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25 Com. Lending Rev. 27 (2010)
Forms of Business Ownership: A Primer for Commercial Lenders

handle is hein.journals/cmlrv25 and id is 273 raw text is: Forms of Business Ownership: A Primer for Commercial Lenders By Gregory L. Prescott, Ellen K. Madden and R. Mark Foster A review of the risk factors associated with the most common forms of business ownership. When starting a new venture, deciding on the form of business ownership is one of the most basic decisions a business owner makes. Although many businesspeople do not real- ize the impact of the business ownership structure decision, the chosen form of business ownership can result in significant ramifications for the owner as well as for the business itself. For instance, the chosen structure will affect the cost and ease of establishing the business entity the liability of the owners for the entity's debts, the continuity of the business upon the death or withdrawal of an owner, the nature of management control, the ease of raising additional capital after inception and the income tax implica- tions associated with the entity's earnings/losses. Commercial lenders should have a basic knowl- edge of the most popular forms of business ownership and the corresponding implications for the business as well as the business owners. This article aims to provide commercial lenders with a basic understanding of the primary advantages and disadvantages of the most common forms of business ownership structure and to highlight the resulting risk factors that lenders should consider as they manage their lending relationships with commercial entities. Forms of Business Ownership The most common forms of business ownership structure include the following: sole proprietorships, general partnerships, limited partnerships, corpora- tions (both C corps and Sub S corps), limited liability companies and limited liability partnerships. Each structure has its own distinct advantages and dis- advantages as well as associated risks for lenders (summary, Exhibit 1). Sole Proprietorship A sole proprietorship (or simply, proprietorship) is an unincorporated business conducted by the owner in his or her individual capacity. It is the simplest form of business ownership, but it is important to know that the sole proprietorship is not a separate legal entity. From a legal standpoint, the business has no existence apart from its owner. The owner main- tains complete authority over the management of the business, and title to the entity's assets is held in the name of the proprietor. The primary advantage of the sole proprietorship structure is that it is the easiest and least expensive ownership structure to organize. Plus, the owner maintains complete control over the business, and the entity is relatively easy to dissolve. The primary disadvantages of this form are that the owner has unlimited personal liability for the debts and obligations of the entity and that it is difficult to raise additional equity capital (if necessary) due to ownership being vested in a single individual. Gregory L. Prescott is a Senior Instructor of Accounting at the University of South Alabama in Mobile. Contact him at gprescot@usouthal.edu. Ellen K. Madden is an Instructor of Accounting at the University of South Alabama in Mobile. Contact her at emadden@usouthal.edu. R. Mark Foster is an Instructor of Accounting at the University of South Alabama in Mobile and a Partner with Allen, Allen, and Foster, LLP. Contact him at markfoster@usouthal.edu. COMMERCIAL LENDING REVIEW 27 NOVEMBER--DECEMBER 2010

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