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Sole Proprietorship
General Partnerships
Limited Partnerships
C-Corporations
S-Corporations
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Advantages:
LowAll profits go to owner
start-up costs & All profits go to owner
Freedom from most regulationsOwner has direct control
Easy to exit business
Disadvantages
Unlimited personal liabilityPersonal finances at risk
Total responsibility
May be more difficult to raise financing
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Businesseshaving two
or moreowners
Income and lossespass through topartners and aretaxed at personal
rate
Each partner shouldbring specific
advantages to thebusiness like
capital, industryknowledge, labor
or physical assets They do not requireregistration withlocal, state or
federalgovernments
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Advantages:
Ease of formation
Pooled talent and Resources
Somewhat easier access to financingSome tax benefits
Disadvantages
Unlimited personal liabilityDivided authority and decisions
Potential for conflict
Continuity of transfer of ownership
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consist of generalpartners with fullliability for theorganization & limitedpartners whose liabilityfor the organization arelimited to a set amount(usually the amount oftheir investment)
Income and losses
pass through topartner and are
taxed at personalrate; flexibility in
profit-lossallocations to
partner
Limited liability,although one
partners must retainunlimited liability
They do requireregistration withlocal, state or
hfederalgovernments
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Advantages:
Good way to acquire capital from limitedpartners
Disadvantages
Cost and complexity of forming can be high
Limited partners cannot participate in
management of business without losing liabilityprotection
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C-Corporations areorganized with ownership of
shares of stock which areassignable and transferable.In theory, corporations areseparate legal entities from
the owners
The control andoperation of a
corporation are in thehands of the
shareholders who tendto operate with a board
of directors
Corporations providelimited liability for the
owners as well. Thismeans
that the owners cannotbe sued for the debts ofthe corporation unless
they personally
guaranteed the debtsThey do require
registration with local,state or federal
governments
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Advantages:
Limited liability Transferable ownershipContinuous existence
Easier access to resourcesDisadvantages
Expensive to set up
Closely regulated
Double taxation
Extensive record keeping
Charter restrictions
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The corporations profitsor losses are passed
through to theshareholders. The shareholders then must reportprofits as supplemental
income.
Up to 75 share-holders;no limits on types of
stock or voting
Income and losses passthrough to partners and
are taxed at personalrate.
They dorequire
registrationwith local,
state orfederal
governments
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Advantages:
Easy to set up
Enjoy limited liability protection and tax benefits of
partnershipCan have a tax-exempt entity as a shareholder
Disadvantages
Must meet certain requirements
May limit future financing options
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Unlimited number ofmembers; flexiblemembership
arrangements forvoting rights and
income.
Unlimited numbersof share holders
Income and lossespass through topartners and aretaxed at personalrate; flexibility in
profit-loss allocationto partners
They do requireregistration withlocal, state or
federalgovernments
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Advantages:
Greater flexibility
Not constrained by regulations on C and S
corporationsTaxed as partnership, not as corporation
Disadvantages
Cost of switching from one form to this canbe high
Need legal and financial advice in formingoperating agreement
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2007 Prentice Hall, Inc. All
rights reserved.A15
Structure
Ownership
Requirements Tax Treatment Liability Advantages Drawbacks
Scorporation
Up to 75share-holders;no limits ontypes of stockor votingarrangements
Income andlosses pass
through to
partners and aretaxed at personalrate; flexibility inprofit-loss
allocation topartners
Limited Easy to set up
Enjoy limitedliability protectionand tax benefitsof partnership
Can have a tax-exempt entity as ashareholder
Must meet certainrequirements
May limit futurefinancing options
Limitedliabilitycompany(LLC)
Unlimitednumber ofmembers;
flexible
membershiparrangementsfor votingrights andincome
Income andlosses pass
through to
partners and are
taxed at personalrate; flexibility inprofit-lossallocations topartners
Limited Greater flexibility
Not constrainedby regulations onC and S
corporations
Taxed as partner-ship, not ascorporation
Cost of switchingfrom one form tothis can be high
Need legal and
financial advice informing operatingagreement
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2007 Prentice Hall, Inc. All
rights reservedA16
StructureOwnership
Requirements Tax Treatment Liability Advantages Drawbacks
Limitedliabilitypartnership(LLP)
Two or moreowners
Income andlosses pass
through to
partner andare taxed atpersonal rate;flexibility in
profit-lossallocations topartners
Limited,althoughonepartnersmustretainunlimited
liability
Good way toacquire capitalfrom limitedpartners
Cost andcomplexity offorming can behigh
Limited partnerscannot participatein management ofbusiness withoutlosing liabilityprotection
Ccorporation
Unlimitednumber ofshareholders;no limits on
types of stock orvotingarrangements
Dividendincome istaxed atcorporate and
personalshareholderlevels; lossesand deductionsare corporate
Limited Limited liabilityTransferableownershipContinuous
existenceEasier access toresources
Expensive to setup
Closely regulated
Double taxation
Extensive recordkeeping
Charterrestrictions