1. MBA1034 GOVERNANCE, LAW & ETHICS
BUSINESS OWNERSHIP :
SOLE PROPRIETOR,
PARTNERSHIPS AND
CORPORATIONS
Smaka Mathibela, University
of Johannesbug, BEd,Mba
International Business(Bradford)
Visiting Fellow, Birmingham City University
Visiting Professor, Shenzhen University
2. Acknowledgements
• This power point slide have been reproduced
by SL Mathibela with several sources of this
presentation which is available on the last
slide of this presentation.
3. 1. Open Discussion
• Rocco R. Vanasco, (1996),"Auditor
independence: an international
perspective", Managerial Auditing
Journal, Vol. 11 No.: 9 pp. 4- 48
5. Evaluation Criteria
• Tax consideration
• Liability exposure
• Start-up and future
capital requirement
• Control
• Managerial ability
• Business goals
• Management
succession plans
• Cost of formation
6. Measures taken by Govt.
1. Protective Measures
•
•
•
Products reserved for exclusive production
Concessions in excise, sales tax
Govt. gives preference to products by SSI
2. Promotional Measures
•
•
•
•
•
•
Imported raw materials are provided at reasonable rates
Development of industrial estates to provide sheds to SSI
Extension of price preference to products by SSI
Preference given to SSI in land allocation
Technical assistance by Central Small Industries Orgn
Financial assistance by banks and public financial
institutes.
7. Lesson 7.2
Choose a Legal Form of Business
Objective:
Students will be able to:
• Discuss advantages and disadvantages of a
sole proprietorship, partnership, and
corporationS.
Chapter 7
Slide 7
9. Factors to Choice of
Ownership
1. Nature of Business
2. Size and Area of Operations
3. Degree of Control Desired
4. Amount of Capital Required
5. Degree of Risk Involves
10. • Choice of Suitable form of ownership –
A Crucial Decision
• The form of ownership determines the •
•
•
•
•
•
Division of Profits
Extent of liability
Extent of Risk
Division of Power
Control of Owner
Long term commitment, cannot be altered easiliy
11. Ideal Form of Ownership
1. Ease of Formation
2. Sufficient Finances
3. Limited Liability
4. Transferability of Interest
5. Efficient Management
12. Ideal Form of Ownership –
Contd.
6. Continuity and Stability
7. Flexibility of Operations
8. Minimum Govt. Control
9. Retention of Business Secrets
10. Low Tax Burden
13. Choosing a Form of Ownership
• There is no one “best” form of
ownership.
• The best form of ownership depends on
an entrepreneur’s particular situation.
• Key: Understanding the characteristics
of each form of ownership and how well
they match an entrepreneur’s business
and personal circumstances.
14. Factors Affecting the Choice
• Tax considerations
• Liability exposure
• Start-up and future capital
requirements
• Control
• Managerial ability
• Business goals
• Management succession plans
• Cost of formation
15. Major Forms of Ownership
• Sole Proprietorship
• Partnership
• Corporation
• S Corporation
• Limited Liability Company
• Joint Venture
17. Entrepreneurship
• Entrepreneur: A person who forms and
operates a new business either by himself or
herself or with others
• Sole proprietorship: A form of business in
which the owner is actually the business
– The business is not a separate legal entity
– Sole proprietor: The owner of a sole
proprietorship
14-17
18. Creation of a Sole Proprietorship
• No federal or state government approval is
required
• D.b.a. (doing business as): A designation for a
business that is operating under a trade name
• Fictitious business name statement (certificate
of trade name)
– A document that is filed with the state that
designates:
• A trade name of a business
• The name and address of the applicant
• The address of the business
19. Advantages of the Sole
Proprietorship
• Simple to create
• Least costly form to begin
• Profit incentive
• Total decision making authority
• No special legal restrictions
• Easy to discontinue
20. Disadvantages of the
Sole Proprietorship
• Unlimited personal liability
• Limited skills and capabilities
• Feelings of isolation
• Limited access to capital
• Lack of continuity of the
business
5 - 20
21. Personal Liability of a Sole Proprietor
• Unlimited personal liability: The
personal liability of a sole proprietor for
the debts and obligations of a sole
proprietorship
• Taxation of a sole proprietorship
– A sole proprietorship does not pay taxes at
the business level
– A sole proprietor has to file tax returns and
pay taxes to state and federal governments
24. Partnership
• An association of two or more
people who co-own a business for
the purpose of making a profit.
