Options for organizing a business
Business Structures
| Structure | Ownership | Tax | Liability |
|---|---|---|---|
| Sole proprietorship | One owner | Income | Unlimited |
| Partnership | 2+ Owners | Individual Income | Somewhat limited |
| Corporation | Shareholders | Corporate and shareholders taxed | Limited |
Informal Business Structures
| Benefits | Drawbacks |
|---|---|
| Simple testing | High-risk |
Works well when you know or are familiar with your customers
Formal Structure
| Benefits | Drawbacks |
|---|---|
| Personal asset collection | More difficult to form |
| Adds legitimacy |
Corporations
| Benefits | Drawbacks |
|---|---|
| Ability to raise Venture Capitalism | Large and complex |
| Heavily Taxed |
LLC
| Benefits | Drawbacks |
|---|---|
| Simple | |
| Lower taxes | |
| Asset Protection |
Types of LLC’s
| Structure | Description |
|---|---|
| Pass-through | Distribution of income |
| S-corp | Wages and distribution of income |
| C-corp | Only if you are making a lot of money, LLC behaves like a corporation |
Sole Proprietorships
Owned and operated by one individual, Sole Proprietorships are the most common in the United States. They typically employ under 50 people, and make up 70% of the US Economy
| Advantages | Disadvantages |
|---|---|
| Ease and cost of formation | Unlimited Liability |
| Secrecy | Limited sources of funds |
| Distribution and use of profits | Limited skillsets |
| Flexibility and control | Lack of continuity |
| Government regulation | Lack of qualified employees |
| Taxation | Taxation |
| Closing the business |
Partnerships
A partnership is an association of 2 or more persons who carry on as co-owners of a business for profit. They are the least common form of business
Partnerships are typically larger than sole proprietorships, but remain smaller than corporations.
| Advantages | Disadvantages |
|---|---|
| Ease of organization | Unlimited liability |
| Availability of capital and credit | Business responsibility |
| Combined skills | Life of the partnership |
| Decision making | Distribution of profits |
| Regulatory controls | Limited sources of funds |
General Partnership
Total sharing of gains and liability.
Limited Partnership
One partner is more liable than the other.
Corporations
A legal entity, defined by the state, whose assets and liability are separate from its owners.
Has many rights, duties, and the powers of a person:
- Can own and transfer properties
- Can enter into properties
- Can sue and be sued
Corporations can also issue stock and deal with dividends.
Double Taxation
Corporations are taxed both on their salaries and their dividends, making it less attractive to create a corporation as a small business.
Joint Ventures
A partnership established for a specific project or limited time. Typically large capital for a short-term project like oil drilling or software development.
S. Corporation
S. Corporations are taxed as though they are partnerships with restrictions on shareholders.
Cooperatives
Cooperatives are composed of individuals or small businesses that band together to reap the benefits of belonging to a larger organization