Ch 7: Type of Business Ownership

1. Ch 7: Type of Business Ownership

2. 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.

3. Sole Proprietor • Owner is personally liable for all of the companies debt • Debt is money that it owes to other businesses or people

4. Sole Proprietor • Advantages • Easy to start • Inexpensive to create • Gives the owner complete authority over all business decision • Receives all of the profits

5. Sole Proprietor • Advantages • Least regulated for of ownership • Business itself pays no taxes because it is not separate from the owner • Income is taxed at the personal rate of the owner • Personal rate is lower than the corporate rate

6. 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 assets • Assets – things that you own • Raising Capital • Money

7. Sole Proprietor • Disadvantages • Owners abilities and skills are limited • Death of the owners automatically dissolves the business unless there is a will.

8. 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 Name • Often called: DBA – doing business as • Obtain from local government offices • Purpose is to ensure that the name is not being used in the area

9. 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

10. 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

11. 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

12. Partnership Advantages • Can draw on the skill, knowledge, and financial resources of more than one person

13. Partnership Two types of Partnership • General • Participant has unlimited personal liability and takes full responsibility for managing the business • Any partner can bind the partnership on contracts

14. Partnership Two types of Partnership • Limited • Partners liability is limited to his or her investment • Cannot be actively involved in managing the business

15. Partnership Advantages of Partnership • Inexpensive to create • Share Ideas • Secure investment capital more easily and in greater amounts

16. Partnership Disadvantages of Partnership • Difficult to dissolve • Personality conflicts • Usually over authority • Must have clear roles • Technical Disadvantages • Can be held liable for other partners actions • Bound by contracts other partner signs

17. Partnership Planning for Successful Partnership • Share business responsibilities • Put things in writing • Be honest about how the business is doing • Establish partnership agreement before the business is started

18. Partnership Planning for Successful Partnership • Have a legal written agreement • How profits will be shared • How responsibilities will be divided • What happens if one partner dies or quits

19. 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

20. Types of Corporation • C-Corporation • Subchapter S Corporation • Nonprofit Corporation

21. 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

22. C-Corporation • Advantages • Status – Corporations get help getting loans • Limited Liability – Only liable up to the amount of their individual investment • Perpetual Existence – Continuous life

23. 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)

24. 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

25. 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

26. Subchapter S Corporation • Disadvantages • Can have no more than 75 stockholders who must be US citizens • Only have one class of stock • Cash 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

27. 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

28. Limited Liability Company • Company whose owners and managers enjoy limited liability and some tax benefits, but it avoids some restrictions associated with S Corporation

29. Limited Liability Company • Benefits • Simpler to start up than a corporation • Allows for flexibility of a partnership structure • Protects it owners with the limited liability of a corporation • Not subject to double taxation • Not limited on the number of members or their status