7.02 - Choose Your Business Structure BF10: Principles of Business and Finance Fall 2015

Types of business structures Sole proprietorship Partnership Corporation

Sole proprietorship Simplest and most common structure chosen to start a business Unincorporated business owned and run by one individual Owner entitled to all profits Owner responsible for all business’s debts, losses and liabilities

Sole proprietorship Advantages: Easy and inexpensive to form Complete control Easy tax preparation Disadvantages: Unlimited personal liability Hard to raise money Heavy burden

Partnership Single business where two or more people share ownership Each partner contributes to money, property, labor, and/or skill Each partner shares in the profits and losses Entail more than one person in the decision-making process

Partnership Advantages: Easy and Inexpensive Shared Financial Commitment Complementary Skills Partnership Incentives for Employees Disadvantages: Joint and Individual Liability Disagreements Among Partners Shared Profits

Partnership Arrangements General Partnerships assume that profits, liability and management duties are divided equally among partners Limited partnerships allow partners to have limited liability as well as limited input with management decisions Joint Ventures act as general partnership, but for only a limited period of time or for a single project

Corporation Independent legal entity owned by shareholders Have costly administrative fees Complex tax and legal requirements Ability to sell ownership shares in the business through stock offerings.

Corporation Advantages: Limited Liability Ability to Generate Capital Corporate Tax Treatment Attractive to Potential Employees Disadvantages: Time and Money Double Taxing Additional Paperwork

Corporation Types The C-corporation is the “classic company structure” owned and operated by a number of shareholders based upon its authorized capital The S-corporation is for small business which enjoys the most number of tax benefits and also offer limited liability protection and reduced taxable gains if the owner sells the business The LLC structure can best be described as the hybrid between the S and the C corporations and offer limited liability protection as to the actions of the corporate entity