Business Technology Mr. Bernstein Greene, pp : Legal Forms of Business November 25, 2013

Business Technology Mr. Bernstein Sole Proprietorships A business that is owned and operated by one person 76% of businesses in the US are sole proprietorships Why? Easiest to create Owners receives all profits, controls all decisions The least regulated form of ownership No double taxation 2

Business Technology Mr. Bernstein Sole Proprietorships Disadvantages: Unlimited liability Reliant on one person Raising capital can be difficult 3

Business Technology Mr. Bernstein Partnerships Most common form of ownership other than sole proprietorship Why? Partners compensate for the weaknesses of the other Easier to raise capital than sole proprietorship Can expand customer base Partnerships can face difficulties if responsibilities are not clearly outlined, or if interests of a partner change Would your business be organized as a Sole Proprietorship, or a Partnership? Why? 4

Business Technology Mr. Bernstein General vs. Limited Partners General Partners have unlimited liability and full responsibility for running the business Any General Partner can enter fully binding contracts on behalf of the partnership All Partnerships must have at least one general partner Limited Partners have a defined liability (ie in $$$) and do not participate in business decisions (“silent partner”) 5

Business Technology Mr. Bernstein Corporations Businesses registered with state government which operate apart from their owners Slices of ownership are called shares of stock Shareholders are the owners Corporations must have Board of Directors, who selects managers to run the company 6

Business Technology Mr. Bernstein Corporations Shareholders have limited liability Corporations have perpetual existence – they do not die Corporations can deduct contributions to health and retirement funds Corporations are more costly to set up The corporation is taxed and the owners are also taxed on any dividends or capital gains: “Double Taxation” Corporate tax rate may be different from individual rates What is tax rate for NJ corporation? For an individual entrepreneur earning $50,000/year in profits? What is the Federal tax for each? (Groups) 7

Business Technology Mr. Bernstein Other Types of Corporations Subchapter S Corporations - taxed like partnerships – no double taxation, with taxes at owner’s personal rate Nonprofit Corporation – cannot distribute profits Examples of Nonprofits? Limited Liability Companies (LLCs) – Offers limited liability without double taxation as profits are passed through to the individual owners 8

Business Technology Mr. Bernstein What form of ownership would you use? Consider: Do you have all the skills needed to run this venture? Do you have the capital needed to start the business, or can you obtain it? Will you be able to run the business and cover living expenses for the first year? Are you willing and able to assume personal liability for claims against the business? Do you want complete control over the business? Do you expect to have initial losses, or will the business be profitable from the beginning? Do you expect to sell the business some day? 9