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MGT602 - Entrepreneurship - Lecture Handout 28

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Transferability of Interest

  • Each of the forms of business offers different advantages as to the transferability of interest.
  • In a proprietorship, the entrepreneur has the right to sell any assets.
  • In the limited partnership, the limited partners can sell their interests at any time without consent of the general partners. A general partner cannot sell any interest unless specified in the partnership agreement.
  • In a corporation shareholders may transfer their shares at any time.
  • In the S Corporation, the transfer of interest can occur only as long as the buyer is an individual.

Capital Requirements

The need for capital during the early months can become one of the most critical factors in keeping a new venture alive.

  • For a proprietorship, any new capital can only come from loans or by additional personal contributions. Often an entrepreneur will take a second mortgage as a source of capital. Any borrowing from an outside investor may require giving up some equity. Failure to make payments can result in foreclosure and liquidation of the business.
  • In the partnership, loans may be obtained from banks or additional funds may be contributed by each partner, but both methods require change in the partnership agreement.
  • In the corporation, new capital can be raised by:
    • Stock may be sold as either voting or nonvoting.
    • Bonds may be sold.
    • Money may also be borrowed in the name of the corporation.

Management Control

  • The entrepreneur will want to retain as much control as possible over the business. In the proprietorship, the entrepreneur has the most control and flexibility in making business decisions.
  • In a partnership the majority usually rules unless the partnership agreement states otherwise.
  • In a limited partnership the limited partners have no control over business decision. Control of day-to-day business is in the hands of management.
  • Major long-term decisions may require a vote of the major stockholders.
  • As the corporation increases in size, the separation of management and control is probable.
  • Stockholders can indirectly affect the operation by electing someone to the board of director

Distribution of Profits and Losses

  • Proprietors receive all profits from the business.
  • In the partnership, the distribution of profits and losses depends on the partnership agreement.
  • Corporations distribute profits through dividends to stockholders.

Attractiveness for Raising Capital

  • In both the proprietorship and partnership, the ability to raise capital depends on the success of the business and personal capability of the entrepreneur.
  • Because of its limitations on personal liability, the corporation is the most attractive form for raising capital.

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