• Always wise to create a partnership
agreement.
• The best partnerships are
built on trust and respect.
25. 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.
26. Advantages of the Partnership
•
•
•
•
•
•
•
•
Easy to establish
Complementary skills of partners
Division of profits
Larger pool of capital
Ability to attract limited partners
Minimal government regulation
Flexibility
Taxation
27. Disadvantages of the
Partnership
• Unlimited liability of at least one partner
• Capital accumulation
• Difficulty in disposing of partnership
interest without dissolving the
partnership
• Lack of continuity
• Potential for personality and authority
conflicts
• Partners bound by law of agency
28. Limited Partnership
• A partnership composed of at least
one general partner and one or more
limited partners.
• A general partner in this partnership
is treated exactly as in a general
partnership.
• A limited partner has limited
liability and is treated as an
investor in the business.
29. General Partnership
• An association of two or more persons to
carry on as co-owners of a business for
profit [UPA Section 6(1)]
– General partners (partners): Persons liable
for the debts and obligations of a general
partnership
• Uniform Partnership Act (UPA): A model
act that codifies partnership law
– Most states have adopted the UPA in whole
or in part
30. Formation of a General
Partnership
• To qualify as a general partnership
under the UPA a business must be
–An association of two or more
persons
–Carrying on a business
–As co-owners
–For profit
31. Name of a General Partnership
• A general partnership must file a
fictitious business name statement
with the appropriate government
agency to operate under a trade
name
• General partnership agreement
–A written agreement that partners
sign to form a general partnership
32. Taxation of General Partnerships
• Flow-through taxation
– The income and losses of partnership flow
onto and have to be reported on the
individual partners’ personal income tax
returns
• Right to participate in management
– Each partner has a right to participate in the
management of a partnership and has an
equal vote on partnership matters
• Unless otherwise agreed
33. Right to Share in Profits
The right to share in the earnings from the
investment of capital
Unless otherwise agreed
Right to an accounting
Action for an accounting: A formal judicial
proceeding in which the court is authorised to
Review the partnership and the partners’
transactions
Award each partner his or her share of the
partnership assets
34. Contract Liability of General Partners
• General partners have unlimited personal
liability for contracts of the partnership
• Under the UPA
– General partners have joint liability for the
contracts and debts of the partnership
– Joint liability: Liability of partners for contracts
and debts of the partnership
• A plaintiff must name the partnership and all of the
partners as defendants in a lawsuit
35. Uniform Limited Partnership Act
• Contains a uniform set of provisions
for the formation, operation, and
dissolution of limited partnerships
• Revised Uniform Limited Partnership
Act (RULPA)
–Provides a more modern,
comprehensive law for the formation,
operation, and dissolution of limited
partnerships
36. Formation of a Limited Partnership
• Certificate of limited partnership: A document
that two or more persons must execute and
sign that makes a limited partnership legal and
binding
– Under RULPA, two or more persons must execute
and sign the certificate
– The certificate of limited partnership must be filed
with
• The secretary of state of the appropriate state
• The county recorder in the county or counties in which
the limited partnership carries on business, if required
by state law
37. Limited Partnership Agreement
• A document that sets forth:
–The rights and duties of
general and limited partners
–The terms and conditions
regarding the operation,
termination, and dissolution of
a partnership, and so on
38. Liability of General and Limited
Partners
• Unlimited liability of general partners
– The unlimited personal liability of general partners
of a limited partnership for the debts and
obligations of the general partnership
• Limited liability of limited partners
– The limited liability of limited partners of a limited
partnership only up to their capital contributions to
the limited partnership
– Limited partners are not personally liable for the
debts and obligations of the limited partnership
40. Corporation
• A separate legal entity from its owners.
