1. LAWS Affecting Business Start-Ups
Principles of Business

2. What are the different types of business structures?
MOST COMMON:
Sole Proprietorship
Partnership
Corporations
C-Corp
S-Corp
Not-for-Profit

3. What are the different types of business structures?
SPECIAL TYPES:
Limited Liability Company (LLC)
Cooperatives

4. Factors to consider when choosing a legal form of ownership:
Your vision regarding the size and nature of your business.
The level of control you wish to have
The level of “structure” you are willing to deal with
The business’ vulnerability to lawsuits

5. Factors to consider when choosing a legal form of ownership:
Tax implications of the different forms of ownership structures
Expected profit (or loss) of the business
Whether or not you need to re-invest earnings into the business
Your need for access to cash out of the business for yourself.

6. Sole Proprietorship
One person owns the business and takes the major responsibility for decisions about its operations
Most business start out as sole proprietorships
About 73% of all businesses in the US are sole proprietorships

7. Sole Proprietorship LEGAL STATUS
A S.P. is not a separate legal entity; the owner IS the business
FORMATION
License to conduct business
Registration of business name
LIFE SPAN
Business terminates when owner becomes disabled, retires or dies

8. Sole Proprietorship TRANSFER OF OWNERSHIP
The owner can sell or give away any asset because there is no legal distinction between the business and the owner
MANAGEMENT RESPONSIBILITY
Management decisions are completely in the hands of the owner; there are no shareholders or Board of Directors to answer to

9. Sole Proprietorship LIABILITY
The owner is personally liable (responsible) for all debts and other business liabilities. The owner’s personal assets are fully exposed to risks.
TAX ISSUES
Income and expenses are reported on the owner’s personal 1040 Tax Form.

10. Sole Proprietorship Advantages: Easy, inexpensive to create
Owner has complete control
Least regulated
Income is taxed at personal level (and rate)
Disadvantages:
Unlimited liability
Raising capital is difficult
Owner may not have the needed skills
Death of owner dissolves business

11. Liability
Responsibility for all debts and actions of the business. If anything goes wrong, it is the owner’s responsibility to “make it right.”
Brainstorm a list of situations that would cause a business owner legal or financial problems.

12. Partnership
Business is owned by two or more people who share the risks, rewards and responsibilities for operation
Often chosen by people who provide professional services (doctors, lawyers, accountants)
About 7% of all businesses in the US are partnerships
General Partner: member of a partnership who has unlimited liability and takes full responsibility for managing the business
Limited Partner: liability is limited to his/her investment and he/she cannot be actively involved in managing the business

13. Partnership LEGAL STATUS
In some ways, a partnership is treated as a separate legal entity because it can own property; but it is not treated as separate when dealing with the feature below…
FORMATION
License to conduct business
Registration of business name
Written agreement between the partners defining ownership, responsibility, etc…

14. Partnership
LIFE SPAN
Business terminates when owner(s) becomes disabled, retire or die
TRANSFER OF OWNERSHIP
Partners may sell their portion of the business if it is agreed upon
MANAGEMENT RESPONSIBILITY
Responsibility is shared between the partners.

15. Partnership LIABILITY
The owners are personally liable (responsible) for all debts and other business liabilities.
TAX ISSUES
Income and expenses are reported on the owners’ personal Tax Forms.

16. Partnership Advantages: Inexpensive to create
General partners have total control
Two heads are better than one
Disadvantages:
If one partner wants out or dies, the partnership ends
Partners are held liable for each other’s actions
Personality conflicts
How does a partnership make up for the shortcomings of a sole proprietorship?

17. Creating a Partnership Agreement
Break up into groups of 3-4.
Develop a written partnership agreement that could be used when students work together on a project.
Share with class.

18. Corporations
A business registered by a state and operates apart from its owners.
A corporation lives on after the owners have sold their interests or passed away.
Ownership (or equity) in a corporation is represented by shares of stock.
Corporations can purchase goods, sue and be sued, and conduct any type of business transaction.

19. Corporation Number of Owners: Separate Legal Entity Status: Formation:
C-Corp - Unlimited
S-Corp – 75 or less
Separate Legal Entity Status:
C Corporation is considered a SLE for legal and tax purposes
S Corporation for legal purposes ONLY
Formation:
CHARTER filed with State

20. Corporation Life Span: Sale/Transfer of Ownership: MGT Responsibility:
Perpetual Life
Sale/Transfer of Ownership:
Shareholders are free to sell stock unless restricted by an agreement
MGT Responsibility:
BOARD OF DIRECTORS

21. Corporation Liability: Taxation: Corporation is a SLE
Board of Directors could be help liable for bad decision making
Taxation:
Corporation is taxed on income
Shareholders also are taxed on individual income
DOUBLE TAXATION

22. Corporation ADVANTAGES: Status Limited liability Continuous life
Tax advantages (can deduct salaries and contributions to benefit plans)
Board of Directors
DISADVANTAGES:
Expensive to start-up ($500 - $2,500)
Income is more heavily taxed
Double taxation

23. Limited Liability Company (LLC)
Number of Owners:
No limit
Most states require at least two
Separate Legal Entity Status:
Has SLE status
Formation:
Like a parternship

24. Limited Liability Company (LLC)
Lifespan:
Unless stated in agreement, dies with owner(s)
Sale/Transfer of Ownership:
Majority of members need to agree on it
MGT Responsibility:
Like a partnership

25. Limited Liability Company (LLC)
Taxation:
Profits are shared as determined in the “Articles of Organization”
Owners are taxed at personal level on profits

26. LLC examples in Hamburg

27. LLC ADVANTAGES: Simpler to set up than a corporation
Flexibility of a partnership
Limited Liability
No double taxation
No limit to number of owners
DISADVANTAGES:
Need a good agreement (Article of Organization)
Raising funds

28. COOPERATIVE
A business is owned and operated by its user-members for the purpose of supplying themselves with goods/services
Must obtain a charter
Members buy stock/shares
Popular in agriculture, building, housing and credit unions
Examples: Eden Valley Co-op, Meridia Community Credit Union, Lexington Coop