Forms of Business Ownership

Choosing the right form of business ownership is

important because the form of ownership you choose will
determine how your business is organized, how the money
that flows in and out of your business is handled,
and How your business is taxed.
Form of Business Ownership Choices
There are essentially four forms of business ownership
1. the sole proprietorship,
2. the partnership,
3. the corporation
4. the cooperative.
 The Sole Proprietorship
A sole proprietorship, also known as the sole trader or simply a
proprietorship, is a type of enterprise that is owned and run by one
natural person and in which there is no legal distinction between the
owner and the business entity. The owner is in direct control of all
elements and is legally accountable for the finances of such business
and this may include debts, loans, loss, etc.

The sole trader receives all profits (subject to tax specific to the
business) and has unlimited liability for all losses and debts. Every
asset of the business is owned by the proprietor and all debts of the
business are the proprietor's. It is a "sole" proprietorship in contrast
with partnerships (which have at least two owners).

A sole proprietor may use a trade name or business name other than
his, her, or its legal name. They may have to legally trademark their
business name if it differs from their own legal name, the process
varies depending upon country of residence.
The Sole Proprietorship (Advantages & Disadvantages )
Advantages
1. Easiest and most inexpensive to set up.
2. Owner solely controls the business.
3. tax reporting is simple (does not require a separate corporate
tax return).

Disadvantages
1. Unlimited personal liability as there is no separation between the
business and the owner.

2. Can be hard to raise capital via debt or equity financing (banks are
reluctant to lend to sole proprietorships and there are no shares to
sell to equity investors).

3. Difficult to sell.
 A partnership
A partnership is an arrangement where parties, known
as partners, agree to cooperate to advance their mutual
interests. The partners in a partnership may be
individuals, businesses, interest-based organizations,
schools, governments or combinations.
Organizations may partner to increase the likelihood
of each achieving their mission and to amplify their
reach.
A partnership may result in issuing and holding
equity or may be only governed by a contract.
 Partnership agreements can be formed in the following
areas:
Business: two or more companies join forces in a joint venture
or a consortium to i) work on a project (eg industrial or
research project) which would be too heavy or too risky for a
single entity, ii) join forces to Have a strong position on the
market, iii) comply with specific regulation (eg in some
emerging countries, foreigners can only invest in the form of
partnerships with local entrepreneurs). In this case, the alliance
may be structured in a process comparable to a Mergers &
Acquisitions transaction.
Politics (or geopolitics): In what is usually called an alliance,
Governments may partner to achieve their national interests,
sometimes against allied Governments holding conflicts
interests, as occurred during World War II and the Cold War.
 Knowledge: In education, accreditation agencies
incrementally evaluate schools, or universities, by the
level and quality of their partnerships with local or
international peers and a variety of other entities
across societal sectors.
Individual: Some partnerships occur at personal
levels, such as when two or more individuals agree to
domicile together, while other partners are not only
personal, but private, known only to the involved
parties.
Partnership (Advantages & Disadvantages )
Advantages
1. Shared risk.
2. Shared management.
3. Tax reporting is simple (does not require a separate
corporate tax return).
Disadvantages
1. Risk of conflict between partners.
2. Either partner can be held responsible for business debts
incurred by the other partner.
3. Shared decision making.
4. Buyouts can be problematical (when one partner wishes
to quit the business).
Types of Partnerships that should be considered:
1- General Partnership
Partners divide responsibility for management and liability,
as well as the shares of profit or loss according to their
internal agreement. Equal shares are assumed unless there
is a written agreement that states differently.
2- Limited Partnership and Partnership with Limited
Liability
Limited means that most of the partners have limited
liability (to the extent of their investment) as well as
limited input regarding management decisions, which
generally encourages investors for short term projects, or
for investing in capital assets. This form of ownership is not
often used for operating retail or service businesses.
Forming a limited partnership is more complex and formal
than that of a general partnership.
3- Joint Venture
Acts like a general partnership, but is clearly for a
limited period of time or a single project. If the
partners in a joint venture repeat the activity, they will
be recognized as an ongoing partnership and will have
to file as such, and distribute accumulated partnership
assets upon dissolution of the entity.
 Types of partners
1. Active Partner (Managing or Working Partner)
A person who takes active part, in the affairs and management of
the business is called active partner. He contributes his shares in
the capital and is also liable to pay the obligations of firm.

2. Nominal Partner
He is not in reality a partner of firm but his name is used as if he
is a member of the firm. He is not entitled in the profit or loss of
the business but he is liable to all the acts of the firm. The person
who has good prestige and status is given, the position of
nominal partner.

3. Sub-Partner
The person who receives a share of profit from one of the regular
partners is called the Sub-Partner. He is not liable to pay the debt
is of the firm. He has no rights and privileges against the firm.
 4. Silent Partner (Silent form managing point of view)
He is that kind of partner who does not participate in the affairs of the business
but is known to outsiders as a partner of the firm. He is liable to pay the debts
of the firm like other partner.

5. Secret Partner (Secret from public point of view)

He is active in the running life of the firm but public does not know him as
partner of the firm. He pays his share in the capital and is liable to settle the
creditors of the firm.

