Business Structures

IRS’ Definition of a Business

A business is where goods and services are exchanged for

money

Business Structure Importance

Choosing the proper legal organizational

structure for a business is very important

It can impact the owner(s) on a daily basis

Income taxes

When they want to borrow money or attract investors

If and when a business is taken to court

Basic Forms

The following are the basic forms of business ownership in

the United States:

Sole Proprietorship

General Partnership

Corporation ("C Corporation")

Corporation (“S Corporation”)

Limited Liability Company (LLC)

Non-Profit Corporation

Governmental units seek to provide services

Sole Proprietorship Advantages

Means that the business owner operates as an

extension of themselves

The profits and losses of the business are taxed to

the owner

No separate business filing

The owner is personally responsible for any

liabilities of the business

The major advantage is that it is the simplest and least

expensive structure

Very little government regulation!!

Sole Proprietorship Disadvantages

If someone sues the business:

For breach of contract

Personal injury

Collect a debt

Courts can directly levy the personal bank

account and other property of the owner

General Partnership

Means the business is owned by 2 or more people

Profits are taxed as income and is based on their ownership percentage

in partnership agreement

Each partner is responsible for the full amount of all liabilities of the

business

The partnership itself is not subject to any income or franchise tax

Control of the business is done jointly each having an equal vote

Advantages there are no state filings are required to create the business entity,

nor are there any ongoing reporting requirements

Very little government regulation!!

Limited Partnership The basic structure and tax implications are the same as for a

general partnership with one major exception:

Allows for one or more limited partner to own a portion of the

business

These limited partners do not participate in the management of

the business

The partnership must have a General Partner who has

personal liability for all liabilities of the partnership

This structure allows a partnership to have outside investors without subjecting

them to the liabilities of the business

Corporation ("C Corporation")

Is a legal entity created under state law

This “entity” has its own rights, privileges and liabilities

A corporation is:

Owned by one or more stockholders

Managed by a board of directors, who are elected by the

stockholders

Officers appointed by the board of directors, conducts the day-

to-day operations

A single individual can be the sole stockholder, director and

officer of the company

“C” Corporation

The stockholders, directors and officers of the company are

protected from the liabilities

The profits and losses of the corporation are not passed

through to the tax returns of the owners

The corporation files its own tax return and pays its own taxes

It may also be subject to state franchise taxes or other annual fees

Advantages to choosing a C Corp is the business structures are based on

saving money on personal taxes

Have a great deal of government regulations!

S Corporation After the corporation has been formed stockholders elect "S

Corporation" status with the IRS

This IRS code permits it to be taxed at the rate of an individual

The profits and losses flow through to the federal tax returns of the

owners

Have the protection of limited personal liability without having to pay

corporate taxes

This structure is generally preferred over a standard corporation when

most of the shareholders are manage the daily activities

Self-employment tax and FICA tax are less. Makes it easier to raise capital as a corporation

than as a sole proprietorship or partnership

Have a great deal of government regulations!

Limited Liability Company (LLC)

An LLC is a hybrid of a corporation and a partnership

The ownership percentages, profit and loss distributions, and voting powers of

each member are determined by its Articles of Organization

An LLC can choose to be taxed like:

A partnership or S Corporation with profits and losses flowing through to the owners’

tax returns

OR like a C Corporation, filing its own return

The owners/officers/directors are protected from the liabilities of the company, as

in a corporation

Advantages are its low cost to create and maintain –

while still offering the protection of a corporation

Non-Profit Corporation A non-profit corporations may be an industry association, a social

organization, a research firm, or even a consulting group

It does not have to be a "charity", per se

It can sell products or services

It can also have employees, and those employees can be paid fair

market value for their services

The difference is that there are no owners, and any "profits" are

simply retained by the corporation to be reinvested

Advantages are see their ‘vision’ come to life

Governmental Units

These types of units can be local, state, and national levels

Are responsible for services such as fire/police

Different names:

Agency

Commission

Bureau

Department

Boards

Examples

• Environmental Protection Agency

• Marriage License Bureau

• Board of Education

Let’s check out the Secretary of State

for California for it’s regulations at:

www.sos.ca.gov/

Differ greatly but knowing them will influence the

work you perform

Organizational Goals

Measuring Organizational Goals

Businesses ~ Seek Profits

Nonprofits ~ How good they are

at providing their services

Governmental ~ How well they

serve the citizens

Structure of Organizations

Board of directors

Establishes policies to guide company operations

Senior management

Provides direction in carrying out policies

Middle management

Directs day-to-day activities

Department employees

Perform tasks to meet the organization’s goals