FORMS OF BUSINESS OWNERSHIP

One of the first decisions you will need to make is how you want to organize your
business. This is an important decision with long-term implications. Consult with an
accountant or attorney to help determine what form is best for you. In making your
decision, you should consider the following:
Your vision for the nature and size of your business.
The level of control you want to have.
Your business’s susceptibility to lawsuits.
Tax implications of various structures.
Need for reinvesting earnings into business.
The level of structure you want to have.

SOLE PROPRIETORSHIPS
The majority of small businesses start as sole proprietorships. Sole proprietorships are
owned by a single person, who is usually also the person responsible for running the
business. All assets are owned by the sole proprietor and also all profits earned. Sole
proprietors are also responsible for all liabilities and debts. To the law, and for tax
purposes, the owner and the company are the same.

Advantages of a Sole Proprietorship

Easy and inexpensive to organize.
Owner is in complete control.
Owners decide whether to keep profits earned or reinvest them in the company.
Profits go directly to the owner’s personal tax return.
Easily dissolved.

Disadvantages of a Sole Proprietorship

Owners have unlimited liability and are solely responsible for debts and liabilities.
This means that their business and personal assets are at risk.
Sole proprietorships are at a disadvantage in raising funds and are usually limited to
using consumer loans or personal savings.
Potential employees may be discouraged by the fact that they cannot own part of
the business.
Some employee benefits are only partially deductible from business income.

PARTNERSHIPS
A partnership is a company owned by two or more partners. Like a sole proprietorship,
the law does not distinguish between the owners and the business. Partners should set
forth legal agreements as to how decisions will be made, how profits will be shared, etc.
There are also three types of partnerships that can be formed:

1. General Partnership
Management responsibilities, profits and/or losses, and liability are shared equally
among partners according to an internal agreement.

2. Limited Partnership/Partnership with Limited Liability
Some partners have limited liability (equal to their investment) and limited input to
management decisions. More complex and formal than a general partnership.

3. Joint Venture
Acts like a partnership for a limited time period or a single project.

Advantages of a Partnership

Easy to establish.
Multiple owners mean that partners can be found with complimenting skills.
Employees may be attracted to the idea of joining a company in which they can
become a partner.
Profits go directly to partners’ personal tax returns.
The ability to raise funds may increase with multiple owners.

Disadvantages of a Partnership

Partners are liable for not only their own decisions, but also those of their partners.
Profits are shared between partners.
Disagreements may arise between partners when making decisions.
Partnership may end at the withdrawal or death of a partner.
Some employee benefits are not tax deductible.

CORPORATIONS
A corporation is filed in the state in which it is headquartered and is recognized as a
legal entity separate from its owners. The owners of a corporation are shareholders and
elect a board of directors to make decisions for the company. A corporation can be
taxed, sued, and enter into contracts. A corporation does not dissolve when its
ownership changes and has an unlimited life.

Advantages of a Corporation

Shareholders have limited liability for the corporation’s debt or in the case of legal
judgments made against the corporation.
Can raise money by selling stock.
Benefits offered to employees are tax deductible.

Disadvantages of a Corporation

Requires more time and money to organize.
May result in higher overall taxes.
Monitored by government agencies and may have to complete paperwork to
comply with regulations.

LIMITED LIABILITY COMPANY (LLC)
A limited liability company, or LLC, is a new form of business ownership unlike a
partnership or corporation. LLCs combine the corporate advantages of limited liability
with the tax efficiencies of a partnership. Thus, formation of an LLC is more complex
than that of a general partnership. An LLC is owned by members whose ownership is
represented by their “interests”. “Interest” in an LLC is similar to “interest” in a
partnership or stock ownership in a corporation. Depending on how an LLC is managed,
its members may resemble partners in a partnership or shareholders in a corporation. If
members choose to have managers manage their company, they will act more like
shareholders. If they manage their company, they will be similar to partners.

Advantages of a Limited Liability Company

LLCs allow pass-through taxation, meaning that earnings are taxed only once.
The LLC owner’s liability is limited to what they have invested in the LLC.
LLCs are allowed to establish any organizational structure, allowing them to
separate profit and voting interests.

Disadvantages of a Limited Liability Company

More paperwork is required to form an LLC and documents must be filed at the
state level.
Some states require a dissolution date to be included in the articles of organization.
Unlike a corporation, which has unlimited life, certain events can be dissolution
events for an LLC, such as death of a partner or bankruptcy.
LLCs are a relatively new form of ownership and thus less familiar.