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Topic 5 : Forms of Business Ownership and Buying an Existing Business -…
Topic 5 : Forms of Business Ownership and Buying an Existing Business
Major Forms of Ownership
General Partnership
Limited Partnership
Sole proprietorship
Corporation
Advantages of a Sole Proprietorship
Profit incentive
Total decision making authority
Least costly form to begin
No special legal restrictions
Simple to create
Easy to discontinue
Disadvantages of Sole Proprietorship
Feelings of isolation
Limited access to capital
Limited skills and capabilities
Lack of continuity of the business
Unlimited personal liability
Lack of continuity of the business
Limited access to capital
Advantages of Partnership
Complementary skills of partners
Division of profits
Easy to establish
Ability to attract limited partners
Larger pool of capital
Minimal government regulation
Flexibility
Taxation
Types of Partners
General partners
Take an active role in managing a business
Have unlimited liability for the partnership's debts
Every partnership must have at least one general partner
Limited partners
Cannot participate in the day-to-day management of a company
Have limited liability for the partnership's debts
Silent partners
Dormant partners
Disadvantages of Partnership
Unlimited liability of at least one partner
Capital accumulation
Difficulty in disposing of partnership interest without dissolving the partnership
Potential for personality and authority conflicts
Partners bound by law of agency
Advantages of the C Corporation
Private placement
Initial public offering (IPO)
Ability to attract capital
Ability to continue indefinitely
Limited liability of stockholders
Transferable ownership
Disadvantages of C Corporation
Potential for diminished managerial incentives
Legal requirements and regulatory red tape
Traditional form of incorporation
Potential loss of control by the founder(s)
Double taxation
Cost and time involved in the incorporation process
Limited Liability Company (LLC)
Resembles an S Corporation but is not subject to the same restrictions
Two documents required:
Articles of organization: creates an LLC by establishing its name and address, method of management, its duration, etc
Operating agreement: establishes for an LLC the provisions governing the way it will conduct business