types of businesses liability of business owners unlimited liability means that a business owner can...
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TYPES OF BUSINESSES
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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
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SOLE PROPRIETORSHIP
A business that is owned and managed by one individual who
receives all the profits and bears all the losses.
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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)
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Costs: Sole Proprietorship
• Unlimited liability
• Difficulty in raising financial capital
• Responsible for all losses
• Management knowledge may be limited
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PARTNERSHIP
A business that is owned and managed by two or more
individuals who receive all the profits and bear all the losses.
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Benefits: Partnership
• Easier to raise financial capital
• Partners may combine managerial skills
• Personal satisfaction
• Lower taxes (pays no corporate income taxes)
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Costs: Partnership
• Unlimited liability
• Shared profits
• Possible conflicts between partners
• Possible instability after death of a partner
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CORPORATION
A business that is owned by stockholders and has rights and
responsibilities as if it were a person.
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Benefits: Corporation
• Limited liability
• Greater financial capital
• Unlimited life
• Specialized management
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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
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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
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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.
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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.
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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.
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Which type is best?
• Depends on your situation!
• They all have strengths and weaknesses.