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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 - PowerPoint PPT Presentation
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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