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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: • Sole Proprietorship • General Partnership • “C” Corporation • “S” Corporation • Limited Liability Company
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 • 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 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 • 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 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 • 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 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 • 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 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 • 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 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 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 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 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 • 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 Company • Advantages • Easier to select % of profits than partnership. • No minutes, like corporations. • Avoid double taxation.
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? • 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 one of the 5 main types for your business and tell your instructor why you chose that type.