Types of Business Ownership

Cooperative

A business owned, controlled, and operated for the mutual benefit of its members - people who use its services, buy its goods, or are employed by it. They are not as common and are often organized as corporations. They often share their earnings with the membership as dividends.

Unlimited Liability

A business owner can be legally forced to use personal money and possessions to pay business debt.

Limited Liability

A business owner cannot be legally forced to use personal money and possessions to pay business debt.

Partnership Agreement

A legal document that clearly defines how the work, responsibilities, rewards and liabilities of a partnership will be shared by the partners. It also specifies what will happen if a partner dies or decides to leave the business.

What is a partnership agreement?

A legal document that clearly defines the work, responsibilities, rewards and liabilities that the partners must share.

Sole Proprietorship

A legally defined type of business ownership in which a single individual owns the business, collects profit from it, and has unlimited liability for its debt.

Dividend

A portion of the corporation's profit.

Share of Stock

A unit of ownership in a corporation.

Name one advantage and one disadvantage of a corporation over a sole proprietorship.

Advantage: The shareholders have limited liability. Disadvantage: They are more difficult and expensive to set up and maintain.

Partnership

At least two individuals share the management, profit and liability.

Subchapter S Corporation

Differs from a C corp. in how it is taxed. It is not taxed as an entity, rather its income or loss is applied to each shareholder and appears on their tax returns. It is not taxed twice so it may offer tax benefits to business owners.

Who owns a cooperative?

Its members - the people who use its services, buy its goods, or are employed by it.

General Partnership

Most common form of partnership in which all partners have unlimited liability.

Sole Proprietorship Disadvantages

Only one person is responsible so he/she has to carry a heavy workload. The sole prop. has unlimited liability. They often find it difficult to borrow money or attract investors. Lack of access to outside cash makes it difficult to expand their business.

General Partnership Advantages

Setting up and maintaining a gen. partnership is relatively simple and it requires little paperwork compared to corporate structure. Relies on the entrep. skills and financial backing of at least two individuals instead of just one. This makes it easier for a partnership to borrow money or appeal to outside investors. Also, gen. part. can attract and motivate employees w/ the incentive of becoming partners in the business at some point in the future.

Limited Liability Company

Similar to a C corp, but with simpler operating requirements and tax procedures and greater liability protection for the business owners. Like a corp, it is possible to be owned by only one individual.

Sole Proprietorship Advantages

Simplest and least expensive option for business ownership. Business income and costs are reported on the owner's personal income tax return so less paperwork and easier tax accounting for the sole prop. The sole prop. is also the sole decision maker, with complete control over the management of the business.

Limited Partnership

Structured so that at least one partner has limited liability for the debts of the business. The other partners have no say in the company's day-to-day operation and are only investors.

How is a sole proprietorship different from a general partnership?

The business is only owned by one person in a sole prop. but two or more individuals own the business in a general partnership.

Corporation

The business itself is considered a "person" (an "entity") under the law, and limited liability is granted to the business owner(s).

A sole proprietor owns two businesses: a clock store and a skateboard outlet. Which business most needs limited liability? Why?

The clock store most needs limited liability because it has a higher chance of going out of business.

Nonprofit Corporation

The company operates not to provide profit for its shareholders but to serve the good of society. They exist through donations. The owners have limited liability regarding the company's debts. Nonprofits often receive special tax treatment from the IRS.

General Partnership Disadvantages

The gen. partners have unlimited liability so they risk losing personal money and possessions to pay business debts. Compared to sole prop., in partnerships the profit is split between the partners, each partner is responsible for the business-related actions of all the others and partners may have trouble agreeing on how the business should be operated.

Liability

The legal obligation of a business owner to use personal money and possessions to pay the debts of the business.

Shareholders/ Stockholders

The owners of a corporation.

What aspects of a proposed business should an entrep. consider before choosing a type of business ownership?

The potential risks and liabilities, its start up costs and investment needs.

Corporation Advantages

The shareholders have limited liability. Shareholders can end their ownership by selling their shares to someone else. The lifespan of a corporation is not tied to the lifespan of its owners. Corporations can raise money easier than the other types because management is delegated to a board of directors.

Corporation Disadvantages

They are more difficult and expensive to set up and maintain than the other business structures. They are regulated under state laws and must follow very specific procedures for keeping records and selling shares. Corp. profit is taxed twice - the corporation pays taxes on the profits it earns and then the shareholders pay personal taxes on corp. dividends received.

C corporations

This is what most corporations are and they are taxed as entities by the federal gov't.

Incorporate

To set up a corporation in accordance with the laws of a particular state in which the business is located.

What is the difference between limited and unlimited liability?

Unlike unlimited liability, limited liability means that the business owner cannot be legally forced to use personal money and possessions to pay business debt.