Download Limited Partnership

Organizational Forms
Sole Proprietorship
Partnership
Corporation
Subchapter S Corporation
Limited Liability Partnership
Limited Liability Companies
Limited Partnership
Non-Profit Entity
Important Considerations
Control: How many cooks are in the kitchen?
Flexibility: A sports car or a battleship?
Liability: Who gets left holding the bag?
Longevity: Nobody lives forever…
Access to Capital: Sweat equity or OPM?
Taxation: Once, twice, or not at all?
Bureaucratic BS: How red is the tape?
Cost: Pay a little or pay a lot?
Sole Proprietorship
Simplest to start and maintain
 Most common structure
 Least costly
 Highest personal risk
 Income is taxed as personal income
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Sole Proprietorship Taxation
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Taxable income “passes
through” the business
Personal income and business
income are combined and taxed
as one
May put you in a higher tax
bracket
Losses can be used to offset
personal income
Sole Proprietorship Taxes
Form 1040
Schedule C or Schedule C-EZ: Profit
and Loss From Business -- Sole
Proprietorship
Form 1040 ES: Acceleration Estimate
Tax for Individuals -- Must estimate
expected income tax for the coming
year
Quarterly vouchers and payments
Sole Proprietorship Legal
Stuff
No registration required if business is in your own
name
If you change the name or use anything other than
your own name, must file Certificate of Conducting
Business Under An Assumed Name with Secretary
of State.
Right of Survivorship Document – Says what will
happen in case of your death
To end business – Liquidate assets, pay off debts,
and walk away.
Sole Proprietorship
Summary
Control: You’ve got it all
Flexibility: It’s your decision (alone)
Liability: You’ve got it all
Longevity: Nobody lives forever…
Capital: Your money, bank debt, and trade
credit
Taxation: Once, but not many breaks
Bureaucratic BS: Almost none
Cost: Very little
Partnership
Use if more than one person’s capital
 Can be oral or written, but non-idiots
put it in writing
 Terminates with the death of any
partner in most states – Can use “Key
Man” insurance to provide for the
continuation of the partnership
 Liability is joint and several unless
there are limited partners
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Partnership Taxes
Form 1040 with proportional share of
partnership income
Form 1065: US Partnership Return of
Income
Schedule K-1: Partner’s Share of
Income Credits, Deductions, etc.
Each partner calculates and files an
estimated tax
Quarterly vouchers and payments
Types of Partnerships
General Partnership
 Partners are equally liable (joint and
several)
 Share workload and decision making
 Operates on a calendar year
 Generally cash-based accounting
Types of Partnerships
Limited Partnership
One or more partners are merely
investors and do not participate in
running the business or making
decisions.
 Limited partners have share of
ownership but liability is limited to the
amount of the investment
 Must have at least one general partner
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Partnership Legal Stuff
The partnership name and information about
the partners must be filed
Written partnership agreement is optional
Estate planning (what happens when a
partner dies) is essential, but complicated
All personal assets of all general partners are
at risk
Partnership terminates with the death of any
partner unless partnership agreement
specifies otherwise
Partnership Summary
Control: Shared between the partners
Flexibility: Now it’s a committee...
Liability: Joint and several
Longevity: Nobody lives forever…
Capital: Partners’ money and some debt
Taxation: Once, but not many breaks
Bureaucratic BS: Some - Partnership
agreements, more stringent records
Cost: Very little
Corporations
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Most difficult and costly to set up
Provides the most benefits to the owners
Separate legal entity – provides limited liability for
all owners
Best access to capital markets
Easiest in which to transfer ownership
Income is taxed twice – once at the corporate
level and once at the personal level – but
otherwise gets very favorable tax treatment
Most closely scrutinized by the US Government
and (if publicly traded) by the SEC
The Corporate Form of
Organization
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Ownership
The shareholders (also known as
stockholders or equity holders) are the
owners of the corporation.
Control
Ultimate control rests with the shareholders,
but the managers control the day to day
operations.
Risk Bearing
While all parties associated with the
corporation bear risk, shareholders bear all
residual risk.
Flow of Control in a
Corporation
Shareholders
Board of Directors
Managers
Corporation Taxes
VERY complicated and constantly changing
Owners file a Form 1040 with personal and
dividend income included
The Corporation files a Form 1120 – US
Corporation Income Tax Return – if gross
receipts, total income, or total assets are
over $500,000
Form 1120A (Short form) if any of the three
are under $500,000 (… some other rules)
Corporation Summary
Control: LOTS of cooks
Flexibility: Now it’s a BIG committee...
Liability: Limited personal liability
Longevity: Nobody lives forever… So what?
Capital: Best access of all forms
Taxation: Twice, but many deductions and
breaks
Bureaucratic BS: Lots and lots and lots
and…
Cost: Can be substantial
Rights of Ownership in
Corporations
Dividend Rights
Voting Rights
majority voting
one vote per share per director
cannot combine votes
cumulative voting
directors are voted on jointly
can cast all votes for a single candidate
Rights of Ownership (contd.)
Liquidation Rights
Owners have the right to a
proportional share of the firm’s
residual value in the event of
liquidation, after other senior claims
are paid.