6. Sleeping Partner or Dormant Partner (Sleeping From Both Points of

View i.e. public and managing)
A person who
(a) does not conduct the management of the firm personally
(b) is not known to the outsiders as a partner of the firm, is called sleeping
partner. But he invests his amount in the business and is liable to clear the
debts of the firm. He is also called dormant partner.
 7. Minor Partner
There is no restriction to join the minor in the partnership by law.
Although he may become partner but with the consent of all existing
partners. In this case, he can be admitted to the profits of the firm
only but not losses. He is not personally liable for the obligations of
the firm. But minor has the right to inspect and copy .the accounts of
the firm. Within six months of his attaining maturity, he has to give
public notice whether he wants to remain partner or not. After his
decision, he will deemed as full fledged partner.

8. Quasi Partner
A person who has retired from the running management life of the
firm but he does not withdraw his capital from the business is know
as quasi-partner. So his capital is considered as a loan and he
receives interest at the rate varying with the profit. Really he is not a
partner but he is a Deferred Creditor.
 9. Senior Partner
A person who brings large portion of capital in the business is called
senior partner. He has prominent position in the firm due to his
experience, skill, energy, age and other abilities.

10. Junior Partner

He invests minor portion of capital in the business and so he has
small share in the profits. He is junior to an other partner in the
firm due to his age, experience and other factors.

11. Holding Out Partner (Estoppels partner)

A person who declares by word of mouth as partner of the firm is
called holding out partner. In reality he is not a regular partner
so he is not entitled to receive share of profit. Such persons are
liable to those parties who have given credit on the faith of such
representation.
 12. Salaried Partner
An individual who does not bring anything i.e. amount or goods in the firm
but has right to receive salary or share in the profit or both is named as
salaried partner. He is known to the outside world as a partner and is liable
for all the acts of the firm like other partners.

13. Incoming Partner

A person who is newly admitted to the firm with the consent of all the
parties is called incoming partner. He is not liable for any act of the firm
done before he became a partner unless he agrees;

14. Retired Partner (Outgoing Partner)

A person who goes out of a firm due to certain event or reason is known as
retired or out going partner. In this situation the remaining partners continue
to carry on the business. Retiring partner is liable for all the obligations and
debts incurred before the retirement. But he will also be liable to third
parties even for future transaction, if he does not give public notice of his
retirement..
 15. partners in Profit Only
He is an individual who gets a share of the profits only
without being liable for the losses. He does not
participate in the management of the business. He will
not be liable to outsiders for all acts of the firm.

16. Limited Partner

A person who has not to pay any obligation more than
the share he holds in the firm is called limited partner.
He can not take part in the management of the firm.
This kind of partner exists in limited partnership.
 Forming a partnership
A partnership is a business form created automatically
when two or more persons engage in a business enterprise
for profit. Consider the following language from the
Uniform Partnership Act: "The association of two or more
persons to carry on as co-owners of a business for profit
forms a partnership, whether or not the persons intend to
form a partnership.
" A partnership--in its various forms--offers its multiple
owners flexibility and relative simplicity of organization
and operation. In limited partnerships and limited liability
partnerships, a partnership can even offer a degree of
liability protection.
 Partnerships can be formed with a handshake--and often
they are. In fact, partnerships are the only business entities
that can be formed by oral agreement.
Of course, as with any important legal relationship, oral
agreements often lead to misunderstandings, which often
lead to disputes.
Thus, you should only form a partnership that is
memorialized with a written partnership agreement.
Preferably, you should prepare this document with the
assistance of an attorney.
Partnership Agreements
Your partnership agreement should detail how business
decisions are made, how disputes are resolved, and how to
handle a buyout.
You'll be glad you have this agreement if for some reason
you run into difficulties with one of the partners or if
someone wants out of the arrangement.
The agreement should address the purpose of the business
and the authority and responsibility of each partner.
It's a good idea to consult an attorney experienced with
small businesses for help in drafting the agreement.
Here are the general steps you need to follow in
order to form a partnership in compliance with
applicable laws.
1. Choose a business name for the partnership and
check for availability.
2. Register the business name with local, state,
and/or federal authorities.
3. Negotiate and execute a partnership agreement.
4. Obtain any required local licenses.
5. Determine what tax obligations the partnership
has, and take care of any necessary registrations.
6. Open a bank account for your business.
Operation of partnership
Partnerships have very simple management structures.
In the case of general partnerships, partnerships are managed by
the partners themselves, with decisions ultimately resting with a
majority of the percentage owners of the partnership.
Partnership-style management is often called owner
management. Corporations, on the other hand, are typically
managed by appointed or elected officers, which is
called representative management.
Keep in mind that a majority of the percentage interest in a
partnership can be very different from a majority of the partners.
This is because one partner may own 60 percent of a
partnership, with four other partners owning only 10 percent
each.
Partnerships (and corporations and LLCs) universally vest
ultimate voting power with a majority of the percentage
ownership interest.
 Of course, partners and shareholders don't call votes every time they
need to make some small business decision such as signing a
contract or ordering office supplies.
Small tasks are managed informally, as they should be.
Voting becomes important, however, when a dispute arises among
the partners.
If the dispute cannot be resolved informally, the partners call a
meeting and take a vote on the matter.
Those partners representing the minority in such a vote must go
along with the decision of the partners representing the majority.
Partnerships do not require formal meetings like corporations do.
Of course, some partnerships elect to have periodic meetings
anyway.
Overall, the management and administrative operation of a
partnership is relatively simple, and this can be an important
advantage.
Like sole proprietorships, partnerships often grow and graduate to
LLC or corporate status.