Types of Business Ownership Chapter 7

Entrepreneurs need to understand the advantages and disadvantages of various types of businesses so that they can choose the one that best suits their needs.

Sole Proprietorship The easiest and most popular form of business ownership is the sole proprietorship. sole proprietorship a business that is owned and operated by one person

Sole Proprietorship The owner of a sole proprietorship: receives the profits, incurs any losses, and is liable for the debts of the business.

Sole Proprietorship In a sole proprietorship the owner must decide how much liability protection he or she needs. liability protection insurance against the debts and actions of a business

Advantages Sole proprietorship is easy and inexpensive to create. The owner has complete authority over all business activities. It is the least regulated form of business ownership. The business pays no taxes; income is taxed at the personal rate of the owner.

Disadvantages The owner has unlimited liability. Raising capital is more difficult. The business is totally reliant on the skills and abilities of the owner. The death of owner dissolves the business unless there is a will to the contrary.

Disadvantages The biggest disadvantage of a sole proprietorship is financial. In this form of business ownership, the owner has unlimited liability. unlimited liability full responsibility for all debts and actions of a business

Partnership A partnership draws on the skills, knowledge, and financial resources of more than one person. partnership an unincorporated business with two or more owners who share the decisions, assets, liabilities, and profits

General vs Limited Partnership The law requires that all partnerships have at least one general partner. A partnership may be set up so that all of the partners are general partners. general partner a participant in a partnership who has unlimited personal liability and takes full responsibility for managing the business

Partnership Some partnerships include a limited partner. a partner in a business whose liability is limited to his or her investment; a limited partner cannot be actively involved in managing the business

Partnership Partnerships are inexpensive to create. General partners have complete control. Partners can share ideas. Partners can share ideas.

Partnership It is difficult to dissolve one partner’s interest without dissolving the partnership. There may be personality conflicts. Partners can be held liable for each others’ actions.

corporations In a corporation, the owners of the business are protected from liability for the actions of the company. There are three types of corporations: C-Corporation Subchapter S Corporation Nonprofit Corporation corporation a business that is registered by a state and operates apart from its owners; it issues shares of stock and lives on after the owners have sold their interest or passed away

C- corporations A C-corporation is the most common corporate form. C-Corporations: In smaller corporations, the founders generally are the major shareholders. C-corporation an entity that pays taxes on earnings; its shareholders pay taxes as well shareholders the owners of a corporation

ability to raise investment money C-corporations ADVANTAGES status limited liability ability to raise investment money perpetual existence employee benefits tax advantages

C-corporations ADVANTAGES Corporate shareholders have limited liability, but some banks require officers to personally guarantee the debts of the company. limited liability partial responsibility of a corporate shareholder; he or she is responsible only up to the amount of his or her individual investment

C-corporations DISADVANTAGES expensive to set up income more heavily taxed subject to double taxation on income pays taxes on profits stockholders taxed on dividends

S- corporations Avoid double taxation with a S-corporation A corporation taxed like a partnership

S- corporations Advantages Disadvantages Profits are only taxed once at the shareholder’s personal tax rate. The S-Corporation in not a taxpaying entity Disadvantages Can have no more than 75 stockholders who must be U.S. citizens Can have only one class of stock Often restaurants are S-Corporations. If the business produces enough cash, this form works If the business shoes a large taxable profit but has not generated enough cash to cover the taxes, the owners must pay the taxes out of their personal earnings

NON-PROFIT CORPORATIONS A nonprofit corporation must fall within one of four categories: religion charity public benefit mutual benefit nonprofit corporation a legal entity that makes money for reasons other than the owner’s profit; it can make a profit, but the profit must remain within the company

limited liability Company There are many benefits to forming a limited liability company (LLC). limited liability company (LLC) a company whose owners and managers have limited liability and some tax benefits, but which avoids some restrictions associated with Subchapter S corporations

limited liability Company LLC is simpler to set up than a corporation LLC allows for the flexibility of a partnership structure LLC protects its owners with the limited liability of a corporation, its members are not liable for the company’s debts. LLX is not subject to double taxation. Provides the pass-through tax advantages of partnership. Profits are taxed personally, and shareholders are taxed only once.

corporations Before deciding on a legal form, ask yourself key questions about: Making the Decision your skills access to capital expenses willingness to assume liability level of control wanted length of time you expect to own the business