EC 4

Forms of Business Ownership

• No single "best" form of ownership exists; the best choice depends on the entrepreneur's specific situation.
• Key factors to consider include tax implications, risk exposure, startup and future capital needs, management control, business goals, succession planning, and formation costs.

Major Forms of Ownership (US)

• Sole Proprietorship
• Partnership
• Corporation
• S Corporation
• Limited Liability Company (LLC)
• Joint Venture

Percentage of Businesses (US)

• Sole Proprietorships: 71.6%
• C-Corporations: 5.6%
• S-Corporations: 12.8%
• Limited Liability Companies: 6.0%
• Limited Partnerships: 1.7%
• General Partnerships: 2.3%

Percentage of Sales (US)

• C-Corporations: 64.3%
• S-Corporations: 18.0%
• Sole Proprietorships: 3.9%
• Limited Liability Companies: 7.5%
• Limited Partnerships: 4.3%
• General Partnerships: 2.0%

Percentage of Net Income (US)

• C-Corporations: 39.0%
• S-Corporations: 15.6%
• Limited Liability Companies: 13.0%
• Sole Proprietorships: 11.8%
• Limited Partnerships: 12.3%
• General Partnerships: 8.2%

Sole Proprietorship

• Advantages: Simple to create, least costly to start, profit incentive, full control, no special legal restrictions
• Disadvantages: Unlimited personal liability, limited skills/abilities, feelings of isolation, limited access to capital.

Partnership

• Represents an association of at least two people co-owning a business for profit.
• It is wise to have a written partnership agreement specifying operating terms and protecting partners' business interests.
• Strong trust and mutual respect are crucial for success.

Partnership Agreement

• Covers partnership name and addresses, duration, business purpose, bank account details, contributions, compensation, management authority, operational responsibilities/decision processes, and voting/tiebreaker rules.
• Outlines terms for new partner admission, work hours/vacation, business activities allowed, handling partner departures.
• Defines dispute resolution and buy-sell agreements to address partner death, divorce, incapacity, or retirement.

Types of Partners

• General Partners: Active in business management, have unlimited liability for all business debts.
• Limited Partners: Not involved in day-to-day operations, have limited liability for business debts

Limited Partnership

• A partnership with at least one general partner and one or more limited partners.
• General partners have full liability; limited partners have limited liability. Limited partners are essentially investors.

Limited Liability Partnerships (LLPs)

• A limited partnership type where all partners are limited partners.
• This provides limited liability for business debts.
• An LLP does not pay taxes as income is passed through to its partners.

Corporation

• A separate legal entity from its owners that has the right to exist in the state of incorporation.
• Types:
  • Domestic: operates in the incorporating state.
  • Foreign: does business in another state than where it was incorporated.
  • Alien: formed in another country and operates in a U.S. state.
• Types (further):
  • Publicly held: numerous shareholders who trade stock publicly.
  • Closely held: small number of shareholders, often family or friends.

Avoiding Legal Tangles (Corporations)

• Company name should clearly denote it's a Corporation (e.g., "Inc.").
• File required reports and pay fees to the state.
• Hold regular officer/director meetings and document them.
• Decisions made are by the corporate governing board; officers sign all documents on behalf of the corporation.
• Maintain distinct separation of corporate assets from personal assets.

Articles of Incorporation

• Documents outlining company name, purpose, duration of business operations, names/addresses of incorporators, place of business.
• Details about capital stock authorization, initial capital, share transfer restrictions, names/addresses of officers/directors.
• Contains operating rules the corporation must adhere to.

C Corporation

• Traditional form of incorporation where the corporation and shareholders pay taxes separately resulting in double taxation.

Limited Liability Company (LLC)

• Combines aspects of partnerships and corporations but is not subject to many of the corporation restrictions,
• Characteristics: Limited liability, continuity of life, free transferability of ownership, centralized management.

Companies in Japan

• Four Main types exist; corporations (kabushiki-gaisha), LLCs (goudou-gaisha), general partnerships (goumei-gaisha), limited partnerships (goushi-gaisha).
• There is also a discontinued type called Yugen-gaisha.

Sole Proprietorship (Japan)

• A simple business structure with reduced tax obligations initially.
• Owners have full responsibility for all business earnings and debts.

How to establish a corporation (Japan)

• Plan business, coordinate among stakeholders
• Prepare incorporation documents, submit them for public notarization
• Establish a corporate account, transfer investment funds
• Prepare/seal documents for registration, register, get confirmation/certificate