Forms_of_Ownership

							 LAWS Affecting
Business Start-Ups


        Principles of
        Business
What are the different types of
business structures?

MOST COMMON:        Sole
                     Proprietorship
                    Partnership
                    Corporations
                       –   C-Corp
                       –   S-Corp
                       –   Not-for-Profit
What are the different types of
business structures?

SPECIAL TYPES:      Limited Liability
                     Company (LLC)
                    Cooperatives
Factors to consider when choosing
a legal form of ownership:

1.   Your vision regarding the size and nature
     of your business.
2.   The level of control you wish to have
3.   The level of “structure” you are willing to
     deal with
4.   The business’ vulnerability to lawsuits
Factors to consider when choosing
a legal form of ownership:

5.   Tax implications of the different forms of
     ownership structures
6.   Expected profit (or loss) of the business
7.   Whether or not you need to re-invest
     earnings into the business
8.   Your need for access to cash out of the
     business for yourself.
Sole Proprietorship

 One person owns the business and
  takes the major responsibility for
  decisions about its operations
 Most business start out as sole
  proprietorships
 About 73% of all businesses in the US
  are sole proprietorships
Sole Proprietorship

LEGAL STATUS
 A S.P. is not a separate legal entity; the owner IS
  the business
FORMATION
 License to conduct business
 Registration of business name
LIFE SPAN
 Business terminates when owner becomes
  disabled, retires or dies
Sole Proprietorship

TRANSFER OF OWNERSHIP
 The owner can sell or give away any asset because
  there is no legal distinction between the business
  and the owner
MANAGEMENT RESPONSIBILITY
 Management decisions are completely in the hands
  of the owner; there are no shareholders or Board of
  Directors to answer to
Sole Proprietorship

LIABILITY
 The owner is personally liable (responsible)
  for all debts and other business liabilities.
  The owner’s personal assets are fully
  exposed to risks.
TAX ISSUES
 Income and expenses are reported on the
  owner’s personal 1040 Tax Form.
Sole Proprietorship

Advantages:                   Disadvantages:
 Easy, inexpensive to         Unlimited liability
  create                       Raising capital is difficult
 Owner has complete           Owner may not have the
  control                       needed skills
 Least regulated              Death of owner
 Income is taxed at            dissolves business
  personal level (and rate)
Liability

   Responsibility for all debts and actions of the
    business. If anything goes wrong, it is the
    owner’s responsibility to “make it right.”
   Brainstorm a list of situations that would cause
    a business owner legal or financial problems.
Partnership

   Business is owned by two         General Partner:
    or more people who                member of a partnership
    share the risks, rewards          who has unlimited liability
    and responsibilities for          and takes full responsibility
    operation                         for managing the business
   Often chosen by people           Limited Partner:
                                      liability is limited to his/her
    who provide professional
                                      investment and he/she
    services (doctors, lawyers,
                                      cannot be actively involved
    accountants)                      in managing the business
   About 7% of all businesses
    in the US are partnerships
 Partnership

LEGAL STATUS
 In some ways, a partnership is treated as a separate
  legal entity because it can own property; but it is not
  treated as separate when dealing with the feature
  below…
FORMATION
 License to conduct business
 Registration of business name
 Written agreement between the partners defining
  ownership, responsibility, etc…
 Partnership

LIFE SPAN
 Business terminates when owner(s) becomes
  disabled, retire or die
TRANSFER OF OWNERSHIP
 Partners may sell their portion of the business if
  it is agreed upon
MANAGEMENT RESPONSIBILITY
 Responsibility is shared between the partners.
Partnership

LIABILITY
 The owners are personally liable (responsible)
  for all debts and other business liabilities.
TAX ISSUES
 Income and expenses are reported on the
  owners’ personal Tax Forms.
Partnership

Advantages:                Disadvantages:
 Inexpensive to create     If one partner wants out
 General partners have      or dies, the partnership
  total control              ends
 Two heads are better      Partners are held liable
  than one                   for each other’s actions
                            Personality conflicts

 How does a partnership make up for
      the shortcomings of a sole
            proprietorship?
Creating a Partnership Agreement

1.   Break up into groups of 3-4.
2.   Develop a written partnership
     agreement that could be used when
     students work together on a project.
3.   Share with class.
Corporations

   A business registered by a state and operates
    apart from its owners.
   A corporation lives on after the owners have
    sold their interests or passed away.
   Ownership (or equity) in a corporation is
    represented by shares of stock.
   Corporations can purchase goods, sue and be
    sued, and conduct any type of business
    transaction.
Corporation

Number of Owners:
  –   C-Corp - Unlimited
  –   S-Corp – 75 or less
Separate Legal Entity Status:
  –   C Corporation is considered a SLE for legal and tax
      purposes
  –   S Corporation for legal purposes ONLY
Formation:
  –   CHARTER filed with State
Corporation

Life Span:
  –   Perpetual Life
Sale/Transfer of Ownership:
  –   Shareholders are free to sell stock unless restricted
      by an agreement
MGT Responsibility:
  –   BOARD OF DIRECTORS
Corporation

Liability:
   –   Corporation is a SLE
   –   Board of Directors could be help liable for bad
       decision making
Taxation:
   –   Corporation is taxed on income
   –   Shareholders also are taxed on individual income
   –   DOUBLE TAXATION
Corporation
ADVANTAGES:                  DISADVANTAGES:
 Status                      Expensive to start-up
 Limited liability            ($500 - $2,500)
 Continuous life             Income is more heavily

 Tax advantages (can
                               taxed
  deduct salaries and         Double taxation
  contributions to benefit
  plans)
 Board of Directors
Limited Liability Company (LLC)

Number of Owners:
  –   No limit
  –   Most states require at least two
Separate Legal Entity Status:
  –   Has SLE status
Formation:
  –   Like a parternship
Limited Liability Company (LLC)

Lifespan:
  –   Unless stated in agreement, dies with owner(s)


Sale/Transfer of Ownership:
  –   Majority of members need to agree on it
MGT Responsibility:
      Like a partnership
Limited Liability Company (LLC)

Taxation:
  –   Profits are shared as determined in the “Articles of
      Organization”
  –   Owners are taxed at personal level on profits
LLC examples in Hamburg
LLC
ADVANTAGES:                  DISADVANTAGES:
 Simpler to set up than a    Need a good agreement
  corporation                  (Article of Organization)
 Flexibility of a            Raising funds
  partnership
 Limited Liability
 No double taxation
 No limit to number of
  owners
COOPERATIVE
A business is owned and operated by its user-
members for the purpose of supplying
themselves with goods/services
   •Must obtain a charter
   •Members buy stock/shares
   •Popular in agriculture, building, housing
   and credit unions
•Examples: Eden Valley Co-op, Meridia
Community Credit Union, Lexington Coop