Module 4: Considerations for Business Owners

How is a sole proprietorship formed?

"At Will" start & terminate at your own discretion.

Corporations possess one very unattractive feature for business owners: _____________. Corporations are separate legal entities which are taxed like a person. Profit is then subject to tax again when it is returned to shareholders as a dividend, in the form of a ____________.

*Double taxation *Dividend tax

A corporation is a _______ legal entity, separate and distinct from its owners. It can be created for a limited duration, or it can have perpetual existence. Since it is a separate legal entity, a corporation has continuity regardless of its owners.

*Separate

What are the advantages of a sole proprietorship?

*Simple to set up: no legal charter and no formal declaration or filing. *Decision making and control are easier: no management committees or board of directors. *The sole proprietor owns it all *Profits of the business are taxed only once: Pass through entities. Taxed as personal income. No corporate taxation between the earnings of the business and what the owner receives

General partnerships have _______ liability whereas limited partnerships have limited liability. Partners share proportion on profit distribution based on interest whereas limited partners share proportion based on interest but receive their share _______.

*Unlimited *First

Limited Liability Company (LLC) How many members? Can they participate in day to day mgmt?Can they be foreign residents? Are there member amount restrictions?

-A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership. -1 or more -Yes, can be foreign residents -No member amount restrictions

How is a corporation terminated?

-An election is made to dissolve the company. -The board must authorize a dissolution -File dissolution with secretary of state(s) -Terminate any licenses -Pay debts/close accounts/notify & pay creditors/file taxes -Distribute assets

Key differences between C-Corporations & S-Corporations

-C Corp pays double taxes -S Corp pays taxes once like a partnership or sole proprietorship

Corporation Advantages

-Limited liability -Ease of Transfer -Perpetual life (unlimited) -Separation of ownership and management -External sources of funds (easier to raise capital) -Expansion potential

Limited Liability Company (LLC) Advantages

-Limited liability for all owner's or "members" to only that amount at risk within the business itself -Greater flexibility than S corporations regarding number and types of shareholders

What are the rules to a Limited Partnership?

-Limited liability: only liable up to capital contribution -Generally prohibited from participating in the day to day management of the business.

Limited Liability Company (LLC) Disadvantages

-Limited life, such as 30 years or a period stated in the operating agreement. -Some states prohibit LLCs from operating in professional, banking or insurance services.

What are the disadvantages of a sole proprietorship?

-Limited to life of owner -Equity capital limited to owner's personal wealth -Unlimited liability -Difficult to sell ownership interest -Lacks checks against his or her judgement -Tax advantages on employee benefits available to corporations are less available to sole proprietors -Taxed at highest personal ordinary income rate.

How is a partnership formed?

-Oral contract -- unless statute of fraud requires written contract, implied by conduct.

How does a corporation form?

-The corporate founders must file the articles of incorporation with the state agency charged with managing business entities -The founders must also state how many shares the corporation will issue initially, and the par value of those shares. -List as for profit/not for profit. -Must pay fees; filing, license, attorney.

Corporate Veil

-The personal liability shield -The corporate protection that entitles shareholders, directors, and officers to limited liability; can be pierced for improper conduct of business or fraud.

How is a sole proprietorship terminated?

1. Contact small business admin to determine if paperwork is needed 2. Inform employees/close down ordering pages/fulfill all orders 3. Provide notice to landlord and Notify debtor/creditors 4. Pay bills. Cancel business bank accounts/credit cards 5. Liquidate assets through sales/donations, save $ for income tax 6. Keep records of all transactions for income tax forms.

S corporations cannot have more than ___________shareholders, all of whom must be U.S. citizens or resident aliens; they can have only one class of stock; and they cannot be members of an affiliated group of companies. These restrictions ensure the "S" tax corp are reserved for only small businesses.

100

Sole Proprietorship

A business owned and managed by a single individual.

Limited Liability Company (LLC)

A company similar to an S corporation but without the special eligibility requirements. ***Study more

S Corporation

A form of corporation (like a small family run business) that avoids double taxation by having its income taxed as if it were a partnership. It is taxed only once when a dividend is declared, shareholders then pay personal income tax with the profit received.

Define Limited Partnership

A partnership with at least one general partner and one limited partner. The limited partner is also known as the silent partner & whose liability is limited to the amount of their investment.

How is a sole proprietorship taxed?

All the income generated by the business oil treated as ordinary personal income to the owner.

How is a partnership terminated?

