Forms of Business Ownership and Buying an Existing Business

Assignment 9:  Chapter 6 Questions

Respond to the following Questions.  Students should complete this assignment after reading and reviewing the material for each chapter, attending class and taking lecture notes.  This assignment is designed to help students review material and prepare for exams.  Save a copy of your chapter questions for your review sheet to study for exams.  Students are expected to provide at least one paragraph (3-5 sentences) for each question.  Each question assignment submission is worth 20 points. 

1.      Explain the advantages and disadvantages of the following types of ownership:  Sole proprietor, Partnership, C-Corporation, S-Corporation, LLC

Legal structure	Advantages	Disadvantages
Sole proprietorship	Single tax Inexpensive to start Easy to create and discontinue No specific legal restriction Profit incentive Total decision making	Unlimited Liability Limited skill and capabilities Feeling of isolation Limited capital lack of continuity to business
Partnership	Single tax More resourceful Inexpensive to start Division of profit Complementary skills Easy to establish Ability to attract limited partner Flexibility Less government regulation	Unlimited Liability Possibility disagreement and conflict Partner bond by law Capital accumulation Difficult in disposing of partnership without dissolving the partnership
C-corporation	Sell stock to raise capital Separated liability Perpetual life Separated of ownership from management Owner do not have to devote time to company to make money on their investment	Double tax Expensive form More law and legal Time consuming and costly Owner have limited control on business More laws and regulation Complex structure
S-corporation	Single Tax Limited liability with restrictions	Shareholder who works should be paid More legal Time consuming and costly Expensive to form
LLC	Separated liability Possibility to raise capital	Expensive to start-up Complex Possibility of conflict

2.     Why is it important to write a partnership agreement?  What should be included in the agreement?

         This agreement has purpose to reach common goals and anticipate for conflict in the future. No matter how strong friendship is, partner should create a partnership agreement. Discussing and then putting in writing how partner will handle sensitive issues such as financial, daily decision making, deadlocks in decisions, compensation and withdrawal from the partnership. These things not only help resolve dispute down the road but also allows the partner to avoid disputes. These below are detail what should be included in the agreement:

–Business name

–Partners’ names and addresses

–Purpose and nature of business

–Business locations

–Starting date of partnership and expected duration

–Contributions to be made by each partner (money, expertise, labor, real estate, personal property, etc.)

–Management responsibilities and authority of each partner

–Duties of each partner

–Salaries and spending authority

–Details on sharing of profits and losses

–Accounting procedures

–Method for purchasing a deceased or retiring partner’s share of firm

–Grievance procedures

–Details on dissolution of partnership and distribution of assets to partners

3.     What are the advantages and disadvantages of buying a business?

Advantages	Disadvantages
Allows a quicker start	Potential to buy a loser
Has a base of financial information for estimating costs and profits	Need more capital
Reduces the cost of getting established	No time to learn while business develop
Eliminates some competition	Cost of legal assistance needed for purchasing
Provides existing customers	Accept current location or move

4.     How do you go about determining the value of a business that you want to buy?

         There are many values that we can consider buying a business. Those are SWOT of that business, price, location, legal issues, what include in that business when we buy, reason they sell it, conditions. If we know all of those, they can give us picture about that business whether or not the business should we buy.

5.     What are the steps in buying a business?

·      Analyze your skills, abilities and interests

·      Develop list of criteria

·      Prepare list of potential candidates

·      Investigated and evaluated potential companies

·      Explore financing options

·      Negotiate a reasonable deal with the owner

·      Ensure a smooth transition