Types of Business Organization Quiz

Franchise

A business established or operated under an independent , third party authorization to sell or distribute a company's goods or services in a particular area

S corporation

A business may elect to be an S Corporation (S Corp) in order to avoid income taxes at the corporate level, like the C Corp, while at the same time retaining the advantage of limited liability that corporations enjoy.

Limited Liability Company

A business organization in which the business (not the owner) is liable for the company's debts

cooperative

A cooperative business, also known as a co-op, is a type of organization that is both owned and controlled by its members, who also happen to use the services and products of the cooperative. These businesses are different from other types of companies, because they are formed and operate for the benefit of their members. In that sense, they are nonprofits.

C Corporation

A corporation is a separate legal and tax entity created by individuals (shareholders) who offer money, property or both for the corporation's capital stock. The corporation remains separate from those who manage and control the operations of the business.

General Partnership

A partnership in which all owners share in operating the business and in assuming liability for the business's debts.

limited liability company advantages

Avoids double taxation of a corporation Retains the corporation's legal benefit of limited liability Provides more management flexibility Less paper work than a corporation Easier to set up then a corporation and still applies limited liability

Limited Partnership advantages

Being a limited partner puts a limitation on liability with respect both to potential lawsuits and money; the limited partner is only going to be liable for the amount of capital it contributed to the business; a business creditor cannot come after the limited partner's personal assets. Easier to attract investors because limited partners have limited liability to the business debts. Profits and losses pass through the business to the partners, who are taxed on their own personal income tax returns. Limited partners get to share in the profits and losses without having to participate in the business itself.

General Partnership Advantages

Businesses as partnerships do not have to pay income tax; each partner files the profits or losses of the business on his or her own personal income tax return. This way the business does not get taxed separately. Easy to establish. There is an increased ability to raise funds when there is more than one owner Wider pool of knowledge, skills, and contacts. Improved management with more than one owner.

Limited liability company Disadvantages

Complexity of Formation Foreign Status in other States Limited to Select Industries State Law Differences The life of the company is limited Confusion in roles ex. Managers and directors Self employment taxes which are typically higher than that of a corporate level

nonprofit corporation Disadvantages

Cost: Creating a nonprofit organization takes time, effort, and money. Fees are required to apply for incorporation and tax exemption. The use of an attorney, accountant, or other consultant may also be necessary. Paperwork: As an exempt corporation, a nonprofit must keep detailed records and submit annual filings to the state and IRS by stated deadlines in order to keep its active and exempt status. Shared control: Although the people who create nonprofits like to shape and control their creations, personal control is limited. A nonprofit organization is subject to laws and regulations, including its own articles of incorporation and bylaws. In some states, a nonprofit is required to have several directors, who in turn are the only people allowed to elect or appoint the officers who determine policy. Scrutiny by the public: A nonprofit is dedicated to the public interest; therefore, its finances are open to public inspection. The public may obtain copies of a nonprofit organization's state and Federal filings to learn about salaries and other expenditures.

Franchise Disadvantages

Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor. The franchise agreement usually includes restrictions on how you can run the business. You might not be able to make changes to suit your local market. You may find that after some time, ongoing franchisor monitoring becomes intrusive. The franchisor might go out of business. Other franchisees could give the brand a bad reputation, so the recruitment process needs to be thorough. You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor. All profits (a percentage of sales) are usually shared with the franchisor. The inflexible nature of a franchise may restrict your ability to introduce changes to the business to respond to the market or make the business grow.

Corperation

DescriptionA corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity and recognized as such in law for certain purposes. Early incorporated entities were established by charter. Most jurisdictions now allow the creation of new corporations through registration

Corporation Disadvantages

Double taxation. Depending on the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income can be taxed twice. Excessive tax filings. Depending on the kind of corporation, the various types of income and other taxes that must be paid can require a substantial amount of paperwork. The exception to this scenario is the S corporation, as noted earlier. Independent management. If there are many investors having no clear majority interest, the management team of a corporation can operate the business without any real oversight from the owners.

Sole Proprietorship Advantages

Filing taxes as a sole proprietorship is relatively easier than that of a corporation. Sole proprietorships typically require less capital to set up and have easier payroll requirements. Sole proprietorships are not as heavily regulated as other forms of organizations Owners have full control over business and make all profits

Limited Partnership Disadvantages

If the limited partner becomes active in the business he or she may have general-partner personal liability. General partner is personally fully liable for the debts of the business. Certificate of Limited Partnership must be filed with the state before the partnership comes into existence, which includes state filing fees.

