Ch 7: Type of Business Ownership

CH 7: TYPE OF BUSINESS

OWNERSHIP

Sole Proprietor Business is owned and run by one

individualNearly 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 startInexpensive to createGives the owner complete authority over all

business decisionReceives all of the profits

Sole Proprietor Advantages

Least regulated for of ownershipBusiness itself pays no taxes because it is not

separate from the owner○ Income is taxed at the personal rate of the

ownerPersonal 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 assetsAssets – things that you own

Raising Capital○ Money

Sole Proprietor Disadvantages

Owners abilities and skills are limitedDeath 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 NameOften 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

PartnershipAdvantages Can draw on the skill, knowledge, and

financial resources of more than one person

PartnershipTwo types of Partnership1. General

Participant has unlimited personal liability and takes full responsibility for managing the business

Any partner can bind the partnership on contracts

PartnershipTwo types of Partnership2. Limited

Partners liability is limited to his or her investment

Cannot be actively involved in managing the business

PartnershipAdvantages of Partnership

Inexpensive to createShare IdeasSecure investment capital more easily and

in greater amounts

PartnershipDisadvantages of Partnership

Difficult to dissolvePersonality conflicts

○ Usually over authority○ Must have clear roles

Technical Disadvantages○ Can be held liable for other partners actions○ Bound by contracts other partner signs

PartnershipPlanning for Successful Partnership1. Share business responsibilities2. Put things in writing3. Be honest about how the business is

doing4. Establish partnership agreement

before the business is started

PartnershipPlanning for Successful Partnership1. Have a legal written agreement

a. How profits will be sharedb. How responsibilities will be dividedc. 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 Corporation1. C-Corporation2. Subchapter S Corporation3. 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 loansLimited Liability – Only liable up to the amount of

their individual investmentPerpetual 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 stockCash 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 corporationAllows for flexibility of a partnership

structureProtects it owners with the limited liability of

a corporationNot subject to double taxationNot limited on the number of members or

their status