The Three Types of Business Organizations Business Organizations

The Three Types of Business Organizations

Business Organizations • Sole Proprietorship • One owner • Tend to be small with no employees • Partnership • Two or more owners • Tend to be small with few, if any, employees • Corporation • Legal entity that is similar to an individual in the eyes of the law • May be large or small, with few or many employees Three Types of Business Organizations

Sole Proprietorship • Benefits • One person • Receives all benefits, profits and income • Easy to start and easy to close down • Costs • • Responsible for all decisions and all debts Unlimited liability Difficult to get start-up or expansion financing Income/profits taxed at personal income rates, not business rates Three Types of Business Organizations

Partnership • Benefits • Shared decision-making • Can rely on partner’s expertise • Relatively easy to start • Costs • • • May have differences of opinions or disagreements Must decide what to do when one person wants to leave or close down Unlimited liability Difficult to get start-up or expansion financing Income/profit taxed at personal income rates, not business rates Three Types of Business Organizations

Corporations • Benefits • • • Legal entity that is held responsible for its decisions Ownership is separate and apart from the owner/shareholders Managed by a board of directors Owners/shareholders have “limited liability” Can be easier to get start-up and expansion financing Considered an “individual” and pays its own taxes at corporate tax rates • Costs • Requires legal advice and fees to establish/maintain • May be subject to more paperwork and state/federal regulations • May have managers with absentee ownership Three Types of Business Organizations

Publicly vs Privately-held Corporations • Publicly-held • Shares sold over stock exchange to members of the general public • Required to file quarterly report with SEC • Information shared with shareholders and general public • Privately-held • Shares not traded over stock exchange; often owned by founder, family members, management or private investors • No reports required • Information not shared with general public Three Types of Business Organizations

Liability • Definition: a company's legal financial debts or other obligations resulting from its daily business operations • Unlimited Liability: Sole Proprietor and Partnership • Individuals are held responsible for all business activities and must pay any debts or obligations of the business • Individuals can be sued and possibly lose personal assets to cover those debts • Limited Liability: Corporation • The corporation itself is held responsible for all business activities and any debts or obligations. • Individual shareholders loss is limited to the amount of money invested in the corporation Three Types of Business Organizations

Financing • Definition: Ability to borrow money to start or expand a business • Limited Options: Sole Proprietor and Partnership • Relies more on individual/personal assets • Often financed using credit cards, personal loans or personal savings • More Options: Corporation • Can sell more stock to raise funds if needed • Can borrow money based on its own assets, not those of the owners Three Types of Business Organizations

Tax Issues • Taxes: Tax rates and deductions vary for personal income tax and corporate/business income tax at both the state and federal levels • Sole Proprietor and Partnership • Income/profits taxed as personal income • Limited deductions for business expenses • Corporations • Income/profits taxes as corporate/business income • Increased options for deducting business expenses, including employee benefits Three Types of Business Organizations

In summary… • Each type of business organization has benefits and costs • While most businesses in the U. S. would be classified a “sole proprietorship”, they tend to be small, homebased businesses with limited services and sales • The vast majority of business sales and business activity is produced by corporations • Corporations may be publicly or privately-held • Liability, financing and taxes are key factors in deciding which business organization is best Three Types of Business Organizations