16: Business Organizations
- Page ID
- 41876
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)- Know the available entity choices when forming a business.
- Identify the factors that determine entity selection.
- Understand common business entities and their advantages and disadvantages.
- 16.1: Introduction
- This page emphasizes that businesses exist primarily to generate profit and can take various forms like manufacturers and service providers. It highlights the importance of carefully choosing a business entity based on factors such as cost, continuity, funding, control, public ownership, tax implications, and asset protection. Entrepreneurs should consider legal and tax ramifications early and plan exit strategies to avoid future complications.
- 16.2: Sole Proprietorship
- This page discusses solo proprietorships as unincorporated businesses owned by one or a couple, highlighting their advantages, such as ease of setup and tax simplicity, as profits are taxed as personal income. It also notes significant drawbacks, including limitations on ownership transfer, challenges in raising capital, and the risk of personal liability for business debts, which can endanger personal assets despite the control and low startup costs they offer.
- 16.3: Partnerships
- This page explains partnerships as unincorporated business associations involving two or more general partners who share profits and losses, requiring no legal filings. Management terms are defined in articles of partnership, and partners face unlimited personal liability for debts. Partnerships can dissolve easily, often utilizing buy/sell agreements for valuing shares.
- 16.4: Franchises
- This page explains franchising as a contractual agreement between a franchisor and franchisee, allowing the latter to operate using the former's trademark. It highlights the benefits for entrepreneurs in utilizing an established business model and retaining profits after fees. Franchises are common in sectors like fast food and hotels and enable U.S. businesses to expand internationally through local ownership. Franchise agreements outline specific operational requirements.
- 16.5: Joint Venture
- This page discusses joint ventures, which involve two or more parties collaborating temporarily on a specific project, sharing profits and losses. Unlike partnerships, they focus on a single transaction and enable businesses to combine resources while retaining separate identities and confidentiality. Examples include Google's collaboration with NASA for Google Earth and BMW and Toyota's research on advanced vehicle technologies.
- 16.6: Corporations
- This page explains that a corporation is a distinct legal entity from its owners, requiring formal incorporation and ongoing compliance. Shareholders enjoy limited liability, safeguarding personal assets against company debts. Corporations face double taxation, although S corporations can avoid this by being taxed as partnerships. While they provide benefits such as continuity and limited liability, they also involve complexities and regulatory obligations.
- 16.7: Limited Liability Entities
- This page explains that a Limited Liability Company (LLC) offers limited liability and tax benefits, requiring minimal formation documentation and allowing flexible taxation. Members can manage the LLC and should consider an operating agreement. It also differentiates related entities: Limited Liability Partnerships (LLPs) protect professionals from liability, while Professional Corporations (PCs) offer limited protection to non-involved members regarding malpractice.
- 16.8: Concluding Thoughts
- This page discusses the importance of selecting the appropriate business entity based on specific needs and goals. It emphasizes that choosing the right structure can help minimize tax and liability while maximizing profits. Understanding the advantages and disadvantages of each entity type is crucial, as there is no universal solution suitable for all businesses.