Choosing the Best Form of Ownership for Your Entrepreneurial Venture

ENTREPRENEURSHIP Lecture No: 17 Resource Person: Malik Jawad Saboor Assistant Professor Department of Management Sciences COMSATS Institute of Information Technology Islamabad.

Previous Lecture Review Entrepreneurs in Action Video on Google Boys

Objectives Guidelines for Preparing Business Plan Tips on Preparing Business Plan Explain the advantages and the disadvantages of the three major forms of ownership The Sole Proprietorship The Partnership The Corporation.

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.

Factors Affecting the Choice Tax considerations Liability exposure Start-up and future capital requirements Control Managerial ability Cost of formation

Major Forms of Ownership Sole Proprietorship Partnership Corporation

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

Disadvantages of the Sole Proprietorship Unlimited personal liability Limited skills and capabilities Feelings of isolation Limited access to capital Lack of continuity

Liability Features of the Basic Forms of Ownership Sole Proprietorship Claims of Sole Proprietor s Creditors Sole Proprietor s Personal Assets

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. Best partnerships are built on trust and respect.

ELEMENTS OF GOOD PARTNERSHIP AGREEMENT What is the financial contribution of each partner? What is the division of work between the partners? What property is included in the partnership and how is it defined? How will/can partnership property be used by individual partners?

ELEMENTS OF GOOD PARTNERSHIP AGREEMENT How will bank accounts be set up and how will accounting and tax matters be handled? How will disputes related to the partnership be resolved? What happens if one partner dies or becomes disabled or incapacitated? What happens if one partner wants to leave the partnership? How will sale of the business be handled?

Advantages of the Partnership Easy to establish Complementary skills of partners Division of profits Larger pool of capital Ability to attract limited partners Little government regulation Taxation

Disadvantages of the Partnership Unlimited liability of at least one partner Capital accumulation Difficulty in disposing of partnership interest Lack of continuity Potential for personality and authority conflicts Partners bound by law of agency

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.

Liability Features of the Basic Forms of Ownership Partnership Claims of Partnership s Creditors General Partner s Personal Assets General Partner s Personal Assets Partnership s Assets

Corporation A separate legal entity from its owners. 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.

Advantages of the Corporation Limited liability of stockholders Ability to attract capital Ability to continue indefinitely Transferable ownership

Liability Features of the Basic Forms of Ownership Corporation Claims of Corporation s Creditors Corporation s Assets Shareholder s Personal Assets Shareholder s Personal Assets

Disadvantages of the Corporation Cost and time of incorporating Double taxation Potential for diminished managerial incentives Legal requirements and regulatory red tape Potential loss of control by founder(s)

You Be The Consultant.. CASE STUDY

YOU BE THE CONSULTANT Louise Tallman spent much of her childhood playing and working in her mother and aunt s antique shop. Her interest, involvement, and love of antiques led her to attend a school of art and design. Upon graduation, Louise decided to start her own antique shop and is in the process of completing her business plan. Q1. the form of ownership for her antique shop? Please explain the relevance of each question and answer, to determination of the suggested form of ownership. What are the questions that you would pose to Louise in order to help her select

Lecture Review Explain the advantages and the disadvantages of the three major forms of ownership The Sole Proprietorship The Partnership The Corporation. Reference: Essentials of Entrepreneurship & Small Business Management, Zimmer, Scarborough &Wilson, 5th Edition