Business Organization

“Before you run in double harness,

look well to the other horse” -
Ovid
 Factors of
Ownership

● Tax considerations
● Liability exposure
● Start-up capital requirements
● Control
● Managerial ability
● Business goals
● Management succession
● Cost of formation
 Major Forms of
Ownership

• Sole Proprietorship

• Partnership

• Corporation

• Limited Liability Company

 Hybrid Forms of Ownership
• Limited Partnership

• S Corporation

• Cooperative
 Forms of Ownership

Forms of Ownership 72%

Proprietorship
(% of business)
Source: Statistical Abstract
of the United States,2004-05, Table 716. 8%
Partnership
20%
Corporation

84%
Forms of Ownership Corporation
(% of sales)
Source: Statistical Abstract 11%
of the United States, 2004-05, Table 716.
Partnership

4%
Proprietorship
 Forms of Ownership
– Non-Employers Only

Forms of Ownership 87%

Proprietorship
(% of business)
Source: Statistical Abstract
of the United States,2004-05, Table 716. 7%
Partnership
6%
Corporation

63%
Forms of Ownership
(% of sales receipts) Proprietorship
Source: Statistical Abstract 20%
of the United States, 2004-05, Table 716.
Partnership

17%
Corporation
 Sole Proprietorship
A business owned/managed by one individual

Advantages Disadvantages
● Simple to create* ● Unlimited liability*
● Low cost to start-up*
● Owner has control
● Limited skills & abilities
● Few legalities ● Limited access to capital
Easy to dissolve
Lack of continuity
●
●
● Single taxation
 Partnerships
An association of 2 or more people (or groups)
who co-own a business
Advantages Disadvantages
● Easy to establish* ● Unlimited liability*
● Complementary skills ● Dissolution
● Pooling of resources ● Lack of continuity
– Ability, Capital, etc. ● Potential for conflict
● Few legalities
● Single taxation
 Types of Partners

● General Partners
– Share in the ownership and management of the business
– Active role in the management of the business
– Unlimited personal liability
– All partnerships must have at least one general partner
● Limited Partners
– Investors who do not participate in the day-to-day
management
– Liability is limited to the amount they have invested
– Any number of limited partners are allowed
 25 Attributes the Ideal Partner
Should Possess
1. Is a good team player
2. Does the job competently and skillfully
3. If a genuinely likable person
4. Is good at giving feedback
5. Is a good listener
6. Is open and receptive to feedback from
others
7. Treats people with dignity and respect
8. Looks for “win-win” solutions to
disagreements
9. Is good at facing tough problems
10. Is a person you can trust
11. Will “go to bat” for other people
12. Gets along well with almost everybody
Source: Robert A Morris. ‘Partner Wars’. Inc., June 1994, p 38.
13. Uses time efficiently and effectively
14. Will admit it or apologize when wrong
15. Has what it takes to be a good manager
16. Is a good problem solver
17. Speaks his/her mind, even when it’s
unpopular
18. Is well organized
19. Treats people fairly and equitably
20. Is good at giving compliments or
positive feedback
21. Is enjoyable to be around
22. Is open to other’s ideas and opinions
23. Is level-headed, even under stress
24. Presents ideas clearly and articulately
25. Has good people skills
 Standard Partnership
Agreement
● Name of Partnership
● Purpose of Business NEVER operate
● Names/Legal Addresses of Partners a partnership
● Contributions of Each Partner to the Business without a written
● How Profits/Losses are Distributed agreement!!
● Salaries or Drawing Rights
● Procedure for Expansion Through Addition of New Partners
● How Assets Are to be Distributed
● Sale of Partnership Interest
● Absence or Disability of a Partner
● Alterations/Modifications of Partnership Agreement
● Dissolution of the Partnership
 The Seven Best Ways to Pester Your
Partner
1. Great minds think alike - but it’s your mind your partner should be
thinking like.
2. Just because your partner tries to make a point doesn’t mean you have to
acknowledge it. Doodling and gazing out the window are effective
diversions.
3. Why risk unpleasant encounters? If ignored long enough, conflicts settle
themselves.
4. Your partner sees your company as maturing and in need of broader
talents. You see it as still your baby and in need only of you.
5. Handing out positions to offspring is a prerogative of ownership, but
must you put up with your partner’s kid when yours is so much smarter?

6. The irksome shortcoming your partner exhibits can’t have been inspired
by you, insofar as you have no irksome shortcomings.
7. Business is business. Admiration, respect, and loyalty your partner can
get from a pet.
Source: Robert A. Mamis, “Two Who Made Good,” Inc., June 1994, p.44.
 Corporations
A separate entity, apart from its owners; may engage in
business, make contracts, sue, be sued, and pay taxes

Advantages
● Limited liability of
stockholders*
● Ability to attract capital*
● Indefinite continuity
● Ease of transfer
Disadvantages
● Start-up costs and procedures
● Double taxation*
● Agency costs
● Legal requirements
● Potential loss of control by
the founder(s)
 Types of Corporations

● C Corporations
– Typical corporate structure
– Corporate tax rates; benefits are tax-advantaged

● S Corporations
– Closely-held corporation (less than 75 shareholders)
– Taxed at personal rates; benefits aren’t as tax-adv.

● Cooperatives
 Limited Liability
Companies (LLC)
Hybrid of a partnership and a corporation

Advantages
● Limited liability*
● Taxed at personal rates
● No double taxation
● Flexibility
– Can act like corporation or
partnership
Disadvantages
● “Red-Tape” – can be
confusing to create
● Relatively expensive to create
● Relatively new form of
organization
– Not many legal precedents
 So which is it gonna be?

● Main determinants:
– Tax implications
– Ease & cost of starting & maintaining
– Liability (but not a substitute for liability insurance!)
– Transferability

● You can make one form look almost identical to any

other form
– Get legal assistance*