Unit 4

Types of Business Ownership

Sole ProprietorshipEasiest & most popular form of business to create

Business that is owned and operated by one personMajority of business in U.S. are Sole Proprietorships

AdvantagesEasy, inexpensive to create.You’re the boss.You receive the $$$. NO sharing. No business taxes, only personal income.

DisadvantagesFinancing. Unlimited Liability—Full responsibility for debts and

actions of the businessRaising Capital-May not have enough assets to qualify for a loanTotal reliance on self. Your skills and abilities. Are they

enough?

Sole Proprietor Cont’d.When using a name other than your own, you must

apply for a Certificate of Doing Business Under an Assumed Name Also known as “DBA” (Doing Business As)

If you hire employees, you need an Employer Identification Number. (EIN). Comes from IRS, used for tax purposes to track federal

income taxes You can get them online.

PartnershipsUnincorporated business with two or more owners

Most common business organization involving more than one ownerUsed to help compensate for the shortcomings of a sole

proprietorshipDBA is required when last names of the partners are not used in

naming the business. Lawyers, Doctors, and Accountants usually set up as partnerships.

AdvantagesInexpensive to create, general partners have complete controlAllows you to share ideas and skills

DisadvantagesIf one partner wants out or dies, the partnership ends Personalities collide! Disagreements over authorityPartners can be liable for each other’s actions

If one partner signs a contract, the other partner is bound.

Partnerships Cont’dGeneral vs. Limited Partners

General: participant in a partnership who has unlimited liability and takes full responsibility for managing the business Liable for the debts of the partnership. Can be bound on contracts. All partnerships must have at least one general partner

Partners do not have to share the business equally This is stated in the partnership agreement

Limited: participant whose liability is limited to his/her investment Invest $10,000, the most you can lose is $10,000. Are not actively involved in managing the business. If they do

become involved, they lose limited liability status.

CorporationBusiness that is registered by a state and operates

apart from its ownersLives on after owners have sold their portions or

diedOwnership is represented by shares of stock

3 Major types of corporations are the C-corporation, Subchapter S corporation, and nonprofit corporationFigure 7.1 – Legal forms of ownership: Comparison

Chart

C-CorporationEntity that pays taxes on earningsShareholders pay taxes as well

Most common corporate formCan protect the entrepreneur from being sued for the actions and

debts of the corporationAdvantages

Limited liabilityAbility to raise investment money (lots of it)Perpetual existenceEmployee benefitsTax advantagesMore professional appearance (image)

DisadvantagesExpensive to set upIncome is more heavily taxedDouble taxation on its earnings

Subchapter S CorporationCan have no more than 75 stockholders who

must be U.S. citizensHelps avoid double taxation of a C-corporation

Only taxed once, at shareholder’s personal tax rateCash businesses like restaurants are often

these types If the business produces enough cash, this works If the business shows a large taxable profit, but

doesn’t generate enough cash, the owners pay for taxes out of their personal earnings

Nonprofit Corporation Legal entity that makes money for reasons

other than the owner’s profitCan make a profit, but must remain within the

company and not be distributed to shareholders Red Cross, Girl Scouts, Habitat for Humanity,

Goodwill, etc.

Limited Liability CompanyCompany whose owners and managers enjoy

limited liability and some tax benefitsAvoids restrictions in Subchapter S CorpAKA LLC.

AdvantagesSimpler to set upFlexibility of partnership structureProtects its owners with limited liabilityNot subject to double taxationNo limitations on the number of members or their

status

ACTIVITY