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Forms of Business Ownership and Buying an Existing Business - Coggle…
Forms of Business Ownership and Buying an Existing Business
Choosing a Form of Ownership
There is no one “best” form of ownership.
The best form of ownership depends on an entrepreneur’s particular situation.
Key: Understanding the characteristics of each form of ownership and how well they match an entrepreneur’s business and personal circumstances.
Factors Affecting the Choice
Control
Entrepreneur must decide early on how much control they are willing to sacrifice in exchange for help from other people.
Managerial ability
Entrepreneur must assess their skills and abilities to manage a business effectively.
Start-up and future capital requirements
Business goals
How big and how profitable an entrepreneur plans for the business to become influences the form of ownership choose.
Liability exxposure
Eg: Faulty products, lawsuit, other difficulties
Entrepreneur must decide the extent to which they are willing to assume personal responsibility for their companies’ financial obligation
Management succession plans
Business owner must look ahead to the day when they will pass their companies on the next generation or to a buyer.
Tax Considerations
The amount of net income an entrepreneur expect to generate, and the tax bill the owner must pay are important factor
Cost of formation
Major Forms of Ownership
General Partnership
Limited Partnership
Sole Proprietorship
Corporation
Sole Proprietorship
A business owned and managed by one individual; the business and the owner are one and the same in the eyes of the law.
Advantages of a Sole Proprietorship
Total decision making authority
The freedom of fast, flexible decisions
No special legal restrictions
Least costly form to begin
There is no need to create and file legal documents
EPF. SOCSO, State Labor department, Sales Tax License (IRB, LHDN)
Least expensive
Profit incentive
Once owner pay all their companies’ expenses, they can keep the remaining profits.
Sole proprietors report the net income and the amount is taxed at the entrepreneur’s personal tax rate
Simple to create
Obtain license from state/country, or local government and begins operation.
For most entrepreneur it is possible to start in a single day.
Easy to discontinue
Can terminate the business quickly, even though he or she will still be personally liable for outstanding debts
Disadvantages of a Sole Proprietorship
Feelings of isolation
pressure alone
Limited access to capital
Most banks and lending institutions have well-defined formula for determining borrower’s eligibility.
Many sole proprietors cannot meet borrowing requirements.
Proprietors difficult to raise additional money and maintain sole proprietors.
Limited skills and capabilities
Many business failures occur because lack the skills, knowledge, and experience in areas that are vital to business success.
Lack of continuity of the business
If the proprietor dies, retires, or become incapacitated, the business automatically terminates.
Unlimited personal liability
The company's debts are the owner's debts
If unpaid business debts remain, creditors can force the sale of these assets to cover its debts.
Advantages of the Partnership
Division of profits
The partnership agreement should articulate each partner’s contribution to the business and his or her share of profits.
Larger pool of capital
Each partner’s asset base enhances the business’s pool of capital and improves its ability to borrow needed funds.
Complementary skills of partners
In successful partnership, the parties’ skill and ability complement one another. Strengthening the companies’ managerial foundation.
Ability to attract limited partners
Easy to establish
Inexpensive. Obtain necessary business licenses and submit minimal numbers of forms.
Minimal government regulation
Flexibility
The partners can respond quickly and creatively to new opportunities
Taxation
A partnership is not subjected to federal taxation,
Limited Partnership
A partnership composed of at least one general partner and at least one limited partner.
Disadvantages of the Partnership
Difficulty in disposing of partnership interest without dissolving the partnership
Potential for personality and authority conflicts
Making sure that the partners’ work habits, goals, ethics, and general philosophy are compatible.
Capital accumulation
It is not as effective as the corporate form of ownership, which can raise capital by selling shares of ownership yo outside investors.
Partners bound by law of agency
Unlimited liability of at least one partner
The general partner has unlimited personal liability for any debts remain after the partnership assets exhausted.
At least one member of every partnership must be a general partner.
Limited Liability Partnership
Gives the advantage of limited liability for the debts of the partnership.
Does not pay taxes – income is passed through to the limited partners who pay taxes on their share of the company’s income.
Corporation
Publicly held: a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges.
Closely held: a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends.
Corporation: a separate legal entity from its owners.
Avoiding Legal Tangles
Identify the company as a corporation by using “Inc.” or “Corporation” in the business name.
File all reports and pay all necessary fees required by the state in a timely manner.
Hold annual meetings to elect officers and directors.
Keep minutes of every meeting (formal and informal) of the officers and directors.
Be sure that the corporation’s board makes all major decisions.
Make it clear that the business is a corporation – officers should sign all documents in the corporation’s name.
Keep corporate assets and the personal assets of the owners separate.
Advantages of Buying an Existing Business
It may continue to be successful
It may already have the best location
Employees and suppliers are established
Equipment is already installed
Inventory is in place and trade credit is established
It’s turnkey
New owners can “hit the ground running”
New owners can use the previous owner’s experience
Financing is easier to obtain
It’s a bargain!
Disadvantages of Buying an Existing Business
The financial costs are high
It’s a “loser”
Previous owner may have created ill will
“Inherited” employees may be unsuitable
The location may have become unsatisfactory
Equipment and facilities may be obsolete or inefficient
Change and innovation can be difficult to implement
Inventory may be outdated or obsolete
Accounts receivable may be worth less than face value
The business may be overpriced