Business Organizations

1. Business Organizations “It’s nothing to be afraid of”

2. What is a business organization? • Form of a business • Ownership structure • Advantages/disadvantages to each one • Taxes • Liability protection • Complexity of operation

4. Sole Proprietorship • Simplest form • Unincorporated • Owned by one person • No separate identity • Income and expenses reported on the owner's individual tax return. • Owner's assets at risk for business debts

5. To form a sole proprietorship: • Obtain licenses or permits • Assumed name/d.b.a • Start doing business

6. To run a sole proprietorship: • All decisions made by owner • No meetings • No internal agreements

7. Partnerships

8. General Partnerships • Association of two or more owners • Partners contribute cash, property or services • Profits and losses included on individual tax returns of the partners • Asset protection • General partnerships provide no asset protection

9. To form a general partnership • Make partnership agreement • Agreement creates partnership • Begin doing business

10. To run a general partnership • Follow rules of agreement • If the agreement does not cover a situation, Uniform Partnership Act (UPA) controls • Most of UPA can be modified by agreement • Provides equality • Equal profits • Equal control • UPA says partnership dissolves if a partner leaves

11. Limited Liability Partnership • Has initials “LLP” at end of name • Partners have no risk of personal liability • File declaration that partnership will be LLP • Secretary of State • No qualifications—automatic • Does not change tax status

12. Limited Partnership • Has “LP” at end of name • One general partner, any number of limited partners • General partner runs business • Limited partners share in profits or losses

13. Limited partnerships are usually poor choices for new businesses!!! • Usually, investment vehicles • High risk operations • In some states, must be registered as securities • Better ways for limiting role of investors

14. Joint Ventures • Partnership for a limited purpose • Each party contributes something • Not a continuing business • Treated as partnership for that business

15. Corporations Evil? Or just misunderstood?

16. Corporations • Creatures of state law • Separate entities • Fictitious person • Have 1st Amendment rights • Created when shareholders trade cash or property for stock • Owners’ assets protected from creditors of corporation • Classified by tax treatment

17. Some states have special rules for certain corporations • Farm corporations • Family corporations • Closely-held corporations

18. C Corporation • Default • Corporation liable for federal income tax • Usually, state income tax, too • Lower rate than individuals • Shareholders pay tax if they receive profits • Dividends

19. S Corporation • Same limited personal liability as C corporation • Earnings taxed at the shareholder level • Corporation pays no tax • Restricted to issuing only one class of stock • No more than 75 shareholders • Must file election with IRS

20. So an S Corporation is better, right? Advantages Disadvantages Limits on ownership Profits taxed, even if not distributed Corporation still must file “informational” return • No taxation of corporation

21. Most small businesses will elect Subchapter S, if they qualify

22. Limited Liability Companies

23. Limited Liability Companies • Identified by initials “LLC” • Relatively new form of business • Now recognized in all states • Limited liability for members • No federal income tax • May elect to be treated as a C corporation • No restrictions on ownership • Any number of owners • Any management structure

24. LLCs are similar to corporations • Organized, not incorporated • Members, not shareholders • Governors, not directors • Operating agreements, not by-laws • Usually, run like corporations • Similar legal rules for internal disputes • No uniform rules

25. Some states make LLCs more difficult to form • Notably, California and New York • Must publish notice of LLC • Not for corporations • Many LLCs converting to corporations • Not other way around

26. Cooperatives

27. Cooperatives are organized to provide services to members • Services provided at lowest cost possible • Save on overhead for independent businesses • Members buy share • Equal voting rights • Distribution of profits • Expenses of co-op • Operating/cash reserve • To members, in proportion to business don

28. Things to Consider

29. Limiting Personal Liability • Major concern if business poses risks • Injuries • Financial risk • Important if owners have non-business assets • Interest in another business • Personal wealth • Choices • Corporation, LLC, LLP best options

30. Ability to Borrow Money • Corporations may find it easier to borrow • Banks often not as familiar with LLCs • Variable ownership structure • Sole proprietorships, partnerships depend on individual credit of owners/partners

31. Control of the Business • Sole proprietor has total control • Corporations managed by board of directors • Shareholders vote for directors • By-laws may be adopted • Partners or LLC members decide how business is run

32. Continuity of the Business • Sole proprietorships die with owners • Death of a partner does not dissolve a partnership, if agreed • Corporations may exist forever • Stock can be sold or bequeathed • LLCs’ operating agreements may ensure continuity

33. Dispute Resolution • Any business is at risk of disagreements between its owners • Businesses have traditionally relied on arbitration • Should be set out in agreement or by-laws

34. “Let us now take up the subject of taxes.”

35. “That’s where my brother lives.” • LLCs not taxed, if chosen • Each member taxed on his/her share of LLC income • Partnerships not taxed • Each partner taxed on his/her share of partnership income • S Corporations not taxed • Income passes through, taxed to to the shareholders • C corporations taxed • Shareholders pay tax on their share