Unit 4 Types of Business Ownership

Sole Proprietorship Easiest & most popular form of business to create Business that is owned and operated by one person Majority of business in U.S. are Sole Proprietorships Advantages Easy, inexpensive to create. You’re the boss. You receive the $$$. NO sharing. No business taxes, only personal income. Disadvantages Financing. Unlimited Liability—Full responsibility for debts and actions of the business Raising Capital-May not have enough assets to qualify for a loan Total reliance on self. Your skills and abilities. Are they enough?

Sole Proprietor Cont’d. When using a name other than your own, you must apply for a Certificate of Doing Business Under an Assumed Name Also known as “DBA” (Doing Business As) If you hire employees, you need an Employer Identification Number. (EIN). Comes from IRS, used for tax purposes to track federal income taxes You can get them online.

Partnerships Unincorporated business with two or more owners Most common business organization involving more than one owner Used to help compensate for the shortcomings of a sole proprietorship DBA is required when last names of the partners are not used in naming the business. Lawyers, Doctors, and Accountants usually set up as partnerships. Advantages Inexpensive to create, general partners have complete control Allows you to share ideas and skills Disadvantages If one partner wants out or dies, the partnership ends Personalities collide! Disagreements over authority Partners can be liable for each other’s actions If one partner signs a contract, the other partner is bound.

Partnerships Cont’d General vs. Limited Partners General : participant in a partnership who has unlimited liability and takes full responsibility for managing the business Liable for the debts of the partnership. Can be bound on contracts. All partnerships must have at least one general partner Partners do not have to share the business equally This is stated in the partnership agreement Limited : participant whose liability is limited to his/her investment Invest $10,000, the most you can lose is $10,000. Are not actively involved in managing the business. If they do become involved, they lose limited liability status.

Corporation Business that is registered by a state and operates apart from its owners Lives on after owners have sold their portions or died Ownership is represented by shares of stock 3 Major types of corporations are the C-corporation, Subchapter S corporation, and nonprofit corporation Figure 7.1 – Legal forms of ownership: Comparison Chart

C-Corporation Entity that pays taxes on earnings Shareholders pay taxes as well Most common corporate form Can protect the entrepreneur from being sued for the actions and debts of the corporation Advantages Limited liability Ability to raise investment money (lots of it) Perpetual existence Employee benefits Tax advantages More professional appearance (image) Disadvantages Expensive to set up Income is more heavily taxed Double taxation on its earnings

Subchapter S Corporation Can have no more than 75 stockholders who must be U.S. citizens Helps avoid double taxation of a C-corporation Only taxed once, at shareholder’s personal tax rate Cash businesses like restaurants are often these types If the business produces enough cash, this works If the business shows a large taxable profit, but doesn’t generate enough cash, the owners pay for taxes out of their personal earnings

Nonprofit Corporation Legal entity that makes money for reasons other than the owner’s profit Can make a profit, but must remain within the company and not be distributed to shareholders Red Cross, Girl Scouts, Habitat for Humanity, Goodwill, etc.

Limited Liability Company Company whose owners and managers enjoy limited liability and some tax benefits Avoids restrictions in Subchapter S Corp AKA LLC. Advantages Simpler to set up Flexibility of partnership structure Protects its owners with limited liability Not subject to double taxation No limitations on the number of members or their status

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