9.02 Business Structures

Choosing a Structure

< How many owners? The number of owners might affect the type of structure you decide to use. Some structures, such as an LLC or C corporation, can have one or multiple owners. An S corporation can have one or multiple owners, but cannot have more than 100 owners. <How important is liability protection? The type of company you are starting will determine how important liability protection is to you.If your type of business is likely to face lawsuits, liability protection will be important. * Limited liability = LLC, C corporation, S corporation, nonprofit corporation * Unprotected liability = sole proprietorship, partnership <How important is tax status The tax status of the company will determine how much of the company's income is taxed. * Tax exempt = Nonprofit corporation * Pass-through taxation = sole proprietorship, partnership, S corporation, LLC (if the LLC is taxed as a partnership) * Double taxation = C corporation, LLC (if the LLC is taxed as a corporation) <How important are company-funded benefits for business owners? Company-funded employee benefits allow owners and employees to get health insurance, life insurance, retirement plans, and other benefits paid for by the company. * Tax breaks on benefits for owners = C corporations, S corporations, nonprofit corporations, LLC (if the LLC is taxed as a corporation) * No tax breaks on benefits for owners = sole proprietorship, partnership, LLC (if the LLC is taxed as a partnership) <Is the organization providing a charitable or public service? If the organization provides a charitable or public service, it might qualify for nonprofit status. You must be willing to reinvest any profits of the corporation back into the corporation, instead of taking any of the profit for yourself as the owner <How much control do you want? This includes control over business decisions, the company's direction and future, finances, and access to the money earned by the company. * Full control = sole proprietorship * Control shared = partnership * Varies (depending on number of owners and how company is set up) = LLC * Less control = C corporation, S corporation, nonprofit corporation <How much complication are you willing to put up with? Complication includes complexity of setting up the business and operating the business. * The more complicated types of businesses also cost more to set up. * Uncomplicated = sole proprietorship, partnership * Moderate = LLC * Complicated = C corporation, S corporation, nonprofit corporation

S corporation (subchapter S corporation)

A corporation with special tax status * Restrictions on the types of companies that can get this status * An S corporation is defined in subchapter S of the Internal Revenue Code used by the IRS to determine the types of taxes this type of corporation must pay * Taxed like a partnership, as a pass- through entity * Main difference between a C corporation and an S corporation is in the company's tax status * May have one or mutiple owners, but no more than 100

Corporation

A separate legal business entity Advantages - Limited Liability Company's owners are not personally accountable for company debts or lawsuits. This means if the company runs out of money, the owners may lose the money they invested in the company, but they won't lose their personal assets, such as their homes or cars. - Employee Benefits - Fundraising Can raise money for its business by selling stock, or ownership rights to others, in the company. This helps to raise money, but it means that more people have ownership of the company Disadvantages - Complicated and expensive to set up - Higher taxes (double taxation, taxed on company and taxed personally)

C corporation

A standard, normal type of corporation - May have 1 or mutiple owners - Protects the liability of its owners, but it has the disadvantage of double taxation - A C corporation's income can be taxed twice, once as a separate entity and again in the personal income taxes of its owners. - Many rules in place regarding the way a corporation is set up and operates, and the laws regarding corporations are well developed. - Not a lot of special restrictions about the types of companies that can become a C corporation, as long as the company is willing to follow the rules, complete the paperwork, and pay the expenses of incorporating

Nonprofit Corporation

Also called a tax exempt corporation * Does not have to pay federal taxes and does not usually have to pay state or local taxes either, but that may depend on the location the corporation is in * May still have to file annual financial reports to the state or federal government * Special restrictions on the types of corporations that can have tax-exempt status * Must have a public-service mission and purpose, such as an educational, charitable, religious, social, or environmental purpose and exists to provide programs and services that help the public. * DOES NOT have the purpose of making a profit for its owners (no shareholders, stock, or personal dividends paid out to owners of the company) * Any extra income must be kept by the corporation for future programs and services. * Can pay its employees a competitive wage, but it can't pay them more than is reasonable for a person in that position to earn.

Limited Liability Company (LLC)

An LLC is a cross between a corporation and a partnership. It offers some of the benefits of each. * Newer form of business entity * Usually easier to set up than a corporation, but more complicated than a partnership * May have 1 or mutiple owners Advantages - Tax Benefits (pass-through taxation) - Limited Liability Disadvantages -New structure - Taxes on employee benefits

Partnership

Has 2 or more owners Advantages - Easy to set up - Tax Benefits (pass-through entity) - Company buys and borrows Disadvantages - Increased personal liability Owners are personally liable for the company's actions/debts Owners have increased liability risk, because partners can be held liable for the acts of other partners. If one partner breaks the law or creates debt on behalf of the company, the other partner can be held legally and financially accountable for that person's actions. - Disagreements - Harder to Dissolve - Shared profits - Taxes on benefits for owners

Entity

a being, such as a person or company

Sole Proprietorship

a single business owner Advantages - Easy to set up - Tax Benefits Taxed as a pass-through entity, all income/expenses are filed on owner's personal tax return - Profits belong to owner, no need to share Disadvantages - Personal Liability Personally liable for any debts or legal issues related to the company (personal assets can be taken to pay company debts. if the company is sued for any reason, the owner of the company is automatically being sued personally) - Owner buys and borrows Company can't buy property/borrow money in company's name and must personally buy property/borrow money - Taxes on benefits for the owner May not be able to get tax breaks for participating in company-funded employee benefit plans, such as health insurance, life insurance, or retirement plans

Pass-through taxation

taxes on the company's income are paid on the personal tax forms of the company's owners (a.k.a. only taxed once)

Personal liability

when a business owner for a company can be held personally accountable for the financial debts and illegal actions of the company