provides Licensed Professional ServicesProvides Licensed Professional Serviceso Doctors, Lawyers, & AccountantsDoctors, Lawyers, & Accountants
F. Schussler/PhotoLink/Getty Images
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Nonprofit CorporationsNonprofit CorporationsCivic, Charitable, Educational, Civic, Charitable, Educational,
ReligiousReligiousTax ExemptTax Exempt
CooperativeCooperativeIndependent ProducersIndependent ProducersBuys/Sells For ClientsBuys/Sells For Clients
Joint VentureJoint VentureFractional OwnershipFractional Ownership
Other LegalOther LegalForms Of Ownership (cont’d)Forms Of Ownership (cont’d)
Royalty-Free/CORBIS
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Checklist ForChecklist ForLegal Form EvaluationLegal Form Evaluation