LAWS Affecting Business Start-Ups Principles of Business

What are the different types of business structures? MOST COMMON: Sole Proprietorship Partnership Corporations C-Corp S-Corp Not-for-Profit

What are the different types of business structures? SPECIAL TYPES: Limited Liability Company (LLC) Cooperatives

Factors to consider when choosing a legal form of ownership: Your vision regarding the size and nature of your business. The level of control you wish to have The level of “structure” you are willing to deal with The business’ vulnerability to lawsuits

Factors to consider when choosing a legal form of ownership: Tax implications of the different forms of ownership structures Expected profit (or loss) of the business Whether or not you need to re-invest earnings into the business Your need for access to cash out of the business for yourself.

Sole Proprietorship One person owns the business and takes the major responsibility for decisions about its operations Most business start out as sole proprietorships About 73% of all businesses in the US are sole proprietorships

Sole Proprietorship LEGAL STATUS A S.P. is not a separate legal entity; the owner IS the business FORMATION License to conduct business Registration of business name LIFE SPAN Business terminates when owner becomes disabled, retires or dies

Sole Proprietorship TRANSFER OF OWNERSHIP The owner can sell or give away any asset because there is no legal distinction between the business and the owner MANAGEMENT RESPONSIBILITY Management decisions are completely in the hands of the owner; there are no shareholders or Board of Directors to answer to

Sole Proprietorship LIABILITY The owner is personally liable (responsible) for all debts and other business liabilities. The owner’s personal assets are fully exposed to risks. TAX ISSUES Income and expenses are reported on the owner’s personal 1040 Tax Form.

Sole Proprietorship Advantages: Easy, inexpensive to create Owner has complete control Least regulated Income is taxed at personal level (and rate) Disadvantages: Unlimited liability Raising capital is difficult Owner may not have the needed skills Death of owner dissolves business

Liability Responsibility for all debts and actions of the business. If anything goes wrong, it is the owner’s responsibility to “make it right.” Brainstorm a list of situations that would cause a business owner legal or financial problems.

Partnership Business is owned by two or more people who share the risks, rewards and responsibilities for operation Often chosen by people who provide professional services (doctors, lawyers, accountants) About 7% of all businesses in the US are partnerships General Partner: member of a partnership who has unlimited liability and takes full responsibility for managing the business Limited Partner: liability is limited to his/her investment and he/she cannot be actively involved in managing the business

Partnership LEGAL STATUS In some ways, a partnership is treated as a separate legal entity because it can own property; but it is not treated as separate when dealing with the feature below… FORMATION License to conduct business Registration of business name Written agreement between the partners defining ownership, responsibility, etc…

Partnership LIFE SPAN Business terminates when owner(s) becomes disabled, retire or die TRANSFER OF OWNERSHIP Partners may sell their portion of the business if it is agreed upon MANAGEMENT RESPONSIBILITY Responsibility is shared between the partners.

Partnership LIABILITY The owners are personally liable (responsible) for all debts and other business liabilities. TAX ISSUES Income and expenses are reported on the owners’ personal Tax Forms.

Partnership Advantages: Inexpensive to create General partners have total control Two heads are better than one Disadvantages: If one partner wants out or dies, the partnership ends Partners are held liable for each other’s actions Personality conflicts How does a partnership make up for the shortcomings of a sole proprietorship?

Creating a Partnership Agreement Break up into groups of 3-4. Develop a written partnership agreement that could be used when students work together on a project. Share with class.

Corporations A business registered by a state and operates apart from its owners. A corporation lives on after the owners have sold their interests or passed away. Ownership (or equity) in a corporation is represented by shares of stock. Corporations can purchase goods, sue and be sued, and conduct any type of business transaction.

Corporation Number of Owners: Separate Legal Entity Status: Formation: C-Corp - Unlimited S-Corp – 75 or less Separate Legal Entity Status: C Corporation is considered a SLE for legal and tax purposes S Corporation for legal purposes ONLY Formation: CHARTER filed with State

Corporation Life Span: Sale/Transfer of Ownership: MGT Responsibility: Perpetual Life Sale/Transfer of Ownership: Shareholders are free to sell stock unless restricted by an agreement MGT Responsibility: BOARD OF DIRECTORS

Corporation Liability: Taxation: Corporation is a SLE Board of Directors could be help liable for bad decision making Taxation: Corporation is taxed on income Shareholders also are taxed on individual income DOUBLE TAXATION

Corporation ADVANTAGES: Status Limited liability Continuous life Tax advantages (can deduct salaries and contributions to benefit plans) Board of Directors DISADVANTAGES: Expensive to start-up ($500 - $2,500) Income is more heavily taxed Double taxation

Limited Liability Company (LLC) Number of Owners: No limit Most states require at least two Separate Legal Entity Status: Has SLE status Formation: Like a parternship

Limited Liability Company (LLC) Lifespan: Unless stated in agreement, dies with owner(s) Sale/Transfer of Ownership: Majority of members need to agree on it MGT Responsibility: Like a partnership

Limited Liability Company (LLC) Taxation: Profits are shared as determined in the “Articles of Organization” Owners are taxed at personal level on profits

LLC examples in Hamburg

LLC ADVANTAGES: Simpler to set up than a corporation Flexibility of a partnership Limited Liability No double taxation No limit to number of owners DISADVANTAGES: Need a good agreement (Article of Organization) Raising funds

COOPERATIVE A business is owned and operated by its user-members for the purpose of supplying themselves with goods/services Must obtain a charter Members buy stock/shares Popular in agriculture, building, housing and credit unions Examples: Eden Valley Co-op, Meridia Community Credit Union, Lexington Coop