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How Should I Organize My Business?. The 5 types:. Sole Proprietorship General Partnership “C” Corporation “S” Corporation Limited Liability Company. Sole Proprietorship.

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the 5 types
The 5 types:
  • Sole Proprietorship
  • General Partnership
  • “C” Corporation
  • “S” Corporation
  • Limited Liability Company
sole proprietorship
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.
sole proprietorship the good
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.
sole proprietorship the good1
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.
sole proprietorship the bad
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.
sole proprietorship the bad1
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.
general partnership
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%.
general partnership1
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
c corporation
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).
c corporation1
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.
s corporation
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.
s corporation1
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.
s corporation2
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.
s corporation3
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.
s corporation4
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.
limited liability company
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").
limited liability company1
Limited Liability Company
  • Advantages
    • Easier to select % of profits than partnership.
    • No minutes, like corporations.
    • Avoid double taxation.
limited liability company2
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.
what s the difference between an s corp and a llc
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.
choose
Choose!
  • Choose one of the 5 main types for your business and tell your instructor why you chose that type.