In The Know - Choosing a form of
Business Ownership
After the initial decision is made to start the business, the new owner must face issues that can affect the
company long into the future. Those issues include:
1. Choosing a form of ownership
2. Obtaining necessary business insurance
Choosing a form of Business Ownership
Entrepreneurs need to take time to evaluate the various forms of ownership and the impact that it will
have on their business. Choosing the correct form of ownership is important because not only does it
have far-reaching effects on the business but also the owner. Although a decision is not irreversible,
getting it right the first time will avert complications and save expense and time. To choose the right form
of ownership the entrepreneur must understand the characteristics of each form and how well those
characteristics match their business and personal circumstances. The following are some of the important
issues entrepreneurs should consider when they are evaluating the various forms of ownership:

Tax Considerations

Burden (cost to form, maintain and understand)

Certainty of Laws (amount of developed case law, primarily for LLCs)

Required Information Disclosure

Liability Exposure

Startup and Future Capital Requirements

Control

Managerial Ability

Business Goals


Management Succession Plans
Cost of Formation
Page 160 of the Zimmerer text details some of the issues to consider when choosing a form of ownership.
Also, from the downloadable resources read and study "10 Rules of Thumb When Choosing a Business
Entity", "Choice of Entity Examples","The Business Entity Selection Tips Power Point" and
"Organizational Structures". These articles and pp. 163-184 in the text will help you to formulate your
thoughts on which form of organization to set up. You will note that on p. 185, Table 5.2 lists the
characteristics of the Major Forms of Ownership.
As you assimilate the information above ask yourself the following questions:

How much money do I need?

What will be the source of any needed funds?

What skills are needed that I cannot provide?

Are there other people available to round out the necessary skills in starting and continuing a
business and do they want to own part of the business?

How much control do I have over the operation?

When do I want to sell the business?

How will the business be taxed and how will applicable laws influence it?


To what extent will I be personally responsible for the debts or claims against the business?
What will happen to the business if I am not able to work for any length of time?
The legal structure of your business will normally take one of the six basic forms:
1. Sole Proprietorship
2. General Partnership
3. Limited Partnership
4. C Corporation
5. S Corporation
6. Limited Liability Company (LLC)
Sole Proprietorship
The sole proprietorship is the most common form of business organization. They account for nearly 72
percent of businesses in the U.S. You own and operate the business and have sole responsibility and
control. You, the owner, ARE the business! The profits of the business are personal income and are
taxed at your personal rate.
Advantages of Proprietorship

Ease of formation-Simple to Create.

Flexible to Business Needs.

Exclusive Control and Decision Making.

Profit Control.

Least Costly to Form.

No Special Legal Restrictions.


Easy to Discontinue.
Losses are Tax deductible.
Disadvantages of Proprietorship
Unlimited Liability!!

Unstable Business Life.

Limited Access to Funds.


Lack of Continuity of Business.
Limited Skills and Capabilities.
Partnership (General and Limited)
A partnership is an association of two or more people who co-own a business for the purpose of making a
profit. A legally married husband and wife are considered a Sole Proprietor if they report taxes on the
same tax return. If they report on separate returns, they are a partnership. In a partnership the co-owners
share the business's assets, liabilities and profits according to the terms of a previously established
partnership agreement. The law does not require a partnership agreement but it is wise to work with an
attorney to develop one that spells out the exact responsibilities, duties and status of each partner. There
are two basic partnerships that will be discussed here. There is a General Partnership where each
partner is liable for all of the debts and obligations of the partnership. In a Limited Partnership, partners
may be general partners, with all of the rights and responsibilities of a normal General Partnership but
there are also some limited partners with limited liability as well as rights and responsibilities. Each
Limited Partnership must have at least one general partner that does not have limited liability.
Advantages of Partnerships

Ease of Formation.

More Skills and Capital Available to Boost Performance and Growth.

Flexible Decision Making, Free from Most Government Control.

Larger Pool of Capital.


No Restrictions on Division of Profits.
Taxes Past Through to Personal Income.
Disadvantages of Partnership

Unlimited Liability of at Least One Partner.

Lack of Ability to Accumulate Capital.

Personal Liability of a Solvent Partner for the Actions of an Unscrupulous Partner.


Unstable Life of Business if Partner Dies or Withdraws.
Potential for Disagreements between Partners could lead to Costly Dissolutions.
Corporations (Subchapter C and S)
The corporation is the most complex of the major forms of business ownership. It is a separate entity
apart from its owners, and may engage in business, make contracts, sue and be sued own property, and
pay taxes. The Supreme Court has defined the corporation as "an artificial being, invisible, intangible, and
existing only in the contemplation of the law". Since the life of the corporation is independent of its
owners, the shareholders can sell their interests in the business without affecting its continuation. C
Corporations are creations of the state. When a corporation is founded, it accepts the regulations and
restrictions of the state in which it is incorporated and any other state in which it chooses to do business.
Advantages of C Corporations

Limited Liability to Stockholders.

Ability to Continue Indefinitely.

Ability to Attract Capital.

Separate Legal Existence.


Transferable Ownership.
Credibility of Organization versus Other Forms.
Disadvantages of C Corporations

Double Taxation.

Considerable Expense in Formation.

Extensive Government Regulation and Reporting.


Greater Administrative Expense. Potential for Diminished Managerial Incentives.
Potential Loss of Control of Founders.
S Corporations
An S Corporation is a distinction that is made for federal income tax purposes only. In terms of its legal
status it is no different from other corporations. Although the Federal Government has simplified some of
the rules and regulations for S Corporations, a business seeking s status must still meet the following
criteria: Domestic Corporation; no nonresident aliens as shareholders; Only one class of stock;
Shareholders are limited to individuals, estates, and certain trusts; No more than 100 shareholders; and
Less than 25% of corporation's gross revenue in 3 successive tax years form passive sources.
Advantages of S Corporations
Pay Personal Tax Rates on Income Rather than Higher Corporate Tax Rates.

Not subject to Corporate Rates on Capital Gains.

Not subject to the Self Employment Taxes on all Income as Sole Proprietors and Partnerships are.
However, must have reasonable payroll taxes on salaries and wages.


Losses can be taken against other Personal Income.
Double taxation avoided.
Disadvantages of S Corporations

Many benefits such as insurance, meals, lodging and other cannot be deducted for Payments to
Shareholders with over 2 Percent Ownership.

Must pay Income Tax on Earnings retained in the Company.


Limited to 100 Shareholders.
Limited to one Class of Stock.
Limited Liability Company
The LLC is like an S Corporation, a cross between a partnership and a corporation. Like S Corporations,
LLCs offer their owners limited personal liability for the debts of the business. LLCs, however, are not
subject to many of the restrictions currently imposed on S Corporations and offer more flexibility than S
Corporations.
Advantages of LLCs

LLCs can have more than 100 Shareholders.

Foreigners and Corporations can be Owners.

LLCs can have more than one class of Stock.

LLCs do not restrict a Member's Participation in Managing the Company.


No Double Taxation.
More Flexible than other Corporate Entities.
Disadvantages of LLCs

All Profit is subject to Self Employment Taxes.

LLC interests are harder to transfer easily.


LLCs not uniform in each state.
Articles of organization must be drawn carefully to avoid taxation as a Corporation.