Preemptive Rights
Owners have the right to subscribe
proportionally to any new shares
issued by the firm.
Forming a Corporation
What do you need?
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$50 (In Mississippi)
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Company name (unique)
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Directors
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Business address
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[Federal Tax ID]
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[Corporate Charter]
Interesting Statistics
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Number of US businesses
Number of US businesses by revenue size
Number of US corporations by Industry
Number of US sole proprietorships by
industry
Number of US partnerships by industry
Number of businesses by state
Most popular small businesses
Businesses by State
BusinessesByState.xls
Need Help?
Small Business Development Center
Sec. Of State - www.sos.state.ms.us
MyCorporation.com
Incorporate USA
Company Corporation
CorpAmerica
BizFilings.com
Quick-Inc.com
Subchapter S Corporation
Owners retain limited liability
Taxed as a partnership - eliminates
double taxation and makes it
easier for owners to be
compensated
All profits are taxed and distributed
annually
Subchapter S Corporation
A corporation can elect S-Corp status
within 75 days of formation if:
1. It is a domestic corporation (i.e., it
operates in the state in which it is
franchised
2. There is only one class of stock
3. It has 75 or fewer stockholders
4. All stockholders are US citizens or
resident aliens
5. There are no subsidiaries
Limited Liability Company
(LLC)
Owned by “members” who may run the
company or appoint managers to do it
Members and managers have limited liability
Taxed like a Subchapter S Corporation
without having to conform to the S Corp
restrictions
Limited liability can make it harder to raise
capital - may require personal guarantees
Limited Liability Partnership
(LLP)
Also called a Professional Corporation
Used primarily by those who render
professional services - lawyers,
doctors, architects, social workers,
etc.
Some tax advantages - possible tax
shelter
Not much liability limitation
Information Sources
The Quick-Inc Guide to Business Entities
LLCs on MyCorporation.com
LLCs on BizFilings.com
BizFilings.com Comparison of:
C Corp to S Corp, S Corp to LLC,
C Corp to LLC
Piercing the Corporate Veil
Creditors may attempt to recover money
from shareholders if:
 The business was initially underfunded
or “thinly capitalized”
 The owners failed to treat the business
as a separate entity themselves:
Fail to use Inc. or Corp or LLC in dealings
Co-mingle assets or funds
Fail to keep good records and hold meetings
The Goal of the Firm
“Maximize Shareholder Wealth”
Better defined than profits
 Is an objective external measure
 Considers timing of cash flows
 Considers all internal and external
factors
 Considers risk differences between
alternative courses of action
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Three Types of Decisions
Investment Decisions
How should capital be invested?
Financing Decision
How should the assets be financed?
Managerial Decisions
How large should the firm be?
How fast should it grow?
Should the firm grant credit to a customer?
How should the managers be compensated?
The Investment Vehicle
Model of the Firm
Investors provide financing to the firm
in exchange for financial securities.
 Firm invests these funds in assets.
 Income generated by the firm is
distributed to the investors.
 Managers act in the best interest of
the shareholders, and take actions to
maximize shareholder wealth.
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The Investment Vehicle Model of the Firm
The Firm
Financing
Decisions
The
World
Investment
Decisions
Exchange of Money
and Real Assets
Financial
Markets
Exchange of Money
and Financial
Assets
Investors
Financial
Intermediaries
Corporate Financial
Management
Financial Markets
and Intermediaries
Investments
The Accounting Model of the Firm
Balance sheet view of the firm.
 Investment decisions are represented
on the asset (i.e. left hand) side of the
balance sheet.
 Financing decisions are represented
on the liabilities and equity (i.e. right
hand) side of the balance sheet.
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The Accounting Model of the Firm
The Investment
Decision
Current Assets
Cash
Marketable Securities
Accounts Receivable
Inventory
Total Fixed Assets
Tangible Fixed Assets
Intangible Fixed Assets
The Financing
Decision
Current Liabilities
Accounts Payable
Current Debt
Net Working Capital
Long Term Liabilities
Long Term Debt
Current Debt
Shareholder’s Equity
Common Stock
Retained Earnings
Set of Contracts Model of
the Firm
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The firm has contracts with a large
number of stakeholders.
These contracts may be explicit or
implicit.
Contracts may also be contingent on
particular future outcomes.
The model recognizes that conflicts of
interest may exist between the various
stakeholders.
Set of Contracts Model of the Firm
Bondholders
Banks
Customers
Employees
Governments
Environment
Common
Stockholders
The Firm
Preferred
Stockholders
Communities
Society
Creditors
Suppliers
Managers
The Agency Model of the Firm
 Managers have day-to-day operational
control of the modern corporation and are
supposed to act as agents for the
shareholders.
 Managers have goals that differ from those
of the shareholders.
 Shareholders must incur costs to make
sure that their "agents" act in their best
interests.
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Monitoring costs
Incentive costs
Notes on sources for this presentation
This presentation includes material provided
in the Chapter 2 slide presentation for
Corporate Finance by Emery and Finnerty
(Prentice Hall)
and
Chapter 3 in Ready or Not, Get Set Go by
Sheila Taylor-Downer (Professional
Prodigy, Inc.)