Principles of Business

LAWS Affecting Business Start-Ups

What are the different types of business structures?

MOST COMMON: Sole Proprietorship

PartnershipCorporations

– 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 personOne 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:Advantages: Easy, inexpensive to

create Owner has complete

control Least regulated Income is taxed at

personal level (and rate)

Disadvantages:Disadvantages: Unlimited liabilityUnlimited liability Raising capital is difficult Owner may not have the

needed skills Death of owner

dissolves business

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 or more people who share the risks, rewards and responsibilities for operation

Often chosen by people who provide professional services (doctors, lawyers, accountants)

About 7% of all businesses in the US are partnerships

General Partner:General Partner: member of a partnership who has unlimited liability and takes full responsibility for managing the business

Limited Partner:Limited Partner: liability is limited to his/her investment and he/she cannot be actively involved in managing the business

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:Advantages: Inexpensive to create General partners have

total control Two heads are better

than one

Disadvantages:Disadvantages: If one partner wants out

or dies, the partnership ends

Partners are held liable 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:ADVANTAGES: Status Limited liability Continuous life Tax advantages (can

deduct salaries and contributions to benefit plans)

Board of Directors

DISADVANTAGES:DISADVANTAGES: Expensive to start-up

($500 - $2,500) Income is more heavily

taxed Double taxation

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:ADVANTAGES: Simpler to set up than a

corporation Flexibility of a

partnership Limited Liability No double taxation No limit to number of

owners

DISADVANTAGES:DISADVANTAGES: Need a good agreement

(Article of Organization) Raising funds

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