Forms of Business Organization

Chapter 35Forms of Business OrganizationCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.35-2Major Forms of Business OrganizationsSole ProprietorshipGeneral PartnershipLimited PartnershipCorporation35-3Sole ProprietorshipDefinition: Unincorporated business owned by one personOwner has total controlOwner has unlimited liabilityProfits taxed directly as income to sole proprietor35-4Advantages and Disadvantages of Sole ProprietorshipAdvantagesEase of creation (“start-up”)Owner has total managerial controlOwner retains profitsDisadvantagesPersonal liability for all business debts/obligationsFunding limited to personal contributions and loans35-5General PartnershipDefinition: Unincorporated business owned and operated by two or more personsEach partner has equal control of businessEach partner has unlimited, personal liability for business debts/obligationsProfits taxed as income to partners35-6Advantages and Disadvantages of PartnershipAdvantagesEase of creation (“start-up”)Partnership income is partner incomeBusiness losses qualify for tax deductionDisadvantagesPersonal liability for all business debts/obligations, including those incurred by other partners on behalf of partnership35-7Limited PartnershipDefinition: Unincorporated business with at least one general partner, and one limited partnerGeneral partner in limited partnership has managerial/operational control over businessLimited partner’s liability limited to extent of his/her capital contributionsLimited partner has no managerial/operational control over business35-8CorporationDefinition: State-sanctioned business with legal identity separate and apart from its owners (shareholders)Owners’ (shareholders’) liability limited to amount of investment in corporationProfits taxed as income to corporation, plus income to owners/shareholders (“double-taxation”)“S” Corporation can avoid double-taxation35-9Advantages and Disadvantages of Corporation AdvantagesLimited liability for shareholdersEase of raising capital by issuing (selling) stockDisadvantages“Double-taxation”Formalities required in establishing and maintaining corporate existence35-10“S” CorporationDefinition: Business organization formed under federal tax law that is considered corporation, yet taxed like a partnershipFormed under federal lawNo more than one hundred (100) shareholdersShareholders must report income on their personal income tax forms35-11Limited Liability Company (LLC)Definition: Business organization with limited liability of a corporation, yet taxed like partnershipFormed under state lawOwners of LLC (“members”) pay personal income taxes on shares they reportNo limitation on number of owners permitted in LLC35-12Specialized Forms of Business OrganizationsCooperative—Organization formed by individuals to market productsJoint stock company—Partnership agreement in which company members hold transferable shares, while all company goods are held in names of partnersBusiness Trust—Business organization governed by group of trustees, who operate trust for beneficiariesSyndicate—Investment group that forms for purpose of financing specific large projectJoint Venture—Relationship between two or more persons/corporations created for specific business undertakingFranchise—Agreement between “franchisor” (owner of trade name/trademark) and “franchisee” (person who, by specific terms of agreement, sells goods/services under trade name/trademark)35-13Advantages and Disadvantages of Franchise (To Franchisee)AdvantagesAssistance from franchisor in starting franchiseTrade name/trademark recognitionFranchisor advertisingDisadvantagesMust meet contractual requirements, or possibly lose franchiseLittle/no creative control over business35-14Advantages and Disadvantages of Franchise (To Franchisor)AdvantagesLow risk in starting franchiseIncreased income from franchisesDisadvantagesLittle control (except contractually) over individual franchiseCan become liable for franchise, if franchisor exerts too much control35-15Types of Franchises“Chain-Style” Business OperationFranchisor helps franchisee establish a business (using franchisor’s business name, and franchisor’s standard “methods and practices”)DistributorshipFranchisor licenses franchisee to sell franchisor’s product in specific areaManufacturing ArrangementFranchisor provides franchisee with technical knowledge to manufacture franchisor’s product35-16Top Ten Global Franchises (2013)Hampton HotelsSubwayJiffy Lube7-ElevenSupercutsAnytime FitnessServproDenny’s , Inc.McDonald’sPizza Hut