ch. 7 entrepreneurship

Limited Liability Corp

Cross between a corporation and a partnership -Income flows through to owners who pay taxes as individuals (avoids double taxation) -Allows more than 100 investors -Allows other corporations to hold stock in the company -flexibility regarding amount of income designated to each individual (unlike in a partnership) -Dissolving LLCs can be drawn-out process and expensive

Limited liability partnership

General Partners -Manage the business -Have unlimited liability -Must have at least one general partner Limited partners -Invest but forego right to manage -Share in the profits according to the limited partnership agreement -Have limited liability Positives/negatives for other partnerships apply to LLPs

board of directors

Individuals who have a fiduciary responsibility to the shareholders of the organization

Subchapter S corporation advantages

-Limited liability -Potential for tax benefits for the owner -Easy formation compared to subchapter C corp -Legitimacy in market as more established form of business -Advantageous for ventures that have large initial loss b/c can be used to offset other income??

Advantages of corporations

-Limited liability for stockholders -Ability to attract capital -Continue beyond lives of founders -shares are transferable -Liquidity can be very high, especially if publicly traded

sole-proprietorship

-One company, one owner (3/4 of all businesses are this) -Low cost, requiring only license to open -owner has total control -small business good for economy

Board of advisors

A group formed at the discretion of the founders and composed of individuals outside the small business that advise the firm

General partnership disadvantages

Partners are held jointly liable for all debts incurred by the partnership (debt becomes your total responsibility if partner fails to meet his obligations) -to accept new equity investment each established partner must surrender a portion of her ownership position -new partnership agreement is needed each time someone comes or goes

Subchapter C corporation advantages

Salaries and bonuses are expensed as costs owner(s) can pay themselves virtually all of profits each year so little profit is reported so little corporate tax is owed -Fringe benefits paid out are not treated as income for employees (owner can have their health insurance and other benefits paid by the corporation, which then expenses these as business costs -No limit to number of shareholders

Subchapter S corporation

-All profits and losses are passed through to shareholders -If assets that have increased in value are sold there is no tax to the corporation -Allows owners to treat income like a sole-proprietorship/partnership cannot be doubled taxed -Liability limited to investment in the organization

subchapter C corporation disadvantages

-Corporation pays tax on profits, then taxed profits are paid as dividends to owner, then owner pays taxes on personal tax return causing double taxation

sole-proprietorship disadvantages

-businesses with more than a single founder can not be of this type -law does not recognize other equity investors which can slow growth process -inability to have multiple owners means equity incentives to attract top employees/executives is not possible -debt of the firm is personal debt of owner -owner has 100% liability

disadvantages of corporations

-complex and expensive to start -profits subject to double taxation -Subject to legal and financial requirements (Record, report decisions and financial data; hold annual meetings; consult with board; file reports with SEC)

Subchapter S corporation disadvantages

-cumbersome and expensive to start -Limited number of shareholders (max 100 shareholders) -shareholder limitation can limit rapid growing organizations or one that might go public in future

professional corporation

-preferred by many licensed professionals -all shareholders are protected from malpractice lawsuits against the PC or any shareholders -also known as Professional Services Crop or Personal Services corp

subchapter C corporation

-separate legal entity -may engage in business, make contracts, own property, pay taxes, and sue and be sued -"Any artificial being, invisible, intangible, and existing only in contemplation of the law."

General partnership

Association of two or more people who co-own a business -Owners report their shares of losses or profits on their own personal income tax returns in proportion to their interest in the firm -Dissolution is easy but requires formal record with local authorities