Vocabulary Terms Ch #7, Types of Businesses

Sole proprietorship Non-profit Corporation

Partnership S-Corporations (Subchapters)

Corporation Limited Liability Corporations (LLC)

General Partner Limited Partner

C-Corporation Shareholders

Limited Liability Unlimited Liability

Preferred Stock Common Stock

Generally there are three types of Business Ownership

Sole ProprietorshipPartnership

Corporations

The amount of Liability and Ownership of a business

Depends on that type of business.

Liability is the

debt of a business. Liability protection is the insurance needed to protect the business from problem lawsuits.

Unlimited liability is:

The full responsibility for debt incurred from the actions of a business.

Sole Proprietorship

Ownership by only one person.

(Accounts for most businesses in US, 76%)

Advantages of a Sole Proprietorship

• Ease of start-up• Allows a great amount of authority over business

activity.• This is the least regulated type of business.• The business is not taxed, only the owner is

taxed.

Disadvantages of Sole Proprietorships

• Unlimited Liability for all debts relating to the business, including personal assets, such as your car and home.

• Limited amount of skills brought into the business

• Death of the business occurs with the death of the Sole Proprietor.

Two types of Partnerships

• General Partnerships

• Limited Partnerships

General Partnership

General Partners have complete control and is responsible for all liability. Law requires that there be least one partner as a General Partner.

Limited Partnership

Not all partners are equal. Partners may be limited to the amount of capital invested in the business, often as a percent, for liability as well as for profit.

Advantages of Partnership

Inexpensive to create General Partners have control of business activity Partners can share ideas, two heads are better than

one. Greater amount of investment capital, than a Sole

Proprietor.

Disadvantages of Partnership

Partnership fragments the organizationIt is difficult to dissolve a partner’s interest.More owners means more personality

conflicts.

Corporations

Are ownership by shareholders

Corporations

And owners are separate entities. Owners have Limited Liability. Corporation are treated as though they are

individuals and have a different tax rate.

Corporate Shield

is the greatest advantage of forming a corporation. It protects owners from lawsuits against the business. Because corporations are separate entities, owners are not responsible for what the corporation does. To pierce a corporate shield, however, lawyers must show that personal assets were purchased by the corporation. Often entrepreneurs choose to become employees of their corporation, retaining management of the business and having the protection of the corporate shield.

Three types of Corporations.

• C – Corporation

• S – Corporation

• Nonprofit Corporation

C – Corporations

Are the most common type of CorporationThe “C” stands for stock Certificates

(Ownership)There must be a Board of Directors (With small

corporations this can be family members)

C-corporations are entities

That pay taxes only on the earnings (profit) of the corporation. The shareholders (owners) pay taxes as well on the dividends, if offered. Dividends (% of $ earned) are given to the shareholders from profits of the corporation, this is usually only offered on Preferred Stock owners. Common Stock does not usually have dividends. Both types of stock usually have voter rights.

% of shares owned in a Corporation is important

Whoever controls majority interests controls the board of directors by voter rights. The board of directors is elected to their posts and hires the management, whom makes policy decisions.

Corporation status makes it easier to:

Get financing, loans and can pull in money from the sale of issuing stock .

Corporations have Limited Liability

Owners (shareholders) are only liable for the amount of the personal investment.

Corporation are taxed at a higher tax rate.

And can pay as much as double of other types of businesses. But are taxed only on the profits (EBIT) Earning Before Interest and Taxes.

S Corporations, Subchapter

This type of Corporation circumvents the double taxation which occurs when an entrepreneur is an employee of the corporation. S Corporations are taxed the same as a partnership or the shareholder’s personal tax rate.

S Corporations

There must be no more than 75 shareholders for a business to become a S Corporation. S Corporations are often cash businesses, like restaurants and can issue only one class of stock.

Non-profit Corporations

Must be a charitable cause, for public benefit. They include trade associations, sports leagues and political groups. Making this corporation eligible for public and private grants

Nonprofit Corporations

Examples of this type of corporation is the Red Cross, Salvation Army, various religious groups and government agencies. Profit remains in the Corporation to do more public good.

Limited Liability Company (LLC)

LLCs were originally created to allow high-risk businesses with high liability to exist. Examples of this are medical corporations or law firms.

Now, however, almost any business can become an LLC. Each state has their own laws regarding LLCs.

Limited Liability Company

An LLC is a company that enjoys the limited liability and some tax benefits, but it avoids the restrictions associated with S corporations.

The benefits of an LLCs

• Simpler to set up than a corporation

• Allows for the flexibility of a partnership

• Protects the owners as if it were an corporation.

Members of LLC are not liable for the company’s debts

• Not subject to double taxation. Profits are taxed personally.

• There is no limitations on the number of members of the LLC