1. Business Organizations “It’s nothing to be afraid of”

2. What is a business organization? Form of a business Ownership structure Advantages/disadvantages to each one – Taxes – Liability protection – Complexity of operation

4. Sole Proprietorship Simplest form Unincorporated Owned by one person No separate identity Income and expenses reported on the owner's individual tax return. Owner's assets at risk for business debts

5. To form a sole proprietorship: Obtain licenses or permits – Assumed name/d.b.a Start doing business

6. To run a sole proprietorship: All decisions made by owner No meetings No internal agreements

7. Partnerships

8. General Partnerships Association of two or more owners Partners contribute cash, property or services Profits and losses included on individual tax returns of the partners Asset protection – General partnerships provide no asset protection

9. To form a general partnership Make partnership agreement – Agreement creates partnership Begin doing business

10. To run a general partnership Follow rules of agreement If the agreement does not cover a situation, Uniform Partnership Act (UPA) controls – Most of UPA can be modified by agreement – Provides equality Equal profits Equal control UPA says partnership dissolves if a partner leaves

11. Limited Liability Partnership Has initials “LLP” at end of name Partners have no risk of personal liability File declaration that partnership will be LLP – Secretary of State – No qualifications—automatic – Does not change tax status

12. Limited Partnership Has “LP” at end of name One general partner, any number of limited partners – General partner runs business – Limited partners share in profits or losses

13. Limited partnerships are usually poor choices for new businesses!!! Usually, investment vehicles – High risk operations In some states, must be registered as securities Better ways for limiting role of investors

14. Joint Ventures Partnership for a limited purpose Each party contributes something Not a continuing business Treated as partnership for that business

15. Corporations Evil? Or just misunderstood?

16. Corporations Creatures of state law Separate entities – Fictitious person – Have 1 st Amendment rights Created when shareholders trade cash or property for stock Owners’ assets protected from creditors of corporation Classified by tax treatment

17. Some states have special rules for certain corporations Farm corporations Family corporations Closely-held corporations

18. C Corporation Default Corporation liable for federal income tax – Usually, state income tax, too – Lower rate than individuals Shareholders pay tax if they receive profits – Dividends

19. S Corporation Same limited personal liability as C corporation Earnings taxed at the shareholder level – Corporation pays no tax Restricted to issuing only one class of stock No more than 75 shareholders Must file election with IRS

20. So an S Corporation is better, right? Advantages No taxation of corporation Disadvantages Limits on ownership Profits taxed, even if not distributed Corporation still must file “informational” return

21. Most small businesses will elect Subchapter S, if they qualify

22. Limited Liability Companies

23. Identified by initials “LLC” Relatively new form of business – Now recognized in all states Limited liability for members No federal income tax – May elect to be treated as a C corporation No restrictions on ownership – Any number of owners – Any management structure

24. LLCs are similar to corporations Organized, not incorporated Members, not shareholders Governors, not directors Operating agreements, not by-laws Usually, run like corporations – Similar legal rules for internal disputes – No uniform rules

25. Some states make LLCs more difficult to form Notably, California and New York Must publish notice of LLC – Not for corporations Many LLCs converting to corporations – Not other way around

26. Cooperatives

27. Cooperatives are organized to provide services to members Services provided at lowest cost possible – Save on overhead for independent businesses Members buy share – Equal voting rights Distribution of profits – Expenses of co-op – Operating/cash reserve – To members, in proportion to business don

28. Things to Consider

29. Limiting Personal Liability Major concern if business poses risks – Injuries – Financial risk Important if owners have non-business assets – Interest in another business – Personal wealth Choices – Corporation, LLC, LLP best options

30. Ability to Borrow Money Corporations may find it easier to borrow Banks often not as familiar with LLCs – Variable ownership structure Sole proprietorships, partnerships depend on individual credit of owners/partners

31. Control of the Business Sole proprietor has total control Corporations managed by board of directors – Shareholders vote for directors – By-laws may be adopted Partners or LLC members decide how business is run

32. Continuity of the Business Sole proprietorships die with owners Death of a partner does not dissolve a partnership, if agreed Corporations may exist forever – Stock can be sold or bequeathed LLCs’ operating agreements may ensure continuity

33. Dispute Resolution Any business is at risk of disagreements between its owners Businesses have traditionally relied on arbitration Should be set out in agreement or by-laws

34. “Let us now take up the subject of taxes.”

35. “That’s where my brother lives.” LLCs not taxed, if chosen – Each member taxed on his/her share of LLC income Partnerships not taxed – Each partner taxed on his/her share of partnership income S Corporations not taxed – Income passes through, taxed to to the shareholders C corporations taxed – Shareholders pay tax on their share