business organizations “it’s nothing to be afraid of”
TRANSCRIPT
![Page 1: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/1.jpg)
Business Organizations
“It’s nothing to be afraid of”
![Page 2: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/2.jpg)
What is a business organization?
• Form of a business• Ownership structure• Advantages/disadvantages to each one– Taxes– Liability protection– Complexity of operation
![Page 3: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/3.jpg)
![Page 4: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/4.jpg)
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
![Page 5: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/5.jpg)
To form a sole proprietorship:
• Obtain licenses or permits– Assumed name/d.b.a
• Start doing business
![Page 6: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/6.jpg)
To run a sole proprietorship:
• All decisions made by owner
• No meetings
• No internal agreements
![Page 7: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/7.jpg)
Partnerships
![Page 8: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/8.jpg)
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
![Page 9: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/9.jpg)
To form a general partnership
• Make partnership agreement– Agreement creates partnership
• Begin doing business
![Page 10: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/10.jpg)
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
![Page 11: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/11.jpg)
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
![Page 12: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/12.jpg)
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
![Page 13: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/13.jpg)
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
![Page 14: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/14.jpg)
Joint Ventures
• Partnership for a limited purpose
• Each party contributes something
• Not a continuing business
• Treated as partnership for that business
![Page 15: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/15.jpg)
CorporationsEvil? Or just misunderstood?
![Page 16: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/16.jpg)
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
![Page 17: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/17.jpg)
Some states have special rules for certain corporations
• Farm corporations
• Family corporations
• Closely-held corporations
![Page 18: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/18.jpg)
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
![Page 19: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/19.jpg)
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
![Page 20: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/20.jpg)
So an S Corporation is better, right?
Advantages• No taxation of corporation
Disadvantages• Limits on ownership• Profits taxed, even if not
distributed• Corporation still must file
“informational” return
![Page 21: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/21.jpg)
Most small businesses will elect Subchapter S, if they qualify
![Page 22: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/22.jpg)
Limited Liability Companies
![Page 23: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/23.jpg)
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
![Page 24: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/24.jpg)
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
![Page 25: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/25.jpg)
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
![Page 26: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/26.jpg)
Cooperatives
![Page 27: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/27.jpg)
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
![Page 28: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/28.jpg)
Things to Consider
![Page 29: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/29.jpg)
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
![Page 30: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/30.jpg)
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
![Page 31: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/31.jpg)
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
![Page 32: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/32.jpg)
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
![Page 33: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/33.jpg)
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
![Page 34: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/34.jpg)
“Let us now take up the subject of taxes.”
![Page 35: Business Organizations “It’s nothing to be afraid of”](https://reader036.vdocuments.net/reader036/viewer/2022070404/56649f395503460f94c55901/html5/thumbnails/35.jpg)
“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