TYPES OF BUSINESSES

Liability of Business Owners

Unlimited liability means that a business owner can be legally forced to use personal money and possessions to pay the debts of the business.

Limited liability means that a business owner cannot be legally forced to use personal money and possessions to pay business debt.

2Section 3.2: Types of Business Ownership

SOLE PROPRIETORSHIP

A business that is owned and managed by one individual who

receives all the profits and bears all the losses.

Benefits: Sole Proprietorship

• Ease of starting and going out of business

• Control over profits and business operations

• Pride of ownership

• Lower taxes (pays no corporate income taxes)

Costs: Sole Proprietorship

• Unlimited liability

• Difficulty in raising financial capital

• Responsible for all losses

• Management knowledge may be limited

PARTNERSHIP

A business that is owned and managed by two or more

individuals who receive all the profits and bear all the losses.

Benefits: Partnership

• Easier to raise financial capital

• Partners may combine managerial skills

• Personal satisfaction

• Lower taxes (pays no corporate income taxes)

Costs: Partnership

• Unlimited liability

• Shared profits

• Possible conflicts between partners

• Possible instability after death of a partner

CORPORATION

A business that is owned by stockholders and has rights and

responsibilities as if it were a person.

Benefits: Corporation

• Limited liability

• Greater financial capital

• Unlimited life

• Specialized management

Costs: Corporation

• Increased taxation (pays corporate income taxes)

• Difficulty in starting (each state has its own rules for a corporate charter)

• May be larger, more bureaucratic than other forms of business

• Increased government control

Types of Corporations Most corporations are C corporations, which are

taxed as an entity by the federal government. A subchapter S corporation differs from a C

corporation in how it is taxed. It is not taxed as an entity, rather its income or loss is applied to each shareholder and appears on their tax returns.

A limited liability company is a legally defined type of business ownership similar to a C corporation, but with simpler operating requirements and tax procedures and greater liability protection for the business owners.

A nonprofit corporation is a legally defined type of business ownership in which the company operates not to provide profit for its shareholders but to serve the good of society.

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Section 3.2: Types of Business Ownership

Limited Liability Company LLC

• The LLC is often described as a hybrid business form. It combines the liability protection of a corporation with the tax treatment and ease of administration of a partnership. As the name suggests, it offers liability protection to its owners for company debts and liabilities.

Benefits: LLC

• LLCs do not require annual meetings and require few ongoing formalities.

• Owners are protected from personal liability for company debts and obligations.

• LLCs enjoy partnership-style, pass-through taxation, which is favorable to many small businesses.

Costs: LLC

• LLCs are more expensive to set up than partnerships.

• An LLC is not an appropriate vehicle for businesses seeking to become public eventually, or to raise money in the capital markets.

• LLCs usually require annual fees and periodic filings with the state.

Which type is best?

• Depends on your situation!

• They all have strengths and weaknesses.