• Types of corporations:
– Domestic – a corporation doing business in
the state in which it is incorporated.
– Foreign – a corporation doing business in a
state other than the state in which it is
incorporated.
– Alien – a corporation formed in another
country but doing business in the United
States.
41. Corporations
Certificate of Incorporation
Name
Statement of purpose
Time horizon
Names and addresses of incorporators
Place of business
Capital stock authorization’
Capital required at time of incorporation
Provisions for preemptive rights
Restrictions on transfering shares
Names and addresses of officers
By-laws
42. An S Corporation
A corporation that retains the legal
characteristics of a regular C corporation but
has the advantage of being taxed as a
partnership if it meets certain criteria:
Domestic US corporation
No nonresident alien stockholder
One class of common stock
Limit shareholders
No more than 100 shareholders
Less than 25% of gross revenues passive
43. S Corporation
• Highly profitable service companies with large
number of shareholders for whom profits are
compensation or retirement benefits
• Fast-growing companies that must retain earnings
to finance growth
• Corporations in which the loss of benefits exceed
tax savings
• Corporations with sizable net operating losses
44. S Corporation
Advantages
All of advantages of a regular C corporation
Single taxation
Avoids tax on appreciation of asset sold
Pay SSS for employees
Different lines of businesses as subsidiaries,
simpler tax filing
45. Corporation CONT…
Types of corporations:
• Publicly held – a corporation that has a
large number of shareholders and
whose stock usually is traded on one of
the large stock exchanges.
• Closely held – a corporation in which
shares are controlled by a relatively
small number of people, often family
members, relatives, or friends.
46. Advantages of the Corporation
• Limited liability of stockholders
• Ability to attract capital
• Ability to continue indefinitely
• Transferable ownership
47. Disadvantages of the
Corporation
• Cost and time of incorporation process
• Double taxation
• Potential for diminished managerial
incentives
• Legal requirements and regulatory “red
tape”
• Potential loss of control by founder(s)
48. S Corporation
Liquidating
Pay all taxes and debts
Obtain written approval of shareholders to
dissolve company
File statement of intent to dissolve with
secretary of state
Distribute all remaining assets
49. Shareholders OF Corp…
• Straight voting: A system in which each
shareholder votes the number of shares
he or she owns on candidates for each
of the positions open
• Cumulative voting: A system in which a
shareholder can accumulate all of his or
her votes and vote them all for one
candidate or split them among several
candidates
50. Shareholders Dividends
• Dividend: A distribution of profits of the
corporation to shareholders
• Piercing the corporate veil: A doctrine
that says if a shareholder dominates a
corporation and uses it for improper
purposes, a court of equity can disregard the
corporate entity and hold the shareholder
personally liable for the corporation’s debts
and obligations
51. Franchise Agreement in
corporation
• An agreement that a franchisor and
franchisee enter into that sets forth the
terms and conditions of a franchise
• Liability of franchisors and franchisees
– The franchisor deals with the franchisee as an
independent contractor
• Franchisees are liable on their own contracts and
are liable for their own torts
• Franchisors are liable for their own contracts and
torts
52. Advantages of Incorporation
• Personal liability is limited to the amount of
money each shareholder invested in the
company.
• Personal assets of shareholders are protected.
• Corporations can raise money by selling stock.
Chapter 7
Slide 52
54. Core Readings of licensing
• Baron, David P.(2013) Business and its
environment, 7th Edition, Pearson, Ch.14
• Cheeseman, Henry R.(2013) Business law, 8th
Edition, Prentice Hall. Ch.14-16
• Barringer, Bruce R. & Ireland, R. Duane, 2011
Entrepreneurship – Successfully launching new
ventures 4th edition, Pearson.
