Chapter 21- Forms of Business Organization

types of franchises

"Chain-Style" Business Operation, Distributorship Manufacturing Arrangement

chain-style business operation

Franchisor helps franchisee establish a business (using franchisor's business name, and franchisor's standard "methods and practices") ex: taco bell

distributorship

Franchisor licenses franchisee to sell franchisor's product in specific area ex: liquor distributorships or most car dealerships

Manufacturing Arrangement

Franchisor provides franchisee with technical knowledge to manufacture franchisor's product ex: Coca Cola, which sells the syrup to its local manufacturing companies to produce and distribute the product

joint venture

Relationship between two or more persons/corporations created for specific business undertaking (often treated like a partnership)

major forms of business organizations

sole proprietorship, general partnership, limited partnership, limited liability partnership limited liability company corporation (fictitious names are often used so that it is not always obvious which form of business organization is being used)

Disadvantages of a corporation

-"Double-taxation" as a "C Corporation" if don't qualify for and elect "S Corporation" status -Formalities required in establishing and maintaining corporate existence (the corporate veil can be pierced)

Advantages of Sole Proprietorship

-Ease of creation ("start-up") -Owner has total managerial control -Owner retains profits

disadvantages of limited partnerships

-General partners have personal liability for all business debts/obligations/losses/liabilities, including those incurred by other partners on behalf of partnership - Difficult to remove general partners

advantages of limited partnerships

-Liability of limited partner(s) limited to investment -Limited partners do not participate in management, and therefore, this may be attractive for certain types of ventures -Business losses qualify for tax deduction and flow through to partners

advantages of LLC

-Limited liability for members/managers - Flexible tax treatment - Flexible management structure with few requires formalities -Potential for perpetual duration

Advantages of a corporation

-Limited liability for shareholders -Ease of raising capital by issuing (selling) stock -more options for structuring stock features (such as voting, nonvoting, preferred/common, etc) -generally free transferability of ownership -can have perpetual duration

Disadvantages of Sole Proprietorship

-Personal liability for all business debts/obligations/losses/liabilities -Funding limited to personal funds and loans

key issues in comparisons

-ability of owners to protect assets from liabilities of business (i.e. does the owner have unlimited, personal liability for business debts/obligations/losses?) -Profits taxed as income to owners and losses qualify for deductions to owners (called "flow through taxation" -flexibility with respect to management -transferability of ownership -ability to raise capital -manageable formalities

advantages of general partnerships

-ease of creation ("Start up") -partnership income is partner income (flow through taxation) -business losses qualify for tax deduction and flow through to partners -few formalities

advantages of LLPs

-liability of limited partner(s) limited to partnership assets/investment except for his or her own personal liability/malpractice -business losses qualify for tax deduction and flow through partners

disadvantages for LLC

-may be limits to ability to raise capital through this structure (when compared to corporations) as some investors may not desire membership status

disadvantages of general partnerships

-personal liability for all business debts/obligations/losses/liabilities, including those incurred by other partners on behalf of partnership -duration is generally more limited

disadvantages to LLPs

-provides slightly less liability protection than other similar forms of organizations (such as corporation and LLC) -formality limitations, such as prohibitions against certain persons or organizations holding partnerships in an LLP

cooperative

Organization formed by individuals or other businesses organizations who pool resources to gain a competitive advantage in the marketplace

franchise

agreement between "franchisor" (owner of trade name/trademark) and "franchisee" (person who sells goods/services under trade name/trademark)

characteristics of a corporation

def: a legal entity formed by issuing stock to investors (shareholders); created by filing Articles of Incorporation -owners are called shareholders and have liability limited to amount of investment in corporation -activities of the corporation are managed by officers and directors -profits taxed as income to corporation, plus income to owners/shareholders ("double taxation") S corporations can avoid double taxation

characteristics of a Limited Liability Company LLC

def: an unincorporated business organization with limited liability of a corporation, yet can be taxed like partnership, created by filing Articles of Organization -owners are called "members" (generally no limitation on number or type of owners permitted in LLC) -activities of LLC managed by either "members" or "managers" (if manager-managed, only appointed managers participate in management) -liability of members for business liabilities is limited to loss of capital contribution can choose to be taxed as a sole proprietorship (in some instances), partnership (tax results flow through to members) or corporation (referred to as "check the box" rules)

characteristics of a limited liability partnership

def: partnership in which all partners assume liability for his or her own actions and for any partner's professional malpractice but then, only to the extent of the partnerships assets and/or capital contributions -liability of limited partner(s) limited to partnership assets/investment except for his or her own personal liability/malpractice, other partners' personal assets cannot be seized) *these are relatively new and are most commonly used in professional services business organization (such as physician groups, law firms, and accounting firms)

S Corporations

def: special type of corporation that is permitted to be taxed like a partnership -all corporations begin as a "C" corporation but can elect under federal law to be treated as an "S" corporation -no more than one hundred shareholders -shareholders must report income on their personal income tax forms *note that the corporation itself is formed under state law but the approval to be treated as an S corporation for tax purposes can only be granted by the federal government through IRS

characteristics of a general partnership

def: unincorporated business owned and operated by 2 or more persons -each partner has equal control of business -each partner has unlimited personal liability for business debts/obligations/losses -profits taxed as income to partners and losses qualify for deductions to partners

characteristics of a sole proprietorship

def: unincorporated business owned by one person -owner has total control -owner has unlimited liability -profits taxed directly as income to sole proprietor *generally operates under a fictitious name

characteristics of a limited partnership

def: unincorporated business with at least one general partner and one limited partner -general partner is limited partnership has managerial/ operational control over business -limited partner's liability limited to extent of his/her capital contributions -limited partner has no managerial/ operational control over business *these are often used in estate planning for transitions of family businesses