The Portable MBA in Finance and Accounting, 3rd Edition

(Greg DeLong) #1

228 Planning and Forecasting


prescribed fee. The members then enter into an operating agreement setting
forth their respective rights and obligations with respect to the business. Most
states that have adopted the LLC have also authorized the limited liability
partnership, which allows general partnerships to obtain limited liability for
their partners by filing their intention to do so with the state. This form of
business entity is normally used by professional associations that previously op-
erated as general partnerships, such as law and accounting firms.


COMPARISON FACTORS


The usefulness of the five basic business forms could be compared on a virtu-
ally unlimited number of measures, but the most effective comparisons will
likely result from employing the following eight:



  1. Complexity and cost of formation.What steps must be taken before your
    business can exist in each of these forms?

  2. Barriers to operation across state lines. What steps must be taken to move
    your business to other states? What additional cost may be involved?

  3. Recognition as a legal entity. Who does the law recognize as the operative
    entity? Who owns the assets of the business? Who can sue and be sued?

  4. Continuity of life. Does the legal entity outlive the owner? This may be
    especially important if the business wishes to attract investors or if the
    goal is an eventual sale of the business.

  5. Transferability of interest.How does one go about selling or other wise
    transferring one’s ownership of the business?

  6. Control. Who makes the decisions regarding the operation, financing,
    and eventual disposition of the business?

  7. Liability.Who is responsible for the debts of the business? If the com-
    pany cannot pay its creditors, must the owners satisfy these debts from
    their personal assets?

  8. Taxation.How does the choice of business form determine the tax
    payable on the profits of the business and the income of its owners?


FORMATION OF SOLE PROPRIETORSHIPS


Ref lecting its status as the default form for the individual entrepreneur, the
sole proprietorship requires no affirmative act for its formation. One operates
a sole proprietorship because one has not chosen to operate in any of the other
forms. The only exception to this rule arises in certain states when the owner
chooses to use a name other than his own as the name of his business. In such
event, he may be required to file a so-called d /b/a certificate with the local
authorities, stating that he is “doing business as” someone other than himself.

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