Created by David Moore, PhD
Forms | Pros | Cons |
---|---|---|
Sole proprietorship | Least Regulated, most common, pass-through taxation, easy to set up. | Unlimited liability, limited to life of owner, Equity limited to owner, difficult to transfer ownership. |
Partnership | More capital, easy to start, pass-through taxation. | Unlimited liability, partnership dissolves with death or sale, difficult to transfer ownership. |
Corporation | Limited liability, Unlimited life, Separation of ownership and management (can be a con), easier to transfer ownership and raise capital. | Double Taxation, increased regulation |
Joint Authority: Any partner can bind the other(s) to agreements.
Joint Liability: Anyone can be sued.
Two types:
General: All partners share in management and liability.
Limited: Limited partners provide capital and receive profits (reduced liability and little to no management)
Lester is the owner of a small manufacturing business. When business prospects look good, he orders $50,000 worth of supplies and uses them in creating merchandise. Unfortunately, there's a sudden drop in demand for his products, and Lester can't sell the items he has produced. When the company that sold Lester the supplies demands payment, he can't pay the bill.
Shirley and Sue are the owners of a flower shop. One day Roger, one of the employees, is delivering flowers using a truck owned by the business. Roger strikes and seriously injures a pedestrian. The injured pedestrian sues Roger, claiming that he drove carelessly and caused the accident. The lawsuit names Shirley and Sue as co-defendants. After a trial, the jury returns a large verdict against Shirley and Sue as owners of the business.
Articles of incorporation or Charter | Name, business purpose, headquarters, shares issued, board of directors. Content varies by state. Legally document creation of a corporation. ex. Amazon: "to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware" |
Bylaws | “set of rules” on how corporation to be run. ex. How are board members elected? How are meetings conducted? |
Limited Liability Company (LLC) | Hybrid of partnership and corporation: Operate and taxed like a partnership, retain limited liability. Must remain un-corporate-like in eyes of IRS to avoid double taxation. Start an LLC |
S-corp | Pay taxes like partnership. Some rules: US citizen, Max 100 shareholders, Gains and losses must equal share in company. |
C-corp | Typical corporation. |
The manager is considering a new investment. This investment will add to firm value(positive NPV) but is relatively risky. Shareholders would benefit from this project.
What is the agency cost here?