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 dayto-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/
Organizational Goals Differ greatly but knowing them will influence the work you perform
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