Choose the Legal Form of Your Business

Forms of Business Organization Sole Proprietorship Sole proprietorship- a business owned and operated by one person Most common form of business ownership 70% of all U.S. businesses Examples: plumbers, auto mechanics, writers

Advantages of Sole Proprietorships Easy to start All business decisions made by the owner Taxed less than other forms of business with less government involvement

Disadvantages of Sole Proprietorships Responsible for all business debts or legal judgments against the business Unlimited liability- when the debts of your business exceed its assets, creditors can claim all of your personal assets including your car, home, and savings Difficult to expand business operations because of lack of money resources

The Partnership Partnership- legal agreement between two or more people to be jointly responsible for the success or failure of a business Least common form of U.S. businesses Partnership agreement- drawn up by a lawyer; specifies the responsibilities of each partner Profits in a partnership are usually divided in proportion equal to the amount of time and money invested

Examples: real estate agencies, law offices, medical offices Subject to little regulation and fairly easy to establish There are two types of partnerships: General partnership- each partner shares in the profits and losses Each partner’s share of the profits is taxed as personal income

Limited partnership- each limited partner is liable for any debts only up to the amount of his or her investment in the company Every limited partnership must have at least one general partner who has unlimited liability Limited partners have no voice in the management of the partnership Must give public notice that one or more partners have limited liability

Advantages of Partnerships Combines the skills of the owners Offer more money for expansion Taxed and regulated less than a corporation

Disadvantages of Partnerships Owners may not agree on all business decisions, but the actions of one partner are legally binding to other partners All partners must assume their share of business debt The business is dissolved if one of the partners die

The Corporation Corporation- a business that is chartered by a state and legally operates apart from the owner Most complicated form of business Larger firms are usually organized as corporations Those who work for a corporation may not be the people who own it

Stockholders- people who own the corporation with limited liability Boards- governing bodies who hire directors and officers to manage the affairs of the business and the interests of the stockholders The value of an organization is divided into equal units called shares of stock Sold on the stock market Stockholders- people who own the corporation with limited liability The losses of the business belong to the stockholder only to the extent of their individual investment

Not responsible for debts incurred by the corporation A corporation can own assets, borrow money, perform business functions with out involving shareholders Subject to more government regulation than sole proprietorships and partnerships

Incorporated- established in the state where they will do business or in another state It is best for most small businesses to incorporate in the state in which you will do business Foreign corporation- incorporated under the laws of a different state from the one in which it does business Must seek approval from and register with each state in which they intend to do business

Subchapter S corporation- a small business that is taxed like a partnership or proprietorship Can have no more than 35 shareholders Must be incorporated in the United States

Advantages of Corporations Each owner has limited liability It is easier for a corporation to raise money for expansion than other forms of business People can easily enter or leave the business by buying or selling shares of stock Each operation area of the business can be professionally managed by an expert in that area

Disadvantages of Corporations The complexity of forming it Increased government regulation Higher taxes on the profits of the corporation and each stockholder Intricate accounting and record keeping

Legal Steps in Establishing Your Business Sole Proprietorship You must file for a DBA- registration process by which your county government officially recognizes that your business exists There is a filing fee for registration This process protects the name of your business Applies only to the county where your business is registered

Corporation Articles of Incorporation- filed with the corporation and securities bureau in your state department of commerce Identify the name and address of your business, its purpose, the names of the initial directors, and the amount of stock issued to each director A filing fee applies No other business may incorporate under your name

Depending on what business you enter and where you locate, you may have to obtain one or more licenses. Individual states license many businesses including; cosmetologists, barbers, marriage counselors, and pharmacists Licensing is done to protect the public from unqualified people practicing in a business and to maintain the health and welfare of the citizens In addition to state licenses, your community may require special local licenses or permits to comply with zoning ordinances, building codes, and safety standards.

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