By an agreement among partners or by operation of the law (bankruptcy, death, unlawful business).

One critical function for boards of directors is to appoint corporate officers. These officers are also known as ______ executives and typically hold titles such as chief executive officer, chief operating officer, chief of staff, and chief marketing officer.

C-Level

QBI Deduction (Qualified Business Income) *TCJA 2017*

Deduction equal to 20% of lessor of: -Qualified business income, or -Taxable income (reduced by net capital gain) Excludes Specified Service Business: -Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services -unavailable for tax years beginning after Dec. 31, 2025

A shareholder suit is a lawsuit brought by a shareholder on behalf of a corporation against a third party. Often, the third party is an insider of the corporation, such as an executive officer or director. This is called __________.

Derivative Litigation

One of the most important functions for shareholders is to ______________________for a corporation.

Elect the Board of Directors

What is Liability like in a General Partnership?

Every partner in the partnership is jointly and severally liable for the partnership's debts and obligations which is a big disadvantage because one partner is "punished" for another partners "bad acts".

How is an LLC formed?

Filing the articles of organization with the State Agency, typically Secretary of State. Typical LLC statutes require only the name of the LLC and the contact information for the LLC's legal agent

What are the different classes of shareholders?

Founders of a corporation may reserve a special class of stock for themselves with preemptive rights (maintains ownership; prevents dilution)

What are the common forms of business organizations?

Franchises could be: *Sole proprietorship *General partnership *Limited partnership *Limited liability company (LLC) Corporations can be: *C-Corporation *S-Corporation *Professional Corporation *Non-profit

How are General Partnerships taxed?

Income "flows through" the business to the partners, who then pay ordinary income tax on the business income tax (similar to sole proprietorship)

By now you should understand how easy, yet dangerous, it is to do business as a sole proprietor, and why many business organizations are drawn to the corporation as a form for doing business. As flexible as the corporation is, however, it is probably best suited for larger businesses. Annual meeting requirements, the need for directors and officers, and the unattractive taxation features make corporations unwieldy and expensive for smaller businesses. What is a good solution to this problem?

LLC

Venture Capital

Money that is invested in new or emerging companies that are perceived as having great profit potential. Some sole proprietorships may get money from them, but typically get money from banks as personal loans.

What is a General Partnership?

Owners agree to share in the profits and losses of the business together, formed formally, with partners writing down their agreement in a special type of contract known as the articles of partnership.

C Corporation

The most common type of corporation, which is a legal business entity that offers limited liability to all of its owners, who are called stockholders

What is Sole Proprietorship liability?

The owner is personally liable for all the business' debts. and obligations

How to terminate/dissolve a General Partnership?

This can be easily done., generally written in the Articles of partnership which typically includes a buy/sell agreement setting forth the agreement of the partners on how to account for a withdrawing partner's share, which the remaining partners then agree to pay to the withdrawing partner (or the spouse or heir if the partner dies).

T/F: In a general partnership, if there are more than two, the remaining partners can reconstitute the partnership if they wish.

True

What is an advantage in forming an S-corporation? a) It can have many stockholders. b) It is only taxed once. c) It is easy to terminate. d) It has absolute control over decision making.

b) There is only a tax on the personal income of the owners, whether or not the profits are distributed

Which example is not a key advantage of a corporation? a) Corporations offer limited personal liability to its owners. b) Corporations may issue stock to raise money. c) Corporations can exist indefinitely, so they do not cease to exist when an owner dies or leaves. d) Corporations are not expensive to start and have few government regulations.

d) It is expensive to start a corporation due to paperwork. Corporations are required to follow government regulations.

Which statement is not an advantage of starting a sole proprietorship? a) There are fewer government regulations. b) It is relatively easy to start. c) A sole proprietor keeps all the profits from the business. d) There is an abundance of money to start up and/or expand the business.

d) There is an abundance of money to start up and/or expand the business.

C-corporations have______ to the number of shareholders. Also, medical reimbursement plans can go through C-corporations unlike S-corporations. C-corporations are taxed differently than S-corporations; however, a loss experienced by a C-corporation should be carried forward, cannot be written off, and goes against future gains. C-corporations must "zero out" books annually or the company will face double-taxation. Shareholders will have to take a salary if all other efforts are exhausted to clear the books, and they will have to pay Social Security and Medicare tax. Alternatively, S-corporations ____________ Social Security and Medicare tax on dividend income.

no limit, do not have to pay