The Three Types of Business Organizations

1. The Three Types of Business Organizations

2. Business Organizations • Sole Proprietorship • One owner • Tend to be small with no employees • Partnership • Two or more owners • Tend to be small with few, if any, employees • Corporation • Legal entity that is similar to an individual in the eyes of the law • May be large or small, with few or many employees

3. Sole Proprietorship • Benefits • One person • Receives all benefits, profits and income • Easy to start and easy to close down • Costs • Responsible for all decisions and all debts • Unlimited liability • Difficult to get start-up or expansion financing • Income/profits taxed at personal income rates, not business rates

4. Partnership • Benefits • Shared decision-making • Can rely on partner’s expertise • Relatively easy to start • Costs • May have differences of opinions or disagreements • Must decide what to do when one person wants to leave or close down • Unlimited liability • Difficult to get start-up or expansion financing • Income/profit taxed at personal income rates, not business rates

5. Corporations • Benefits • Legal entity that is held responsible for its decisions • Ownership is separate and apart from the owner/shareholders • Managed by a board of directors • Owners/shareholders have “limited liability” • Can be easier to get start-up and expansion financing • Considered an “individual” and pays its own taxes at corporate tax rates •  Costs • Requires legal advice and fees to establish/maintain • May be subject to more paperwork and state/federal regulations • May have managers with absentee ownership

6. Publicly vs Privately-held Corporations • Publicly-held • Shares sold over stock exchange to members of the general public • Required to file quarterly report with SEC • Information shared with shareholders and general public • Privately-held • Shares not traded over stock exchange; often owned by founder, family members, management or private investors • No reports required • Information not shared with general public

7. Liability • Definition: a company's legal financial debts or other obligations resulting from its daily business operations • Unlimited Liability: Sole Proprietor and Partnership • Individuals are held responsible for all business activities and must pay any debts or obligations of the business • Individuals can be sued and possibly lose personal assets to cover those debts • Limited Liability: Corporation • The corporation itself is held responsible for all business activities and any debts or obligations. • Individual shareholders loss is limited to the amount of money invested in the corporation

8. Financing • Definition: Ability to borrow money to start or expand a business • Limited Options: Sole Proprietor and Partnership • Relies more on individual/personal assets • Often financed using credit cards, personal loans or personal savings • More Options: Corporation • Can sell more stock to raise funds if needed • Can borrow money based on its own assets, not those of the owners

9. Tax Issues • Taxes: Tax rates and deductions vary for personal income tax and corporate/business income tax at both the state and federal levels • Sole Proprietor and Partnership • Income/profits taxed as personal income • Limited deductions for business expenses • Corporations • Income/profits taxes as corporate/business income • Increased options for deducting business expenses, including employee benefits

10. In summary… • Each type of business organization has benefits and costs • While most businesses in the U.S. would be classified a “sole proprietorship”, they tend to be small, homebased businesses with limited services and sales • The vast majority of business sales and business activity is produced by corporations • Corporations may be publicly or privately-held • Liability, financing and taxes are key factors in deciding which business organization is best