Legal Forms of Organization

MANAGEMENT FUNDAMENTALS OF MANAGEMENT Ms. Lani Ann T. Macabinguil Course Instructor  LEGAL FORMS OF ORGANIZATION SUB-CHAPTER 4 TWO (2) PRIMARY FACTORS AFFECTING FORM OF OWNERSHIP DECISIONS LEGAL TAXES LIABILITI ES ...

MANAGEMENT FUNDAMENTALS OF MANAGEMENT Ms. Lani Ann T. Macabinguil Course Instructor  LEGAL FORMS OF ORGANIZATION SUB-CHAPTER 4 TWO (2) PRIMARY FACTORS AFFECTING FORM OF OWNERSHIP DECISIONS LEGAL TAXES LIABILITI ES  SOLE 1 Proprietorship A form of legal organization in which the owner maintains sole and complete control over the business and is personally liable for business debts  OWNERSHIP REQUIREME NTS DRAWBACKS Total responsibility one TAX TREATMENT Income and losses May be more difficult “pass through” to owner to raise financing and are taxed at personal rate SOLE PROPRIETOR DRAWBACKS SHIP LIABILITY Personal finances at risk Unlimited personal liability Unlimited Miss out on many business personal liability tax deductions Low start-up costs Owner has direct control All profits go to owner Easy to exit business Freedom from most regulations ADVANTAGES  GENERAL 2 Partnership A form of legal organization in which two or more business owners share the management and risk of the business  OWNERSHIP REQUIREME NTS DRAWBACKS Two or TAX more owners TREATMENT Income and losses “pass Potential for conflict through” to partners and Continuity of are taxed at personal rate; transfer of ownership flexibility in profit-loss allocations to partners GENERAL PARTNERSHI DRAWBACKS P LIABILITY Unlimited Unlimited personal liability personal liability Ease of formation Divided authority Some tax benefits and decisions Somewhat easier access to financing Pooled talent; Pooled resources ADVANTAGES  LIMITED LIABILITY 3 Partnership A form of legal organization consisting of general partner(s) and limited liability partner(s). Allows partners to limit their own liability for business debts according to their portion of ownership or investment.  OWNERSHIP REQUIREME NTS DRAWBACKS Two or TAX Limited partners more owners TREATMENT Income and losses “pass Cannot participate in through” to partners and management of business are taxed at personal rate; without losing liability flexibility in profit-loss protection allocations to partners LIMITED LIABILITY DRAWBACKS PARTNERSHI LIABILITY Cost and P Limited, although complexity of one partner must forming can Good way to retain unlimited be high acquire capital liability from limited partners ADVANTAGES  4 C Corporation A legal business entity that is separate from its owners and managers  OWNERSHIP REQUIREMENTS Unlimited number of DRAWBACKS shareholders; no limits on TAX types of stock or voting TREATMENT arrangements Dividend income is Double taxation taxed at corporate and Extensive record keeping personal shareholder Charter restrictions levels; losses and deductions are corporate CORPORATI DRAWBACKS ON LIABILITY Expensive to set up Closely regulated Limited Limited liability Transferable ownership Continuous existence Easier access to resources ADVANTAGES  LIMITED LIABILITY 5 Company A form of legal organization that’s a hybrid between a partnership and a corporation  OWNERSHIP REQUIREMENTS Unlimited number of members”; flexible TAX DRAWBACKS membership arrangements TREATMENT for voting rights Income and losses Need legal and and income “pass through” to partners financial advice in and are taxed at personal forming operating rate; flexibility in agreement LIMITED profit-loss allocations to partners LIABILITY DRAWBACKS COMPANY LIABILITY Cost of switching from one form to Limited this can be high Greater flexibility Taxed as partnership, not as corporation ADVANTAGES  ONE PERSON 5 CORPORATION Is a form of company with just one stockholder. This single stockholder is also the sole incorporator, director, and president.  OWNERSHIP REQUIREME NTS DRAWBACKS TAX OPC needs only a single stockholder. TREATMENT More paperwork and complexities. Incomes received by the OPC is subject to corporate income tax rate of 30%. LIMITED ONE LIABILITY PERSON DRAWBACKS COMPANY LIABILITY Limited to Natural Persons, Trusts, or Limited Estates. More opportunities, less liabilities ADVANTAGES  LEGAL FORMS OF ORGANIZATION SUB-CHAPTER 4