Forms of Business Ownership

Partnerships

• Master Limited Partnership: a partnership that resembles a corporation but is taxed like a partnership, avoiding corporate income tax.
• Limited Liability Partnership: limits partners' risk to their personal assets, only liable for their own actions and those of people under their supervision.

Advantages of Partnerships

• More financial resources
• Shared management and pooled/complementary skills and knowledge
• Longer survival
• No special taxes

Disadvantages of Partnerships

• Unlimited liability
• Division of profits
• Disagreements among partners
• Difficult to terminate

Corporations

Advantages of Corporations

• Limited liability
• Ability to raise more money for investment
• Size
• Perpetual life
• Ease of ownership change
• Ease of attracting talented employees
• Separation of ownership from management

Disadvantages of Corporations

• Initial cost
• Extensive paperwork
• Double taxation
• Two tax returns
• Size
• Difficulty of termination
• Possible conflict with stockholders and board of directors

S Corporation

• A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships.
• Qualifications for S Corporations:
  • Have no more than 100 shareholders.
  • Have shareholders that are individuals or estates and are citizens or permanent residents of the U.S.
  • Have only one class of stock.
  • Derive no more than 25% of income from passive sources.

Limited Liability Company (LLC)

• Similar to an S corporation, but without the eligibility requirements.
• Advantages of LLCs:
  • Limited liability
  • Choice of taxation
  • Flexible ownership rules
  • Flexible distribution of profits and losses
  • Operating flexibility
• Disadvantages of LLCs:
  • No stock, therefore ownership is nontransferable

Forms of Ownership

• Sole Proprietorship: a business owned and usually managed by one person.
• Partnership: two or more people legally agree to become co-owners of a business.
• Corporation: a legal entity with authority to act and have liability apart from its owners.

Sole Proprietorship

Benefits of Sole Proprietorship

• Ease of starting and ending the business
• Being your own boss
• Pride of ownership
• Leaving a legacy
• Retention of company profit
• No special taxes

Disadvantages of Sole Proprietorship

• Unlimited liability
• Limited financial resources
• Management difficulties
• Overwhelming time commitment
• Few fringe benefits
• Limited growth
• Limited life span

Partnerships

Major Types of Partnerships

• General Partnership: all owners share in operating the business and in assuming liability for the business's debts.
• Limited Partnership: a partnership with one or more general partners and one or more limited partners.

Types of Partners

• General Partner: an owner (partner) who has unlimited liability and is active in managing the firm.
• Limited Partner: an owner who invests money in the business, but enjoys limited liability.