CHAPTER 29 Starting a Business - PowerPoint Presentation

Slide1

CHAPTER 29

Starting a

Business

LLCs and

Other OptionsSlide2

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Quote of the Day

“Business underlies everything in our national life, including our spiritual life. Witness the fact that in the Lord’s Prayer, the first petition is for daily bread. No one can worship God or love his neighbor on an empty stomach.”Woodrow Wilson,

United States presidentSlide4

Sole Proprietorships

A sole proprietorship is an unincorporated business owned by one person.Sole proprietorships are easy and inexpensive to create and operate.Earnings are reported on the owner’s personal tax returns.Slide5

Corporations

Corporations offer limited liability – usually the managers’ and investors’ personal property is not at risk.Managers, employees and even stockholders are still personally liable for their own negligence and crimes.Corporate stock can be bought and sold, making investments easy to get.Corporations have perpetual existence; they can continue without their founders.

Corporations involve a lot of expense and effort to create and operate.

Corporations are taxable entities.Slide6

Close Corporations

“Close corporation” and “closely held corporation” refer to a corporation whose stock is not publicly traded on a stock exchange.Common provisions of close corporations:Protection of Minority ShareholdersTransfer RestrictionsFlexibilityDispute ResolutionSlide7

“S” Corporations

Shareholders of S corps have the best of all worlds: the limited liability of a corporation and the tax status of a partnership.The disadvantages of an S corp are:There can only be one class of stocks.There can be only 100 shareholders

.

Shareholders cannot be partnerships or other corporations.

Shareholders must be U.S. citizens

.

All shareholders must agree that the company should be an S corporation.Slide8

Limited Liability Companies

An LLC offers the limited liability of a corporation and the tax status of a partnership, without the cumbersome requirements of an S corporation (such as annual filing, rules about classes of stock and numbers of stockholders, etc.)The disadvantages with LLCs include expensive set-up and more difficulty in obtaining capital financing.Slide9

Limited Liability Companies

The LLC is popular because it has:Limited Liability (like a corporation)Favorable Tax Status (like a partnership) Flexibility in classes of membershipEasy Transferability of Interest

Duration (does not dissolve upon withdrawal of a member)

When an LLC goes public, it is taxed as a corporation rather than like a partnership.

The LLC veil may be pierced just like a corporation’s if the law is not technically upheld.Slide10

General Partnership

A partnership is an unincorporated association of two or more co-owners who carry on a business for profit.Each co-owner is a general partner.Partnerships are not taxable entities; all income and losses are passed on to the partners for tax purposes.Unless otherwise agreed, partners share profits, losses and management equally.

Partners

can be held personally liable for the partnership actions and debts

.

Partnerships are easy to form (sometimes it happens unintentionally!)Slide11

Partnership by Estoppel

Partnership by estoppel applies if:Participants tell other people that they are partners (even though they are not), or they allow other people to say, without contradiction, that they are partners.A third party relies on this assertion; andThe third party suffers harm.Slide12

Management Rights

Each and every partner has equal rights in the management and conduct of the business, unless the partners agree otherwise.Large partnerships usually designate managing partners (sometimes called members of the executive committee).Sometimes, managing is done almost dictatorially by the partner who brings in the most business (the “rainmaker.”)Slide13

Management Duties

Duty of Care – duty owed by partners to manage the partnership affairs without gross negligence, reckless conduct, intentional misconduct, or knowing violation of law.Duty of Loyalty

–

duty of utmost loyalty. Duty to not compete with partnership, turn over any profit to partnership, and avoid conflicts of interest.

Duty of Good Faith & Fair Dealing

– duty to deal with each other and the partnership in a fair way.Slide14

Terminating a Partnership

Ending a partnership business involves three steps:Dissolution --decision to end business; can be voluntary or automatic.Winding Up -- During the winding up process, all debts of the partnership are paid, and the remaining proceeds are distributed to the partners.Termination -- the end; happens when winding up is complete.Slide15

Dissolution

Dissolution process may depend on the type of partnership involved.Partnership at Will -- the partners have not agreed in advance how long their partnership will last; any of them may leave at any time.Term Partnership -- the partners have decided on a length of time or a particular task to be completed; the partnership automatically ends at the end of the time or task.Slide16

Dissolution (cont’d)

Partnership at Will When a partner quits, it is called dissociation.When one or more partners dissociate, the partnership can either buy out the departing partner(s) and continue in business or wind up the business and terminate the partnership.

Term Partnership

A

partner always has the power to leave a partnership but may not have the right

.

Under the UPA, a term partnership dissolves if: a partner dissociates and half the remaining partners vote to wind up OR all the partners agree to dissolve.Slide17

Dissolution (cont’d)

All partnerships dissolve if…The term expires or partnership achieves its goal.An event happens that the partners have agreed

in advance

will

cause dissociation.

Partnership business becomes illegal.

A court determines that the partnership cannot function successfully.Slide18

Limited Liability Partnerships (LLPs)

Partners in an LLP are not personally liable for debts of the partnership (whether arising from contract or tort).Slide19

Limited Partnerships and Limited Liability Limited Partnerships

Have both general (active) and limited (money-only) partners; only general partners may manage business.In a limited partnership, only the general partners are personally liable.In a limited liability limited partnership, the general partner is not personally liable for the debts of the partnership

.

Limited partnerships are not taxable.Slide20

Limited Partnerships and Limited Liability Limited Partnerships

Formation of limited partnerships require a filed certificate of limited partnership.Limited partners have the right to transfer the value of their partnership interest, but may only transfer the interest itself with partnership permission.Usually, limited partnerships have perpetual existence – dissociation does not cause dissolution.Slide21

Professional Corporations

Most states let professionals incorporate.In many states, PCs provide more liability protection than a partnership.The corporation may be liable for an individual member’s mistakes, but the innocent professionals are not at risk.Slide22

Joint Venture

A joint venture is a partnership for a limited purpose.Nonprofit enterprises do not qualify as a joint venture.Slide23

Other Forms of OrganizationA business trust is an unincorporated association run by trustees for the benefit of investors (who are called “beneficiaries”).

Cooperatives are groups of individuals or businesses that join together to gain the advantages of volume purchases or sales.Slide24

Franchises

Are not actually a separate form of business – they can take almost any one of the ones discussed already. Franchising is a popular method of starting a business that is a compromise between employment and starting your own business. Franchisees have freedom to make many choices, but are limited in other ways.Slide25

“No one form of organization is right for every business. The proper choice depends upon factors such as sources of financing, tax issues, liability concerns, and the entrepreneur’s goals.”