Types of Business Organizations: Sole Proprietorship, Partnership, Corporation, Nonprofit, and LLC

1. Business Organizations: Textbook: Chp 27 & 28 Applied Business Law

2. Introduction to Business Organizations • The way that a business is set up is often as important as how it is run and the choice of business entity often has a huge influence on the eventual success or failure of that business.

4. The Main Idea Entrepreneurs need to understand the advantages and disadvantages of various types of businesses so that they can choose the one that best suits their needs.

5. Sole Proprietorship sole proprietorship a business that is owned and operated by one person The easiest and most popular form of business ownership is the sole proprietorship.

6. Sole Proprietorship The owner of a sole proprietorship: • receives the profits, • incurs any losses, and • is liable for the debts of the business.

7. Sole Proprietorship liability protection insurance against the debts and actions of a business In a sole proprietorship the owner must decide how much liability protection he or she needs.

8. Sole Proprietorship Advantages Sole proprietorship is easy and inexpensive to create. The owner has complete authority over all business activities. It is the least regulated form of business ownership. The business pays no taxes; income is taxed at thepersonal rate of the owner. 8

9. Sole Proprietorship Disadvantages The owner has unlimited liability. Raising capital is more difficult. The business is totally reliant on the skills and abilities of the owner. The death of owner dissolves the business unless there is a will to the contrary. 9

10. Disadvantages unlimited liability full responsibility for all debts and actions of a business The biggest disadvantage of a sole proprietorship is financial. In this form of business ownership, the owner has unlimited liability.

11. Partnerships partnership an unincorporated business with two or more owners who share the decisions, assets, liabilities, and profits A partnership draws on the skills, knowledge, and financial resources of more than one person.

12. General versus Limited Partners general partner a participant in a partnership who has unlimited personal liability and takes full responsibility for managing the business The law requires that all partnerships have at least one general partner. A partnership may be set up so that all of the partners are general partners.

13. General versus Limited Partners limited partner a partner in a business whose liability is limited to his or her investment; a limited partner cannot be actively involved in managing the business Some partnerships include a limited partner.

14. Partnerships Advantages Partnerships are inexpensive to create. General partners have complete control. Partners can share ideas. Partners can secure investment capital more easily and in greater amounts. 14

15. Partnerships Disadvantages It is difficult to dissolve one partner’s interest without dissolving the partnership. There may be personality conflicts. Partners can be held liable for each others’ actions. 15

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17. The Main Idea In a corporation, the owners of the business are protected from liability for the actions of the company.

18. What Is a Corporation? corporation a business that is registered by a state and operates apart from its owners; it issues shares of stock and lives on after the owners have sold their interest or passed away • There are three types of corporations: • C-corporation • Subchapter S corporation • nonprofit corporation

19. C-Corporation C-corporation an entity that pays taxes on earnings; its shareholders pay taxes as well A C-corporation is the most common corporate form.

20. C-Corporation shareholders the owners of a corporation In smaller corporations, the founders generally are the major shareholders.

21. C-Corporation Advantages status limited liability ability to raise investment money perpetual existence employee benefits tax advantages 21

22. Advantages limited liability partial responsibility of a corporate shareholder; he or she is responsible only up to the amount of his or her individual investment Corporate shareholders have limited liability, but some banks require officers to personally guarantee the debts of the company.

23. C-Corporation Disadvantages expensive to set up income more heavily taxed subject to double taxation on income pays taxes on profits stockholders taxed on dividends 23

24. Nonprofit Corporation • A nonprofit corporation must fall within one of four categories: • religion • charity • public benefit • mutual benefit nonprofit corporation a legal entity that makes money for reasons other than the owner’s profit; it can make a profit, but the profit must remain within the company

25. Limited Liability Company limited liability company (LLC) a company whose owners and managers have limited liability and some tax benefits, but which avoids some restrictions associated with Subchapter S corporations There are many benefits to forming a limited liability company (LLC).

26. Making the Decision Before deciding on a legal form, ask yourself key questions about: • your skills • access to capital • expenses • willingness to assume liability • level of control wanted • length of time you expect to own the business