Types of Business Ownership Sole Proprietorships Partnerships Corporations

Sole Proprietorship  The easiest and most popular form of business to create  Is a business that is owned and operated by one person  Nearly 76% of all businesses in the United States are sole proprietorships  Is it right for you? Ask yourself  How much liability protection, or insurance do you need?  Do you need to seek investment capital?  What effect will the business have on your tax status?

Sole Proprietorship - Advantages  Easy and inexpensive to create  Gives owner complete authority  Owner receives all of the profits  Income from the business is taxed at the personal rate rather than as a business

Sole Proprietorship - Disadvantages  Biggest = FINANCIAL  Owner has unlimited liability or full responsibility for all debts and actions of the business  May have to pay debts from personal assets  May be limited to total reliance on the owner’s abilities and skills – which may not be sufficient  Death of the owner automatically dissolves the business unless there is a will

Setting Up A Sole Proprietorship  Simple as deciding on a company name  When using a name other than your own you need to apply for a Certificate of Doing Business Under an Assumed Name – “DBA”  If you are hiring employees you will need an Employer Identification Number (EIN)  Comes from the IRS  Used for tax purposes  You will need a TAX ID number if you are a vendor or retailer  Assigned by the state’s Department of Revenue

Partnerships  An unincorporated business with two or more owners  Most common form for more than one owner  Requires a DBA if the partner’s names are not being used  General vs. Limited Partners  General Partner – participant who has unlimited personal liability and takes full responsibility for managing the business  Limited Partner – partner whose liability is limited to his or her investment

Partnerships - Advantages  Inexpensive to create  General partners have complete control  Share ideas and secure investment capital more easily and in greater amounts  Pulling skills and abilities from all partners

Partnerships - Disadvantages  Difficult to dissolve business  Personality conflicts  Bound by the laws of agency  Partners are held liable for each other’s actions

Making a Partnership Work  Share business responsibilities  Put things in writing  Be honest about how the business is doing  Law does not require a partnership to be based on a written document – However, it should have one  Agreements answer many questions on the specifics of the business

Corporations  A business that is registered by a state and operates apart from its owners  Lives on after the owners have sold their interests or passed away  Three major types: 1.C-corporation 2.Sub-chapter S Corporation 3.Nonprofit Corporation

C-Corporation  An entity that pays taxes on earnings  Shareholders pay taxes as well  Can protect the entrepreneur from being sued for the actions and debts of the corporation  You need to file a Certificate of Incorporation with the state and the issuing of stock  Shareholders are the owners of the corporation  Required to have a board of directors

C-Corporation  Advantages  Ability to raise investment money  Employee benefits  Tax advantages  Professional appearance  Limited Liability – they are liable only up to the amount of their individual investment  Disadvantages  Expensive to set up - $500-$2500  Income is heavily taxed  Pay taxes on profits and shareholders pay taxes = double taxation

Subchapter S Corporation  Advantages  Taxed like a partnership  Profits are taxed only once at the shareholder’s personal tax rate  Not a tax paying entity  Disadvantages  No more than 75 stockholders who must be US citizens  Only one class of stock  If business does not generate enough cash to cover taxes, the owners must pay out of pocket

Nonprofit Corporation  Benefit a certain cause in the community  Legal entity that makes money for reasons other than the owners’ profit  Can make a profit but must remain within the company and not to shareholders  Charity  Public Benefit – advance science, education, the arts  Mutual Benefit – trade associations, amateur sports leagues, and political groups

Limited Liability Company (LLC)  Owners enjoy limited liability and some tax benefits  Avoids some restrictions associated with Subchapter S Corporations  Benefits  Simpler to set up  Protects its owners – owners not liable for the company’s debts  Not subject to double taxation  No limitations on the number of members