Cooperative advantages

Less Taxation. Similar to an LLC, cooperatives that are incorporated normally are not taxed on surplus earnings (or patronage dividends) refunded to members. Therefore, members of a cooperative are only taxed once on their income from the cooperative and not on both the individual and the cooperative level. Funding Opportunities. Depending on the type of cooperative you own or participate in, there are a variety of government-sponsored grant programs to help you start. For example, the USDA Rural Development program offers grants to those establishing and operating new and existing rural development cooperatives. Reduce Costs and Improve Products and Services. By leveraging their size, cooperatives can more easily obtain discounts on supplies and other materials and services. Suppliers are more likely to give better products and services because they are working with a customer of more substantial size. Consequently, the members of the cooperative can focus on improving products and services. Perpetual Existence. A cooperative structure brings less disruption and more continuity to the business. Unlike other business structures, members in a cooperative can routinely join or leave the business without causing dissolution. Democratic Organization. Democracy is a defining element of cooperatives. The democratic structure of a cooperative ensures that it serves its members' needs. The amount of a member's monetary investment in the cooperative does not affect the weight of each vote, so no member-owner can dominate the decision-making process. The "one member-one vote" philosophy particularly appeals to smaller investors because they have as much say in the organization as does a larger investor.

Corporation Advantages

Limited liability. The shareholders of a corporation are only liable up to the amount of their investments. The corporate entity shields them from any further liability, so their personal assets are protected. Source of capital. A publicly-held corporation in particular can raise substantial amounts by selling shares or issuing bonds. Ownership transfers. It is not especially difficult for a shareholder to sell shares in a corporation, though this is more difficult when the entity is privately-held. Perpetual life. There is no limit to the life of a corporation, since ownership of it can pass through many generations of investors. Pass through. If the corporation is structured as an S corporation, profits and losses are passed through to the shareholders, so that the corporation does not pay income taxes.

Cooperative Disadvantages

Obtaining Capital through Investors. Cooperatives may suffer from slower cash flow since a member's incentive to contribute depends on how much they use the cooperative's services and products. While the "one member-one vote" philosophy is appealing to small investors, larger investors may choose to invest their money elsewhere because a larger share investment in the cooperative does not translate to greater decision-making power. Lack of Membership and Participation. If members do not fully participate and perform their duties, whether it be voting or carrying out daily operations, then the business cannot operate at full capacity. If a lack of participation becomes an ongoing issue for a cooperative, it could risk losing members.

General Partnership Disadvantages

Partners are jointly and severally liable for the actions of other partnership obligations including contracts, torts, and breaches of trust. If a partner has been sued but cannot pay the third party the full amount, the third party may collect the money from the remaining partners. Each partner is individually liable for the debts and obligations of the business; if the business does not have enough assets to pay back business debts, creditors can take the personal assets of the partners. A partner cannot transfer interest in the business without the unanimous consent of the partners. Partnerships can potentially be unstable because of the danger of dissolution if one partner wants to withdrawal from the business or dies.

Nonprofit company advantages

Tax exemption/deduction: Organizations that qualify as public charities under Internal Revenue Code are eligible for federal exemption from payment of corporate income tax. Once exempt from this tax, the nonprofit will usually be exempt from similar state and local taxes. If an organization has obtained 501(c)(3) tax exempt status, an individual's or company's charitable contributions to this entity are tax-deductible. Eligibility for public and private grants: Many foundations and government agencies limit their grants to public charities. Nonprofit organizations also can offer tax deductions to individuals or businesses that give charitable contributions. Formal structure: A nonprofit organization exists as a legal entity in its own right and separately from its founder(s). Incorporation puts the nonprofit's mission and structure above the personal interests of individuals associated with it. Limited liability: Under the law, creditors and courts are limited to the assets of the nonprofit organization. The founders, directors, members, and employees are not personally liable for the nonprofit's debts. However, there are exceptions. A person cannot use the corporation to shield illegal or irresponsible acts on his/her part. Also, directors have a fiduciary responsibility; if they do not perform their jobs in the nonprofit's best interests, and the nonprofit is harmed, they can be held liable

Sole Proprietorship Disadvantages

The owner of a sole proprietorship is solely liable for all debts and actions of the company. All personal wealth is linked to the business. Financial statements are not required in a sole proprietorship as are typically required of a corporation, meaning a lack of financial control is very probable. It is difficult to find outside investors to fund sole proprietorships, meaning growth potential is very limited beyond a certain point.

Franchise Advantages

The risk of business failure is reduced by franchising. Your business is based on a proven idea. You can check how successful other franchises are before committing yourself. Products and services will have already established a market share. Therefore there will be no need for market testing. You can use a recognised brand name and trade mark. You benefit from any advertising or promotion by the owner of the franchise - the 'franchisor'. The franchisor gives you support - usually as a complete package including training, help setting up the business, a manual telling you how to run the business and ongoing advice. No prior experience is needed as the training received from the franchisor should ensure the franchisee establishes the skills required to operate the franchise. A franchise enables a small business to compete with big businesses, more so than an independent small business, due to the pool of support from the franchisor and network of other franchisees. You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same territory. Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation. You can benefit from communicating and sharing ideas with, and receiving support from, other franchisees in the network. Relationships with suppliers have already been established.

Sole Proprietorship

a business owned and managed by a single individual who has ultimate liability

nonprofit corporation

a corporation that does not seek to earn a profit for the business but towards something else including charitable, religious, education, or science

limited partnership

form of partnership where one or more partners are not active in the daily running of the business, and whose liability for the partnership's debt is restricted to the amount invested in the business