Types of Business Organizations

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Types of Business Organizations

• Sole Proprietorships
• Partnerships
• Corporations

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What is a Sole Proprietorship?

• The easiest and most popular form of business to
  create
• The owner is the only one responsible for
  businesss activities
• 76 of all businesses in the US are sole
  proprietorships
• Owner has liability money owed to others

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Advantages

• Easy to start quickly
• Inexpensive to create
• Owner has complete authority over all activities
  and receives all profits
• The least regulated
• Business pays no taxes not separate
• Business income is taxed at owners rate

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Disadvantages

• Less financial protection
• Unlimited liability debts incurred by business
  may be paid from owners personal assets
• Full responsibility
• More difficult to raise capital
• Limited growth potential
• Lack of longevity - Death of the owner dissolves
  the business

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How to Set Up a Sole Proprietorship

• First Business Name
• If you use a made up name you have to apply for a
  Certificate of Doing Business Under an Assumed
  Name (DBA) from local government no other
  business can have same name
• If you are going to have employees you need an
  Employer Identification Number (EIN) from IRS for
  tax purposes
• EIN tracks federal income tax withheld and
  federal income tax returns

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What is a Partnership?

• Partnership more than one person shares the
  business decisions and outcomes
• 2 or more people own a business and share assets,
  liabilities and profits
• Compensates for shortcomings of a sole
  proprietorship

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General Vs. Limited Partners

• General Partners
• All partners have unlimited personal liability
  and take full responsibility for the management
  of the business
• Law requires at least 1 general partner

• Limited Partners
• Partners dont share equally
• Liability is limited to investment
• Cannot be actively involved in managing the
  business
• If they are they lose limited liability status

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Other Types of Partnerships

• Joint Venture
• 2 companies join to complete a specific project
• They act like partners for a specified period of
  time and then the partnership ends

• Strategic Alliance
• 2 businesses work together for mutual benefit
• Example You form a strategic alliance with a
  manufacturer that agrees to produce your new
  product for you

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Advantages of Partnerships

• Easy Start-Up
• Specialization
• Shared Decision Making
• Shared Business Losses

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Disadvantages of Partnerships

• Unlimited liability (including your partners
  liability)
• Fragmented entity hard to dissolve one
  partners interest without dissolving the
  partnership
• Potential for conflict
• Personality conflicts
• Disagreements about authority
• Unclear roles
• Lack of longevity

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Making a Partnership Work

• Consider each others needs before committing to
  the partnership
• Plan for disagreements
• Share business responsibilities
• Put things in writing
• Always be honest about how the business is doing
• Establish a partnership agreement in advance

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Partnership Agreements

• Not required but good idea
• Attorney draw up based on the Uniform Partnership
  Act
• Profit sharing, responsibilities, what happens if
  one partner quits or dies
• Prevents problems

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Check Your Understanding

• Why is the sole proprietorship the most popular
  form of legal ownership?
• If you form a partnership, why should you draft a
  partnership agreement?
• What is the difference between general and
  limited partners?

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Corporations

• Youll Learn
• The benefits and costs of setting up a
  corporation
• The difference between a C-Corporation and a
  Subchapter S Corporation
• How a Limited Liability Company works

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What is a Corporation?

• Corporation A business that is chartered, or
  registered, by a state
• Legally separate from owners treated as an
  entity
• Lives after owners have sold interests or passed
  away

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Why Its Important

• In a corporation, the owner or owners of the
  business are protected from liability for the
  actions of the company
• A corporation is a legal entity (has rights like
  a person)

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Forming a Corporation

• Much more complicated start-up than a sole
  proprietorship
• Must apply for a state license known as Articles
  of Incorporation
  
• Name address of the proposed corp.
• Location of corporate headquarters
• Method of fund-raising the corp. will take
• Amount of money the corp. expects to raise
• Names addresses of the major corporate officers
• Length of time the corp. is expected to exist
• Receive a corporate charter

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C-Corporation

• The most common corporate form
• Protects the entrepreneur from being sued for
  actions and debts of the corporation
• Can be complex need an attorney to help
• Certificate of Incorporation stock
• Board of Directors required
• Board makes policy decisions/select officers

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Advantages/Disadvantages

• Expensive to set up
• 500-2500 in fees
• Government regulations
• Income more heavily taxed
• Taxed on profits
• Stockholders must pay income taxes on their
  dividends

• Raise money by issuing shares of stock
• Common stock voting rights
• Preferred stock 1st to get their investment
  back
• Limited liability
• More status
• Pension/retirement funds
• Separation of ownership from management

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Subchapter S Corporation

• Avoids double taxation of C-Corp.
• Taxed like sole proprietorship or partnership
• Profits pass through corporation taxed only
  once
• Often cash businesses

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Nonprofit Corporations

• Nonprofit corporations Legal entities that make
  money for reasons other than the owners profit
• Can make a profit but money must stay within the
  company
• Charity
• Public Benefit (foundations)
• Mutual Benefit (trade assn., sports, political)
• Religion (churches)

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Limited Liability Companies (LLC)

• Limited liability of a corporation
• Tax advantages of a partnership
• Shareholders are only taxed once
• Doctors, lawyers use to protect partners
• Popular with foreign investors family owners

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Corporate Structure

• Charter identifies the corp. officers
• Board of Directors people from inside or
  outside of the company.
• Key decision-making body.
• Selects corporate officers

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Corporate Finances Raising Funds - A

• Funds raised by selling stock (ownership of the
  firm)
• Ownership issued in portions known as shares
• Profits are paid in dividends
• Common stock shareholders have a voice in how
  the company is run and share dividends.
• Preferred stock guaranteed dividends but no say
  in running of corporation

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Corporate Finances Raising Funds - B

• Funds are raised by selling corporate bonds
• Corporation borrows money from the investor
• Holder receives principal interest

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Other Forms of Organization

• Corporate combinations mergers
• Acquisitions
• Consolidations
• _Conglomerate
• Subsidiaries
• Franchises

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Check Your Understanding

• What are the 3 reasons people choose the
  corporate form?
• What is the difference between a C-Corporation
  and a Subchapter S Corporation?
• Explain how a nonprofit business can try to make
  a profit.