Business in Bed - Types of Business Organization
These are the basic ways a business can be set up

 

Sole Proprietorship:
A business owned by a single person.

Advantages: Easiest and least expensive type to set up. Owner has complete control. Fewer reporting requirements. No separate taxation. May register a trade name (assumed business name or d.b.a.) to prevent confusion.

Disadvantages: Unlimited liability, putting all of individual's assets at risk. Limited life span - ends at death of owner. Ability to raise capital limited to personal resources and bank loans. Total profits taxed as income to the owner.

Partnership:
Two or more people who agree to share ownership and/or management of a business.

General partners share in the operation of the business and are liable for its debts and obligations. A written agreement is not required, but is strongly recommended.
Limited partnerships are more complicated as they involve investors. Professional legal and accounting advice should be sought to form this type of partnership.

Advantages: Allows pooling of resources and talents. Business can be continued after the loss of a partner. Authority is generally not limited to one person. Profits and losses can be allocated differently than capital contributions.

Disadvantages: Can be complicated to dissolve. Organization costs can be higher. Each partner has unlimited personal liability for business obligations. Profits are taxed as income to individual partners even if the income is retained by the partnership. Since each partner can act on behalf of the business, great care must be taken in the selection of partners.

Corporation:
There are two basic types of corporations:

C Corporation: A separate entity from the persons who own the entity. The owners are referred to as stockholders or shareholders who elect a board of directors. The board of directors establishes corporate policies, elects corporate officers and determines the amount and timing of any distribution of property to the shareholders. The corporation must adopt corporate bylaws, which establish the structure for the business including procedures for election of officers, division of responsibilities and other corporate activities.
S Corporation: Same as a C Corporation except: It is not considered a separate entity for tax purposes so there is no risk of double taxation. Items of income, loss, deduction and credit pass through to the shareholders much like a partnership. There can be no more than 35 shareholders, and, with few exceptions, only US citizens may be shareholders.

Advantages: Shareholders are not personally responsible for the obligations of the corporation. Simple transfer of ownership through sale and transfer of stock. Perpetual existence of the corporation as a legal entity. Financing is more flexible through the sale of securities to investors. Centralized management.

Disadvantages: Organization costs can be high. Must qualify to do business in other states. Will lose corporate status and put individuals at risk of personal liability if requirements are not followed. S Corporations have less flexibility than partnerships in allocating profits and losses among shareholders.

LLC (Limited Liability Company):
An unincorporated association consisting of members and managers.
Individual state laws govern whether or not a LLC can be formed by a single owner.

Advantages: Combines the best features of corporations and partnerships. Flexible organization. Low organization costs. Owner(s) can have the limited liability of a corporation. No double taxation as items of income, gain, loss, deduction and credit pass through to the individual return of the member(s).

Disadvantages: Not all states recognize LLCs. Not all states allow single member LLCs. Since LLCs are a relatively new type of business organization, there is uncertainty as to how laws will be interpreted.

Note: This is general information only and it is not intended to be used as legal or accounting advice. For more detailed information, check the specific regulations for your state. It is always best to consult with an attorney and an accountant prior to making a decision on the type of organization you should use for your business.

 

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