Lesson 7

The vast majority of small businesses start out as sole proprietorships. These

businesses usually are owned by one person, individual who has day-to-day

responsibility for running the business. Sole proprietors can be independent

contractors, freelancers or home-based businesses.

The owner receives all profits.

There is unlimited liability if anything happens in the business. Your personal

assets are at risk.

In a partnership, two or more people share ownership of a single business. Like

proprietorships, the law does not distinguish between the business and its owners.

The partners should have a legal agreement that establishes how decisions will be

made, how profits will be shared, how disputes will be resolved, how future partners

will be admitted to the partnership, how partners can be bought out or what steps will

be taken to dissolve the partnership when needed.

 It is easy to establish (with the exception of developing a partnership

agreement).

 Separate legal status gives liability protection.

 Profits are taxed only once.

 Partners may have complementary skills.

Partners are jointly and individually liable for other partners’ actions.

 Profits must be shared with the partners.

 Decision making is divided.

 Business can suffer if the detailed partnership agreement is not in place.

A corporation is considered by law to be a unique entity, separate from those

who own it. A corporation can be taxed, sued and enter into contractual agreements.

The corporation has a life of its own and does not dissolve when ownership changes.

There are three types of corporations: C-corporation, S-corporation and Limited

Liability Company.

A C-corporation is a corporation that is taxed separately from its owners. It gives

the owners limited liability, which can encourage more risk-taking and potential

investment.

 It is limited liability.

 In regards to transfer of ownership, shareholders can sell their shares.

 Capital is easier to raise through the sale of stock.

 The company pays fringe benefits.

 There are tax benefits.

 It is subject to double taxation. (Corporation and shareholder earnings are

taxed.)

 It can be costly to form.

 There are more administrative duties. This entity type is required by law to have

annual meetings, notify stockholders of the meeting and keep minutes of

meetings.

 C-corps pay corporate taxes at a different time than other forms of business.