9.01: Business Organization

Taxpayers

Are people who pay taxes.

Advantages Limited liability The corporation structure protects owners from personal liability. Any debts or lawsuits against the company are only held against the company. The 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 The corporation can hire the owner of the company as an employee, so the owner can participate in company-funded benefit plans, such as health insurance, life insurance, and retirement plans. A corporation can deduct the cost of employee benefits from its taxes, so they are not taxed. Fundraising A corporation can raise money for its business by selling stock in the company. This means the owner would sell some of the ownership rights to other people. This helps to raise money, but it means that more people have ownership of the company.

Disadvantages Complicated and expensive to set up A corporation is complicated and expensive to set up, operate, and dissolve. The articles of incorporation involve more paperwork than other types of businesses, and corporations have many rules and regulations to follow. Higher taxes The corporation business structure usually means higher taxes overall. The corporation is a separate legal entity, so it is usually taxed on its income. You'll learn about two special kinds of corporations that aren't taxed on their income in the next lesson. The money that the shareholders get from that income is taxed again on the personal income tax forms of the owners, which means the money is taxed twice. This is called double taxation.

Advantages Easy to set up A partnership is fairly easy to set up, but a little more complicated and expensive than a sole proprietorship. It's a good idea to spend time developing a clear and complete partnership agreement at the beginning, to avoid misunderstandings later. Tax benefits A partnership is a pass-through entity, so owners file the company's income on their personal tax forms. This means the company's income is only taxed once, so you get to keep more of the income than if the company was taxed separately first and then taxed again as your personal income. The company does file an informational tax return to the IRS, but it doesn't have to pay taxes as a separate business entity. Company buys and borrows A partnership can own property and borrow money in the company's name. However, the owners are still personally responsible for company debts.

Disadvantages Increased personal liability Owners of a partnership are personally liable for the company's actions and debts. Owners of a partnership actually have increased liability risk, because partners can be held liable for the acts of other partners. This means that if your partner breaks the law or creates debt on behalf of the company, you can be held legally and financially accountable for that person's actions. Disagreements In a partnership, decisions are made by more than one person, so disagreements can occur. This can make it difficult to make a decision quickly, and you may not always be happy with the outcome of a decision. This can create problems in the friendship you have with your partners. Harder to dissolve A partnership is more complicated to dissolve, because there are more people involved, and they might not all agree about whether or how to dissolve the partnership. Shared profits You have to share the company's profits with your partners. Taxes on employee benefits If the owners participate in company benefit plans such as health insurance, life insurance, or retirement, they might not get tax breaks on the cost of those plans, because they are not considered employees.

Advantages Tax benefits An LLC can choose to be taxed like a partnership, which allows pass-through taxation. This means lower taxes, because the LLC isn't taxed as a separate entity first. The LLC can decide to be taxed as a corporation instead, which means higher taxes but allows the owners to participate in company-funded employee benefits. Limited liability An LLC protects the liability of its owners, like a corporation does. This means it's harder to hold the owners personally responsible for the debts and actions of the company. However, the amount of liability protection may vary by state.

Disadvantages New structure The LLC business structure is relatively new, compared to the other business structures. This means the laws affecting LLCs are not fully settled. They are still developing. Laws may vary by state, and it means you have less security in your liability protection than a corporation does. Taxes on employee benefits If the LLC is taxed as a partnership, the owners lose some company-funded benefits. They may have to pay taxes on money spent for health insurance, life insurance, retirement plans, or other employee benefits.

Advantages Easy to set up A sole proprietorship is the simplest and least expensive type of business to set up or dissolve. In many cases, there are no legal documents needed, other than a business license. Tax benefits A sole proprietorship is taxed as a pass-through entity, so all income and expenses are filed on the owner's personal tax return. This means the company's income is only taxed once, so you get to keep more of the income than if the company was taxed separately first and then taxed again as your personal income. Profits are all yours You don't have to share the company's profits with anyone else, since you are the only owner of the company.

Disadvantages Personal liability A sole proprietor is personally liable for any debts or legal issues related to the company. Personal assets can be taken to pay company debts, and if the company is sued for any reason, the owner of the company is automatically being sued personally. Owner buys and borrows The company can't buy property or borrow money in the company's name. The owner must personally buy the property or borrow the money. No employee benefits Owners of a sole proprietorship can't participate in company-funded employee benefit plans, such as health insurance, life insurance, or retirement plans.

sole proprietorship

Has a single business owner

Partnership

Hs two or more owners

In the U.S. taxes are collected by a government by a government agency called

Internal Revenue Service (IRS)

Entity

Is a being, such as a person or company

Tax

Is a financial obligation that a person is required by law to pay.

Liability

Is a legal term for being held accountable and obligated to fulfill a commitment.

Limited Liability company (LLC)

Is a newer form of business entity. It is not a corporation.

Corporation

Is a separate legal business entity. It is legally independent from is owners. (Shareholders)

Which of the following is true n regard to taxation of LLC?

Pass-through taxation

Mark the types of businesses that are most likely to need personal protection for their owners.

Skiing lessons An in-home nurse A bakery A children's daycare center Drivers education class

Pass-through entities

The company is not taxed as a separate entity

If a company is a pass-through entity, that means

The company's income is not taxed as a separate entity. It is taxed only one the personal tax forms of its owners.

Pass-through taxation

The tax responsibility passes through to the owners of the company so they must pay he taxes in their individual income tax forms.

personal liability

You can be held personally accountable for the financial debts add illegal actions of your company.