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Business Structure:
Choose A Structure
For legal and financial purposes, you must have a formal
structure for your business. Your four basic choices:
1. Sole proprietorship. The owner and the business
are the same (usually a service business, with the owner providing
the service). Business and personal tax returns are filed
together. According to the U.S. Small Business Administration,
more than 75% of all businesses operate as sole proprietorships.
Advantages: Simple and inexpensive (start-up costs
are low); maximum control.
Disadvantages: Personal legal liability; limited
ability to raise capital; succession issue.
2. Partnership. A business with more than one owner;
divides profits and losses among participants. It's most appropriate
for lawyers, doctors, and other professional service providers,
but not for most new businesses.
3. Incorporation. A likely choice for businesses with
employees or bank financing. It costs $500 to $1,000 or more
for attorney and fees. A corporation is a state-chartered
organization owned by shareholders. The shareholders elect
a board of directors who are ultimately responsible for management
of the business. There are two forms of for-profit corporations
(see below).
Advantages: Personal assets are protected if the
business fails or is sued.
Disadvantages: Taxes on profits are potentially
higher than with sole proprietorship.
S corporation. So called because it is under subchapter
S of the Internal Revenue Code; known as a Sub S.
Advantages: Most appropriate for start-ups; limits
personal liability; eliminates double taxation.
Disadvantages: Taxes on many fringe benefits;
limits on retirement benefits; restricts number of stockholders
to 35.
C corporation. So called because it is taxed under
regular corporate income tax rules.
Advantages: Limited liability; access to capital
(can raise money through sale of stock); perpetual life
(unlike sole proprietorship); ownership can be transferred.
Disadvantages: Profits are subject to double taxation
(corporate income is taxed, and then dividends paid to
stockholders are taxed as part of the individual's income);
regulation and paperwork; start-up costs, including legal
and filing fees.
4. Limited liability company (LLC). State-chartered
organization that allows for the reduced personal liability
of a corporation, but with the tax advantages of a partnership.
Advantages: Liability protection; no "member"
restrictions; no double taxation; easier access to capital
(compared with partnership).
Disadvantages: Tax and liability benefits vary
from state to state; high costs of start-up.
Compare Organizational Structures
- Identify the legal structures of your key competitors.
- Why, in your view, did each competitor select its particular
organizational structure?
- How does their structure benefit or hurt them?
- Select the structure that best suits your new company's
needs. List three reasons why this option will benefit you.
Similarly, for the remaining three structures, list reasons
why they would not prove advantageous.
- Sole Proprietorship
- Partnership
- Incorporation
- Limited Liability Company (LLC)
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Comparing
Organizational Structures
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Attribute
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S
Corp
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C
Corp
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Partnership
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Sole
Proprietorship
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LLC
|
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Liability
protection
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Yes
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Yes
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No
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No
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Yes
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Member
restrictions
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Yes
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No
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No
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Yes
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No
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Double
taxation
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No
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Yes
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No
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No
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No
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Transfer
of shares
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Yes
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Yes
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No
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No
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No
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High
cost of start-up
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Yes
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Yes
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No
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No
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Yes/No
*
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Easy
access to capital
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Yes
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Yes
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Yes/No
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No
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Yes
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*Can be high, particularly in states that have only recently
adopted LLC regulations.
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