How Should I Organize My Business?

1. How Should I Organize My Business?

2. The 5 types: • Sole Proprietorship • General Partnership • “C” Corporation • “S” Corporation • Limited Liability Company

3. Sole Proprietorship • Most small businesses are sole proprietorships, because this type of business is the easiest and least expensive way to start into business. • Sole ProprietorshipA sole proprietorship is a form of business in which an individual starts a business under his or her own name. • They often have a fictitious business name or a “doing business as.” • In a sole proprietorship, you are the business; that is, the business is not a separate entity from you.

4. Sole Proprietorship – The Good • Control • You have complete control over all aspects of the business. You don’t have to ask permission of anyone to hire or fire employees, to sell a new product, or move to a new location. • Simple Taxes • The profits of your company are taxed on your personal tax return, so it is simpler than many other types. • Profits • You keep all the profits of the business; you don’t have to share them with anyone.

5. Sole Proprietorship – The Good • Draw • You can take money out of your company for your personal use (as a “draw”) at any time, as long as you make sure the business’ bills are paid. • Ease of Setup • You can start your business without any complicated or expensive legal filings, and you don’t need an attorney.

6. Sole Proprietorship – The Bad • Responsibility for Debts • If the business has a loss, or it owes money to creditors, you are personally responsible for payment. • Responsibility for Liabilities • If someone sues the business, you are personally liable. Your personal assets may be used to pay off debts or liabilities of the business.

7. Sole Proprietorship – The Bad • Difficulty in Obtaining Funds • Because you are the only owner, you can’t sell any shares to fund business growth, and banks are more cautious about lending money to sole proprietorships. • No Continuation • If something happens to you, the business ends, and your family may be left with a business that is difficult to sell or run without you.

8. General Partnership • What is a Partnership? • A partnership is a type of business in which two or more individuals share in the work and the profits and losses. • The partners own various percentages of the business and can have different duties. • However you decide to set it up, the partnership percentages must equal 100%.

9. General Partnership Advantages Disadvantages Share the rewards Unequal duties Legally responsible for your partners activities Can be sued if customer is hurt! • No Extra Tax • Share the Risk

10. C Corporation • A corporation is a business entity that is separate from its owners. • Each of the owners invests in the corporation by purchasing shares of stock. • The corporation may be public (with shares being sold to the general public) or private (with shares being distributed among a few individuals and not sold publicly).

11. C Corporation Advantages Disadvantages Much more paperwork. You’re taxed twice, as a person and as a corporation. Owner receives a salary and so is taxed. Must keep minutes of meetings. Elect board, etc. Lots of extra fees. • A legal entity, just like a person. • Someone can sue the corporation, not you. Whew! • If the corporation loses a law suit and declares bankruptcy, your money might be safe.

12. S Corporation • A Sub-chapter S Corporation is a corporation which elects "small business" status. (This is not a separate form of business.) • It’s a corporation that is taxed like a partnership, but enjoys the benefits of having limited liability, like a c corporation. • Not everyone can select this, though.

13. S Corporation • Should You Choose “S Corporation” Status? • Forming an S corporation generally allows you to pass business losses through to your personal income tax return, where you can use it to offset any income that you have from other sources.

14. S Corporation • Should You Choose “S Corporation” Status? • S corporation shareholders are not subject to self-employment taxes (active LLC owners are). These taxes, which add up to more than 15% of your income, are used to pay your Social Security and Medicare taxes.

15. S Corporation • Aside from the benefits, S corporations impose strict requirements. Here are the main rules: • Each S corporation shareholder must be a U.S. citizen or resident. • S corporations may not have more than 100 shareholders.

16. S Corporation • Fortunately, a decision to choose to be an S corporation isn't permanent. • If your business later becomes more profitable and you find there are tax advantages to being a regular corporation, you can drop your S corporation status after a certain amount of time.

17. Limited Liability Company • It is not a corporation. • It is an organization which is run in many ways like a partnership, but which offers liability protection to its owners (called "members").

18. Limited Liability Company • Advantages • Easier to select % of profits than partnership. • No minutes, like corporations. • Avoid double taxation.

19. Limited Liability Company • Disadvantages • Limited Life: Corporations can live forever, whereas a LLC is dissolved when a member dies or undergoes bankruptcy. • Going Public: Hard to raise capital like corporations can. • Added Complexity: Running a sole-proprietorship or partnership will have less paperwork and complexity.

20. What’s the difference between an S-Corp and a LLC? • First, in an S-Corp, “owners” receive a fair-market salary, plus shares of stock. • The number of shares determines how much of the profit they will receive. • With an LLC the owners are self-employed. • So, if you make more money than fair market salary, you’ll be paying extra employment taxes, because it will come as “self-employment” income. • In the S-Corp, anything over fair market salary is a profit distribution, not “wages”, and only subject to your normal income tax, not employment taxes.

21. Choose! • Choose one of the 5 main types for your business and tell your instructor why you chose that type.

22. The End