TYPES OF BUSINESSES

Liability of Business Owners Owner’s liability is the legal obligation of a business owner to use personal money and possessions to pay the debts of the business. Unlimited liability means that a business owner can be legally forced to use personal money and possessions to pay the debts of the business. Limited liability means that a business owner cannot be legally forced to use personal money and possessions to pay business debt. Section 3.2: Types of Business Ownership

SOLE PROPRIETORSHIP A business that is owned and managed by one individual who receives all the profits and bears all the losses.

Benefits: Sole Proprietorship Ease of starting and going out of business Control over profits and business operations Pride of ownership Lower taxes (pays no corporate income taxes)

Costs: Sole Proprietorship Unlimited liability Difficulty in raising financial capital Responsible for all losses Management knowledge may be limited

PARTNERSHIP A business that is owned and managed by two or more individuals who receive all the profits and bear all the losses.

Benefits: Partnership Easier to raise financial capital Partners may combine managerial skills Personal satisfaction Lower taxes (pays no corporate income taxes)

Costs: Partnership Unlimited liability Shared profits Possible conflicts between partners Possible instability after death of a partner

CORPORATION A business that is owned by stockholders and has rights and responsibilities as if it were a person.

Benefits: Corporation Limited liability Greater financial capital Unlimited life Specialized management

Costs: Corporation Increased taxation (pays corporate income taxes) Difficulty in starting (each state has its own rules for a corporate charter) May be larger, more bureaucratic than other forms of business Increased government control

Section 3.2: Types of Business Ownership Types of Corporations Most corporations are C corporations, which are taxed as an entity by the federal government. A subchapter S corporation differs from a C corporation in how it is taxed. It is not taxed as an entity, rather its income or loss is applied to each shareholder and appears on their tax returns. A limited liability company is a legally defined type of business ownership similar to a C corporation, but with simpler operating requirements and tax procedures and greater liability protection for the business owners. A nonprofit corporation is a legally defined type of business ownership in which the company operates not to provide profit for its shareholders but to serve the good of society. Section 3.2: Types of Business Ownership

Limited Liability Company LLC The LLC is often described as a hybrid business form. It combines the liability protection of a corporation with the tax treatment and ease of administration of a partnership. As the name suggests, it offers liability protection to its owners for company debts and liabilities.

Benefits: LLC LLCs do not require annual meetings and require few ongoing formalities. Owners are protected from personal liability for company debts and obligations. LLCs enjoy partnership-style, pass-through taxation, which is favorable to many small businesses.

Costs: LLC LLCs are more expensive to set up than partnerships. An LLC is not an appropriate vehicle for businesses seeking to become public eventually, or to raise money in the capital markets. LLCs usually require annual fees and periodic filings with the state.

Which type is best? Depends on your situation! They all have strengths and weaknesses.