Summary of Chapter 5: Types of Business Partnerships and Corporations | Môn Business Administration - Trường Đại học Quốc tế, Đại học Quốc gia Thành phố Hồ Chí Minh

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A partnership is a legal form of business with at least two or more owners. Types of partnership:
- Limited partnership: Partnership between one or more general partners and one or more
limited partners. A limited partner is an owner who invests money in the business but does
not have any management responsibility or liability for losses beyond the system. Limited
liability means that limited partners are not responsible for the debts of the business beyond
the investment made in to the company. A limited partnership is especially designed to help raise money.
- General partnership: All the owners share in operating the business. All the owners are equally
responsible and liable. The three elements of any general partnership are common ownership,
sharing profits and losses and sharing the right to get involved in managing the business. A
general partner is an owner who has unlimited liability and is active in managing the firm.
Every firm consist of at least one general partner.
- Master limited partnership (MLP): Acts like a corporation on the stock market but is taxed
like a partnership. It avoids the corporate income tax.
- Limited liability partnership (LLP): A partnership that limit the partners’ risk of losing their
personal assets to only their own performances and omissions and to the performances and
omissions of people under their supervision. This means that if a partner may betrade you,
you won’t lose all your personal assets, as in a general partnership. Advantages: - More financial resources
- Sharing management and combined knowledge - Longer survival
- No special taxes: Owners pay the normal income tax Disadvantages:
- Unlimited liability: each general partner is liable for the debts of the firm, no matter who
caused those debts. Partners can loose their homes, cars etc.
- Sharing profits: possible conflicts
- Disagreements among the partners
- More difficult to end (terminate) Sole proprietorship
This is a business that is owned, and usually managed, by one person. On top of that, it is the
most common form of business ownership. Advantages: - You are your own boss
- Starting and ending a sole proprietorship is easy
No special taxes: You just pay the normal income tax, however this depends in which country you live. lOMoAR cPSD| 59078336
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- Pride of ownership: You deserve all the credit for taking risks and providing demanded goods and services.
- Legacy for future generations (business owners have something to leave behind for future generations)
- You don’t have to share your profit Disadvantages: - Limited financial resources
- Unlimited liability (this is the responsibility of business owners for all of the debts of the
business) the companies’ debts, are your debts.
- Management difficulties: Not everything can be done efficiently by one person. On top of
that, it is difficult to attract skilled employees because you can’t compete with the benefits offered by big companies.
- Overwhelming time commitment: hard to have time for anything else in life. It is a way of life.
- Few fringe benefits: You can’t take a paid vacation, no sick leave and health insurance you have to pay yourself as well.
- Limited growth: Because all creativity, funding and know-how comes from one person
- Limited life span: When the owner dies, retires or becomes incapacitated the company often ends to exist Corporation
A corporation is a legal entity with the power to act and to have liability separate from its
owners. A conventional (c) corporation is a state-chartered legal entity with the power to act
and to have liability separate from its owners as well. Advantages of a conventional corporation (C-corporation):
- There is a separation of ownership from management: the stockholders/owners have some
say in who runs the corporation, but they have no control over the daily operations. - Limited
liability (Ltd.) means that the owners of the company are responsible for losses only up to the amount they invest
- Size: Because they have the chance to raise large amounts of money to work with,
corporations can build, for example, modern factories with the latest equipment available.
- Perpetual life of the company: The death of one or more owners does not terminate the
corporation because corporations are separate from those who own them.
- Furthermore, it is easy to change ownership, you just have to sell your stock.
- Easy to attract talented employees: by offering nice benefits as stock options.
More money for investment: To raise money a corporation can sell ownership(stock) to
everyone who is interested, borrow money from individual investors through issuing bonds.
And last, corporations can borrow money from financial institutions.
Disadvantages of a conventional corporation (C-corporation): lOMoAR cPSD| 59078336
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- Initial high cost: incorporation costs a lot of money, involves expensive lawyers and accountants.
- Extensive paperwork: The tax laws forces a corporation to prove all the deductions and
expenses are legitimate. Corporations therefore must process many forms.
- Double taxation: First the corporation pays tax on the income and then the stockholders pay tax on the dividends.
- Two tax returns for individual incorporates: If an individual incorporates, he or she must file
both an individual tax return and a corporate tax return.
- Size: Sometimes corporations become too inflexible and too limited to respond quickly to market changes.
- Difficult to terminate: In a sense that it is hard to terminate a whole corporation.
- Possibility of conflict with board of directors: If the stockholders elect a board of directors
that disagrees with the present management. It is also possible for people to incorporate their
business. The main reasons for doing so are the special tax advantages and the limited liability.
S corporations are created by the government and are taxed like sole proprietorships or
partnerships. A company who wants to become a S corporation has to fulfil these criteria:
- The shareholders have to be individuals or estates and some of them have to be citizens or
permanent residents of the USA. - Have no more than 100 shareholders
- The company should have only one class of outstanding stock
- The company is not allowed to have more than 25 percent of the income derived from your
passive resources such as rents, royalties, interest, etc. The limited liability companies (LLC)
This type of ownership is similar to the S-corporation but does not have the special demands. Advantages:
- Limited liability: personal assets are protected
- Choice of taxation: taxed as partnerships or as corporation
- Flexible ownership rules: LLC’s don’t have to comply with ownership restrictions as S corporations do.
- Flexible distribution of profit and losses: profit does not have to be distributed in a proportion
to the money each person invests.
- Operating flexibility: LLC’s do not have to be that precise in describing how the company
operates (file written resolutions, annual meetings etc) Disadvantages:
- Limited life span: LLC’s are required to formulate dissolution dates in the articles of
organization. By death: LLCs dissolve automatically.
No stock: LLC ownership is not transferable. LLC members need the approval to the other
members in order to sell their interests. (S corporations and regular corporations can sell shares.) lOMoAR cPSD| 59078336
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- Fewer incentives: you cannot use stock options as a stimulus for employees
- Taxes: LLC members must pay self-employment taxes on profits. The difference in
comparison with a s corporation is that they pay the self-employment tax on salary but not on the entire profit.
- Paperwork: More than sole proprietors, less than corporations. Corporate Expansions Merger:
When two firms form/become a new company. There are several types of mergers: - Vertical
mergers: When the two companies which operate in different stages of related businesses become one.
- Horizontal mergers: When two companies which operate in the same stage of related businesses become one.
- Conglomerate mergers: When two companies which operate in different businesses become
one. The major purpose of a conglomerate merger is to diversify business operations and investments.
Acquisition: When a company purchases obligations and property of another company.
A leveraged buyout (LBO): When a group of people or an individual buys all the stock of a
company and takes a firm private. Franchise
A franchise is an arrangement in which a person buys the right to use a business name and to
sell its products in a certain area. If you want to start a franchise in another country you have
to make sure you adapt to the countries culture. The person who buys a franchise is called a
franchisee. The person who sells the idea to the franchisee is called the franchisor. Advantages:
- Personal ownership: your store, you are your own boss, enjoy incentives and profits.
- Nationally recognized name - Financial advice and assistance - Lower failure rate:
- Management and marketing assistance: A franchisee has several benefits. First, they possess
a nationally recognized franchise with an already established reputation. Secondly, they get
assistance in all phases of operation such as; promotion and a choosing location. Disadvantages
- Franchise fees can be very high
- Management regulations: you have to obey limitations and orders. - Share of profits
- Coattail effect: If other franchisees fail, you could be forced out of business. - Restrictions on selling Fraudulent franchisors