Chapter 35 Forms of Business Organizations PDF

Chapter 35 Forms of Business Organizations McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.  Major Forms of Business Organizations Sole Proprietorship General Partnership Limited P...

Chapter 35 Forms of Business Organizations McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.  Major Forms of Business Organizations Sole Proprietorship General Partnership Limited Partnership Corporation 35-2  Sole Proprietorship Defnition: Uninoorporated business owned by one person Owner has total oontrol Owner has unlimited liability Profts taxed direotly as inoome to sole proprietor 35-3  Advantages and Disadvantages of Sole Proprietorship Advantages Ease of oreation (“start-up”) Owner has total managerial oontrol Owner retains profts Disadvantages Personal liability for all business debts/obligations Funding limited to personal oontributions and loans 35-4  General Partnership Defnition: Uninoorporated business owned and operated by two or more persons Eaoh partner has equal oontrol of business Eaoh partner has unlimited, personal liability for business debts/obligations Profts taxed as inoome to partners 35-5  Advantages and Disadvantages of Partnership Advantages Ease of oreation (“start-up”) Partnership inoome is partner inoome Business losses qualify for tax deduotion Disadvantages Personal liability for all business debts/obligations, inoluding those inourred by other partners on behalf of partnership 35-6  Limited Partnership Defnition: Uninoorporated business with at least one general partner, and one limited partner General partner in limited partnership has managerial/operational oontrol over business Limited partner’s liability limited to extent of his/her oapital oontributions Limited partner has no managerial/operational oontrol over business 35-7  Corporation Defnition: State-sanotioned business with legal identity separate and apart from its owners (shareholders) Owners’ (shareholders’) liability limited to amount of investment in oorporation Profts taxed as inoome to oorporation, plus inoome to owners/shareholders (“double-taxation”) “S” Corporation oan avoid double-taxation 35-8  Advantages and Disadvantages of Corporation Advantages Limited liability for shareholders Ease of raising oapital by issuing (selling) stook Disadvantages “Double-taxation” Formalities required in establishing and maintaining oorporate existenoe 35-9  “S” Corporation Defnition: Business organization formed under federal tax law that is oonsidered oorporation, yet taxed like a partnership Formed under federal law No more than seventy-fve shareholders Shareholders must report inoome on their personal inoome tax forms 35-10  Limited Liability Company (LLC) Defnition: Business organization with limited liability of a oorporation, yet taxed like partnership Formed under state law Owners of LLC (“members”) pay personal inoome taxes on shares they report No limitation on number of owners permitted in LLC 35-11  Chapter 35 Ethical Dilemma As this chapter indicates, a corporation is a legal construct with an identity separate and apart from its owner(s). The primary legal advantage to converting one’s business from an unincorporated enterprise to the corporate form is the ability to avoid personal liability for the business’s fnancial obligations. Since the corporation is distinguishable from its owner, the owner’s personal assets cannot be seized to satisfy business obligations. This efectively means that an owner can “crash and burn” a corporation fnancially, bankrupt the business, and walk away from the “faming wreckage” of the corporation without personal obligation for business debts. Is it ethical for an owner to use the corporate entity to avoid personal obligation for business debts? 35-12  Chapter 35 Case Hypothetical Allison Seizer has a very wealthy father, businessman Warren Seizer of “Chime” restaurant fame, although her family pedigree was not what attracted Blake Patterson to his girlfriend of three years; instead, it was “love at frst sight.” Blake proposes to Allison, and the two are married with the blessing of Warren Seizer. Warren wants the best for his daughter and son-in-law, so he ofers a “Chime” franchise to Blake, with a prime location in the center of the Elmwood business district. After one year, it is clear that the newest “Chime” is and will be a tremendous business success. In fact, sales, revenue and proft goals for the restaurant are shattered in its frst year of operation, and Blake would like to think that his “hands-on” ownership and operation of the restaurant was an important part of the store’s success. Unfortunately, the couple’s relationship has sufered over the year. Blake asks for his freedom, and Allison obliges. Wedding bells have been replaced by divorce attorneys. Warren Seizer is furious. He is frmly convinced that Blake is to blame for the marriage’s dissolution, because there is no conceivable way (at least in his mind) that his “angel,” could be responsible for the divorce. The creative genius behind “Chime” plots justice for his daughter and himself, although some may call it revenge. On September 1, Warren Seizer personally delivers a Notice of Termination of Franchise to Blake Patterson. The document states that Patterson’s franchise agreement has been terminated for cause, and that he must either close the restaurant, or cease and desist from using the name “Chime,” advertising the franchise chime logo, and selling all franchise-related products, within 30 days. Who wins: The “ex-father-in-law,” or the “ex-son-in-law?” 35-13  Specialized Forms of Business Organizations Cooperative—Organization formed by individuals to market produots Joint stook oompany—Partnership agreement in whioh oompany members hold transferable shares, while all oompany goods are held in names of partners Business Trust—Business organization governed by group of trustees, who operate trust for benefoiaries Syndioate—Investment group that forms for purpose of fnanoing speoifo large projeot Joint Venture—Relationship between two or more persons/oorporations oreated for speoifo business undertaking Franohise—Agreement between “franohisor” (owner of trade name/trademark) and “franohisee” (person who, by speoifo terms of agreement, sells goods/servioes under trade name/trademark) 35-14  Advantages and Disadvantages of Franchise (To Franchisee) Advantages Assistanoe from franohisor in starting franohise Trade name/trademark reoognition Franohisor advertising Disadvantages Must meet oontraotual requirements, or possibly lose franohise Little/no oreative oontrol over business 35-15  Advantages and Disadvantages of Franchise (To Franchisor) Advantages Low risk in starting franohise Inoreased inoome from franohises Disadvantages Little oontrol (exoept oontraotually) over individual franohise Can beoome liable for franohise, if franohisor exerts too muoh oontrol 35-16  Types of Franchises “Chain-Style” Business Operation Franohisor helps franohisee establish a business (using franohisor’s business name, and franohisor’s standard “methods and praotioes”) Distributorship Franohisor lioenses franohisee to sell franohisor’s produot in speoifo area Manufaoturing Arrangement Franohisor provides franohisee with teohnioal knowledge to manufaoture franohisor’s produot 35-17 Top Ten Global Franchises (2009) Subway Aoe Hardware Corp. MoDonald’s Pizza Hut Liberty Tax Servioe UPS Store Sonio Drive In Cirole K Restaurants Papa John’s Interoontinental International, Ino. Hotels Group 35-18