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Forms of business organization
Sole (Single) Proprietorship
Partnership
Corporation
Co-operative
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Sole Proprietorships
ONE OWNER
ALL THE ASSETS AND
PROFITS ARE ATTRIBUTED DIRECTLY TO THE OWNER.
NO SPECIAL
LEGAL REQUIREMENTS.
OWNER’S EQUITY CONSISTS PRIMARILY OF THE OWNER’S CAPITAL ACCOUNT.
RESPONSIBILITY FOR RUNNING THE BUSINESS, ITS LIABILITIES OR DEBTS
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SOLE PROPRIETORSHIP
ADVANTAGES
Easiest and least expensive form of ownership
to organize
Ease of formation
Sole proprietors are in complete
control, and within the parameters of the law, may make decisions as they see fit
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SOLE PROPRIETORSHIP
ADVANTAGES
Sole proprietors receive all income generated by
the business to keep or reinvest.
Profits from the business
flow-through directly to the owner's personal tax return
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SOLE PROPRIETORSHIP
ADVANTAGES
The business is easy to dissolve, if
desired
Minimal working capital required
DISADVANTAGES
Sole proprietors have unlimited liability
Sole proprietors
are legally responsible for all debts against the business
Their business and personal assets are at risk
Difficulty raising capital
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SOLE PROPRIETORSHIP
ADVANTAGES
The business is easy to dissolve, if
desired
DISADVANTAGES
Some employee benefits such as owner's medical insurance premiums
are not directly deductible from business income (only partially deductible as an adjustment to income).
Lack of continuity in business organization in the absence of the owner
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Partnerships
TWO OR MORE OWNERS
Partnership agreement may be
oral or written.
PROFITS ARE ATTRIBUTED DIRECTLY TO THE
PARTNERS.
OWNERS’ EQUITY CONSISTS PRIMARILY OF THE PARTNERS’ CAPITAL ACCOUNTS.
THE PARTNERS SHOULD HAVE A LEGAL AGREEMENT THAT SETS FORTH HOW DECISIONS WILL BE MADE, PROFITS WILL BE SHARED, DISPUTES WILL BE RESOLVED, HOW FUTURE PARTNERS WILL BE ADMITTED TO THE PARTNERSHIP, HOW PARTNERS CAN BE BOUGHT OUT, OR WHAT STEPS WILL BE TAKEN TO DISSOLVE THE PARTNERSHIP WHEN NEEDED
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Partnerships
THE PARTNERS MUST DECIDE UP FRONT HOW
MUCH TIME AND CAPITAL EACH WILL CONTRIBUTE
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Partnerships
ADVANTAGES
Partnerships are relatively easy to establish; however time
should be invested in developing the partnership agreement
With more
than one owner, the ability to raise funds may be increased
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Partnerships
ADVANTAGES
The profits from the business flow directly through
to the partners' personal tax returns
Prospective employees may be
attracted to the business if given the incentive to become a partner
The business usually will benefit from partners who have complementary skills
DISADVANTAGES
Profits must be shared with others
Since decisions are shared, disagreements can occur
Some employee benefits are not deductible from business income on tax returns
The partnership may have a limited life; it may end upon the withdrawal or death of a partner
Unlimited liability (for general partners)
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TYPES OF PARTNERSHIPS
General partnerships
Partners divide responsibility for management
and liability, as well as the shares of profit
or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently
Limited Partnership and Partnership with Limited Liability
"Limited" means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which generally encourages investors for short term projects, or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership
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TYPES OF PARTNERSHIPS
Joint Venture
Acts like a general partnership,
but is clearly for a limited period of time
or a single project. If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity
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Corporations
A CORPORATION IS IDENTIFIED BY THE TERMS "LIMITED",
"LTD.", "INCORPORATED", "INC.", "CORPORATION", OR "CORP.".
WHATEVER THE TERM, IT
MUST APPEAR WITH THE CORPORATE NAME ON ALL DOCUMENTS, STATIONERY, AND SO ON, AS IT APPEARS ON THE INCORPORATION DOCUMENT
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Corporations
USUALLY THERE ARE MANY OWNERS.
Owners are referred to
as shareholders.
THE OWNERS HAVE LIMITED LIABILITY FOR THE DEBTS
OF THE CORPORATION.
No shareholder of a corporation is personally liable for the debts, obligations or acts of the corporation.
THE SHAREHOLDERS ELECT A BOARD OF DIRECTORS TO OVERSEE THE MAJOR POLICIES AND DECISIONS.
THE CORPORATION HAS A LIFE OF ITS OWN AND DOES NOT DISSOLVE WHEN OWNERSHIP CHANGES.
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Corporations
ADVANTAGES
Shareholders have limited liability for the corporation's debts
or judgments against the corporations.
Shareholders can only be
held accountable for their investment in stock of the company.
Corporations can raise additional funds through the sale of stock.
A corporation may deduct the cost of benefits it provides to officers and employees.
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Corporations
ADVANTAGES
Can elect S corporation status if certain requirements
are met. This election enables company to be taxed
similar to a partnership.
Ownership is transferable
Continuous existence
DISADVANTAGES
The process of incorporation requires more time and money than other forms of organization.
Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible form business income, thus this income can be taxed twice.
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TYPES OF CORPORATIONS
Subchapter S Corporations
A tax election only;
this election enables the shareholder to treat the earnings
and profits as distributions, and have them pass through directly to their personal tax return. The shareholder, if working for the company, and if there is a profit, must pay herself wages, and it must meet standards of "reasonable compensation". The basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS (Internal Revenue Service) can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount
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TYPES OF CORPORATIONS
Private Corporation
A private corporation can be
formed by one or more people. A majority of
its directors must be residents. A private corporation cannot sell shares or securities to the general public.
Public Corporation
Generally, a "public corporation" is one that offers its securities to the public.