Chapter 5

The Structure
Legal Forms of Ventures

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 Important factors
◦ How easily the form of business organization can
be implemented
◦ The amount of capital required to implement the
form of business organization
◦ Legal considerations that might limit the options
available to the entrepreneur
◦ The tax effects of the form of organization
selected
◦ The potential liability to the owner of the form of
organization selected

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 Advantages of proprietorships
◦ Financial advantages
◦ Lack of restrictions
◦ Secrecy
◦ Personal satisfaction

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 Disadvantages of proprietorships
◦ Unlimited liability
◦ Limited size
◦ Limited life

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 As defined by the Revised Uniform
Partnership Act (RUPA): An association of two
or more persons to carry on as co-owners of
a business for profit

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  Relative predominance of proprietorships,
partnerships, and corporations in U.S. business

Corporations 20%

Partnerships 9%

Nonfarm
Proprietorships 71%

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 General partnerships
 Limited partnerships
 Other types of partnerships

◦ Silent partner
◦ Secret partner
◦ Nominal partner
◦ Limited liability partnership (LLP)

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 Increased sources of capital and credit
 Improved decision-making potential
 Improved chances for expansion and growth
 Definite legal status

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 Unlimited liability
 Problem of continuity
 Managerial problems
 Size limitations

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 Although they constitute only about 20% of
all business, corporations account for more
than 90% of all business receipts

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 Legal status—A corporation is a legal person
and a legal entity independent of its owners
(shareholders) and its managers (officers
and the board of directors)
 Powers—A corporation may acquire, hold,
and convey property in its own name
 Management—A shareholder has no right or
duty to manage the business

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 Owners liability—The shareholders have
limited liability
 Transferability of owner’s interest—The
ownership interest in a corporation is freely
transferable
 Taxation—Double-taxation possibility

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 Limited liability
 Indefinite life
 Growth potential
 Managerial efficiency
 Transfer of ownership

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 Heavy taxation
 High organizing expenses
 Government restrictions
 Lack of secrecy

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 Subchapter S corporations
◦ Named after the subchapter of the Internal
Revenue Code
◦ Now are called S corporations
 It can have no more than 75 stockholders and
no more than 25% of the corporate income
can come from such passive investments as
dividends, rent, and capital gains

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 A hybrid form of business enterprise that
offers the limited liability of the corporation
but the tax advantages of a partnership

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