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Types of Businesses - Ch. 5
Sole Proprietorship: Owner is only one responsible for the business activities
What is a sole proprietorship?
liability: money owed to others, responsibility
Advantages:
Easy and inexpensive to create
Owner receives all profits
Least regulated
Profit is taxed at individual rate which is often lower than business rates
Disadvantages:
Owner has unlimited liability for all debts and actions of the business
Owners personal assets are at risk
Difficult to get financing if owner doesnt have good credit or adequate assets to secure
Total reliance on the skills and experience of the owner
How to Set Up a Sole Proprietorship
Partnerships: Sole Proprietorship with more than one owner
What is a Partnership?
General Partners
All partners have unlimited personal liability
All partners take full responsibility for the management of the business
Law requires all partnerships to have at least one general partner
Limited Partnerships
Liability is limited to the amount of their investment
Cannot be actively involved in managing the business or lose limited liability status
Joint Venture
Two companies join together to accomplish a specific project
Strategic Alliance
Two businesses work together for a mutual benefit
Advantages:
Inexpensive to create
Partner retain control
Sharing of ideas and investment capital
Disadvantages
Personality conflicts
Difficult to dissolve one partners interest
How to make a partnership work
Share responsibilities
Put everything in writing
Always be honest about how the business is doing
Corporations
What is a corporation?
Chartered or registered with the state
Lives on after the owners have sold their interests or pass away
C-Corporation
Most common type
Protects the entrepreneur from being sued for actions or debts of the corporation
However, if the entrepreneur acts criminally or negligently, there is no protection
Advantages:
Can raise money by issuing stock
common stock: owners have voting rights
preferred stock: owners are first to receive investment in case of failure
Limited Liability: only up to amount invested
Disadvantages:
Expensive and difficult to set up
Double taxation
Corporations profits are taxed
Shareholder pays personal taxes on income from investment
Subchapter S Corporation
Taxed like a sole proprietorship or partnership
Cash businesses are often S corporations
Nonprofit Corporation
To benefit a cause or the community
Can make a profit, however, profit must remain with the company
Limited Liability Company (LLC)
Best of all worlds
Limited liability like a corporation
Members not liable for companys debts
Tax advantages of sole proprietorship or partnership (taxed once)
Common to professional practice like medical or legal to protect partners
Varies by state so check local laws