Ch 7: Type of Business Ownership

Sole Proprietor Business is owned and run by one individual Nearly 76% of all businesses Owner receives all of its profits and bear all of its losses.

Sole Proprietor Owner is personally liable for all of the companies debt Debt is money that it owes to other businesses or people

Sole Proprietor Advantages Easy to start Inexpensive to create Gives the owner complete authority over all business decision Receives all of the profits

Sole Proprietor Advantages Least regulated for of ownership Business itself pays no taxes because it is not separate from the owner Income is taxed at the personal rate of the owner Personal rate is lower than the corporate rate

Sole Proprietor Disadvantages The owner has unlimited liability Means that the owner is fully responsible for all debts and actions of the business Personally responsible from the owner’s personal assets Assets – things that you own Raising Capital Money

Sole Proprietor Disadvantages Owners abilities and skills are limited Death of the owners automatically dissolves the business unless there is a will.

Sole Proprietor How to start Is as simple as coming up with a company name When using a name other than your own, you must apply for a Certificate of Doing Business Under an Assumed Name Often called: DBA – doing business as Obtain from local government offices Purpose is to ensure that the name is not being used in the area

Sole Proprietor How to start If you are going to hire employees Need an Employer Identification Number (EIN) Comes from the IRS (Internal Revenue Service) Used for tax purposes to track federal income tax withheld and federal income tax returns

Sole Proprietor How to start If you are going to be a vendors or retailer (sell items) Sales Tax Identification Number Assigned by state’s Department of Revenue Retailer acts as an agent for the state by collecting and remitting the required amount

Partnership Unincorporated business with two or more owners Most common business organization Partners share decisions, assets, liabilities, and profits Requires a DBA (Doing Business As) when the last names are not used in naming the business

Partnership Advantages Can draw on the skill, knowledge, and financial resources of more than one person

Partnership Two types of Partnership General Participant has unlimited personal liability and takes full responsibility for managing the business Any partner can bind the partnership on contracts

Partnership Two types of Partnership Limited Partners liability is limited to his or her investment Cannot be actively involved in managing the business

Partnership Advantages of Partnership Inexpensive to create Share Ideas Secure investment capital more easily and in greater amounts

Partnership Disadvantages of Partnership Difficult to dissolve Personality conflicts Usually over authority Must have clear roles Technical Disadvantages Can be held liable for other partners actions Bound by contracts other partner signs

Partnership Planning for Successful Partnership Share business responsibilities Put things in writing Be honest about how the business is doing Establish partnership agreement before the business is started

Partnership Planning for Successful Partnership Have a legal written agreement How profits will be shared How responsibilities will be divided What happens if one partner dies or quits

What is a Corporation Corporation Business that is registered by a state and operates apart from its owners Lives on after the owners have sold their interests or passed away

Types of Corporation C-Corporation Subchapter S Corporation Nonprofit Corporation

C-Corporation Pays taxes on earnings Shareholders pay taxes as well File Certificate of Incorporation with the state Issue stocks Shareholders – Owners of Corporation Required to have a Board of Directors

C-Corporation Advantages Status – Corporations get help getting loans Limited Liability – Only liable up to the amount of their individual investment Perpetual Existence – Continuous life

C-Corporation Advantages Owners can create pension and retirement funds and offer profit sharing Tax Advantage – Deduct certain expenses from their reported income (Salaries and Contribution to benefit plans)

C-Corporation Disadvantages Expensive to start up – Cost $500 to $2500 to create Taxed – Corporations income is heavily taxed Corporation pay tax on profits Shareholders pay tax on dividends

Subchapter S Corporation Taxed like a partnership Avoids double taxation Advantages Profits taxed only once at shareholders personal tax rate S Corp is not a taxpaying entity

Subchapter S Corporation Disadvantages Can have no more than 75 stockholders who must be US citizens Only have one class of stock Cash businesses are S Corps If business produces enough cash, the form works If business shows a large taxable profit but has not generated enough cash to cover the taxes, the owners must pay out of their earnings

Nonprofit Corporation Businesses that benefit certain causes in the community Make money for reasons other than the owner’s profit Business can make profit, however, the profit must remain within the company and not be distributed to shareholders

Limited Liability Company Company whose owners and managers enjoy limited liability and some tax benefits, but it avoids some restrictions associated with S Corporation

Limited Liability Company Benefits Simpler to start up than a corporation Allows for flexibility of a partnership structure Protects it owners with the limited liability of a corporation Not subject to double taxation Not limited on the number of members or their status