Choosing a

Form of

Ownership
Phoebe Jane F. Dangel

Considerations
1

Tax
Considerations

Liability
Exposure

Managerial
Ability

Business
Goals

3
Start-up and
future capital
requirements

Management
Succession
Plans

4
Control

Cost of
Formation

The Sole
Proprietorship

Forms of

Ownership

The
Partnership

The
Corporation

The
Cooperative

The
S Corporation

The Limited
Liability
Company

The Joint
Venture

Other forms

Forms of Ownership
FIGURE 3.1

Forms of Business Ownership

Source: Based on data from Sources of Income, Internal Revenue Service.

Sales
Sole Proprietorships

71.9%

C Corporations

6.4%

S Corporations

12.6%

Limited Liability Companies

5.3%

Limited Partnerships

1.4%

General Partnerships

2.3%

(a) Percentage of Businesses

Forms of Ownership
FIGURE 3.1

Forms of Business Ownership

Source: Based on data from Sources of Income, Internal Revenue Service.

Sales

C Corporations
Sole Proprietorships
General Partnerships

Limited Partnerships
Limited Liability Companies
S Corporations

(b) Percentage of Net Income

55.8%
11.8%
3.2%
8.0%

7.4%
13.9%

The Sole
Proprietorship

Simplest and most popular form of ownership.

It is designed for a business owned and
managed by one individual.
The sole proprietor is the only owner and ultimate
decision maker for the business.

The Sole Proprietorship

1
Simple to Create

Easy to
Discontinue

Least Costly to
Establish

Advantages

5
No Special Legal
Restrictions

3
Profit Incentive

4
Total DecisionMaking Authority

The Sole Proprietorship

1
Unlimited
Personal
Liability

Lack of
Business
Continuity

Limited Access
to Capital
Disadvantages

Feelings of
Isolation

Limited Skills
and Ability

The Partnership

An association of two or more people who coown a business for the purpose of making a
profit.

Co-owners/partners legally share a business assets,

liabilities, and profits according to the terms of an
established partnership agreement.
Partnership Agreement, document that states all of the terms of operating the
partnership for the protection of each partner involved. Uniform Partnership Act
(UPA) is used in the absence of a Partnership Agreement.

Advantages

o
o
o
o
o

Easy to Establish
Complementary Skills
Division of Profits
Larger Pool of Capital
Ability to Attract Limited
Partners
o Little Governmental Regulation
o Flexibility
o Taxation

Disadvantages

o Unlimited Liability of At Least One

Partner
o Capital Accumulation
o Difficulty in Disposing of Partnership
Interest
o Potential for Personality and
Authority Conflicts

Limited Partnerships

A modification of a
general partnership.
Limited partnerships
are
composed of at least
one general partner
and at least one limited
partner.

*General Partner

*Limited Partner

He or she has
unlimited personal
liability for the
partnerships debts

Treated as investors in
the business venture
with limited liability and
therefore can lose only
the amount they have
invested in the
business

Limited Liability

Partnerships

Limited Liability Partnerships, or LLPs, in which all partners in the

business are limited partners, having only limited liability for the
debts and obligations of the partnership
As with other partnership forms, an LLP does not pay taxes; its income is
passed through to the limited partners, who pay personal taxes on their
shares of the companys net income.

The Corporation

The most complex of the three major forms of business ownership.

The Corporation

A corporation (also
known as C corporation)
is an artificial legal entity
created by the state that
can sue or be sued in its
own name, enter into and
enforce contracts, hold title
to and transfer property,
and be found civilly and
criminally liable for
violations of the law.

Requirements for
Incorporation
1. The Corporations Name
2. The Corporations Statement
of Purpose
3. The Companys Time
Horizon
4. Names and Addresses of the
Incorporators
5. Place of Business
.
.
.
11. Rules under which the
corporation will operate

The Corporation
Domestic Corporations,
conducts business in
the state in which it is
incorporated

Foreign Corporations,
conducts business in
another state

Alien Corporations,
formed in other
countries and conduct
business in the United
States

Publicly held
corporations, have a
large number of
shareholders, and their
stock is usually traded
on one of the organized
stock exchanges

Closely held
corporations have shares
that are controlled by a
relatively small number
of people, often family
members, relatives, or
friends

Professional corporation
offers professionals such
as lawyers, doctors,
dentists, accountants,
and others the
advantages of the
corporate form of
ownership

Advantages

o Limited Liability of
Stockholders
o Ability to Attract Capital
o Ability to Continue
Indefinitely
o Transferable Ownership

Disadvantages

o Cost and Time Involved in the

Incorporation Process
o Double Taxation
o Potential for Diminished Managerial
Incentives
o Legal Requirements and Regulatory
Red Tape
o Potential Loss of Control by the
Founders

The Corporation

The

Cooperative

Autonomous and duly registered association of persons,

with a common bond of interest, who have voluntarily
joined together to achieve their social, economic, and
cultural needs and aspirations by making equitable
contributions to the capital required, patronizing their
products and services and accepting a fair share of risks ad
benefits of the undertaking in accordance with the
universally accepted cooperative principles. -CDA

The Cooperative

1. Have at least 15 members.

2. Prepare a general statement/economic survey.
3. Draft the cooperatives by-laws.
4. Draft the articles of cooperation.
5. Secure bond for accountable officer(s).
6. Register coop with the CDA.

Organizing a Coop

Credit Cooperative
Consumer Cooperative
Producers Cooperative
Multi-Purpose Cooperative
Agrarian Reform Cooperative
Workers Cooperative
Electric Cooperative
Insurance Cooperative
Cooperative Bank
Housing Cooperative
Types of Coop

Alternative Forms of Ownership

The S Corporation
The Internal Revenue Service Code created the Subchapter S corporation
in 1954. More commonly known as an S corporation, this form of
ownership has undergone modifications in its legal requirements. An S
corporation is a distinction that is made only for federal income tax
purposes and is, in terms of its legal characteristics, no different from any
other corporation.
Increased allowed number of shareholders to 100
Allowed to own subsidiary companies

The Limited Liability Company, LLC

Hybrid structure that features elements of a partnership and a corporation.

o Fastest growing form of business ownership

o Most have multiple owners called members
An LLC cannot have any more than two of the following four corporate
characteristics:
1.
2.
3.
4.

Limited liability
Continuity of life
Free transferability of interest
Centralized Management

The Joint Venture

Very much like a partnership, except that it is formed for a specific purpose.

Thank You