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Organizational Types for Small Businesses with Evelyn Ritchie

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In this session, you will learn the pros and cons of different business structures. Participants will become familiar with the common types of business formations and what structure will work best for their business.

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Organizational Types for Small Businesses with Evelyn Ritchie

  1. 1. Organizational Types and Considerations FOR A SMALL BUSINESS
  2. 2. ORGANIZATIONAL TYPES and CONSIDERATIONS 4 Welcome 1. Agenda 2. Ground Rules 3. Introductions
  3. 3. ORGANIZATIONAL TYPES and CONSIDERATIONS 5 Objectives Identify general characteristics, advantages, and disadvantages of each of these organizational types for small businesses: • Sole Proprietorship • Partnerships • Limited Liability Company (LLC) • C-corporation • S-corporation
  4. 4. ORGANIZATIONAL TYPES and CONSIDERATIONS 6 What Do You Know? What do you know or want to learn about organizational types for small businesses?
  5. 5. ORGANIZATIONAL TYPES and CONSIDERATIONS 7 What are the 5 common organizational types (also called “legal structures”)? • Sole Proprietorship • Partnership (general, limited, & LLP) • Limited Liability Company (LLC) • C-corporation • S-corporation Organizational Types Continued …
  6. 6. ORGANIZATIONAL TYPES and CONSIDERATIONS 8 Factors for Choosing an Organizational Type • Taxation – Taxes on profits are paid through personal tax returns except for corporations • Liability and Risk – Responsibility for harm to another person or property, or contract disputes • Management – Decision-making authority • Continuity and Transferability – How a business persists and how it is sold • Expense and Formality – Costs, legal responsibility, degree of complexity
  7. 7. ORGANIZATIONAL TYPES and CONSIDERATIONS 9 Discussion Point #1: Organizational Factors Which organizational factors have the most impact on your business?
  8. 8. ORGANIZATIONAL TYPES and CONSIDERATIONS 10 Sole Proprietorship Business is one and the same as the owner Advantages and Disadvantages • Owner has unlimited personal liability • Pass-through taxes – personal tax return • Owner controls business • Simplest form of organization • Lowest cost to form • Appropriate for small start-up
  9. 9. ORGANIZATIONAL TYPES and CONSIDERATIONS 11 General Partnership Business association of two or more people Advantages and Disadvantages • Owners have personal liability • Pass-through taxation • Shared risk and costs • Simple to form, low cost Create a partnership agreement
  10. 10. ORGANIZATIONAL TYPES and CONSIDERATIONS 12 Limited Partnerships and Limited Liability Partnerships Advantages and Disadvantages • General and limited partners – general partner runs business • Pass-through taxation • Requires a partnership agreement • Liability will depend on the type of partner (general or limited)
  11. 11. ORGANIZATIONAL TYPES and CONSIDERATIONS 13 Limited Liability Company (LLC) Unincorporated hybrid entity, with traits of corporation & gen. partnership (or sole prop.) Advantages and Disadvantages • Greater flexibility than sole proprietorship and partnership in distributing profits (less restrictive than S-corporation) • Limited liability – like corporation • Pass-through taxation – like sole proprietorship or partnership
  12. 12. ORGANIZATIONAL TYPES and CONSIDERATIONS 14 Corporation Legal entity, created under the laws of a state, which has its own privileges and liabilities distinct from those of its members Types: • C-corporation • S-corporation Most businesses DO NOT need to incorporate
  13. 13. ORGANIZATIONAL TYPES and CONSIDERATIONS 15 C-Corporation C Also called “regular corporation” (most common for larger companies) Advantages and Disadvantages • Limited liability • Company is taxed (double taxation an issue) • Complex to form • Complex ownership and management • Appropriate for a few specific reasons – otherwise, choose another organizational type
  14. 14. ORGANIZATIONAL TYPES and CONSIDERATIONS 16 S-Corporation Owner has limited liability of a corporate shareholder but pays income tax like a sole proprietor or partner Advantages and Disadvantages • Same as C-corporation except for pass-through taxation S
  15. 15. ORGANIZATIONAL TYPES and CONSIDERATIONS 17 Choosing an Organizational Type How do I decide which structure is best for my business? • Establish business plan, think about business • Initial guidelines: Owner-operator? Partnership? Multiple owners? Product with significant liability? Large venture with multiple owners and complex financing? • Ask attorney • Research through Small Business Administration and IRS websites
  16. 16. ORGANIZATIONAL TYPES and CONSIDERATIONS 18 Discussion Point #2: Your Organizational Type Which organizational type will be right for you and your new business?
  17. 17. ORGANIZATIONAL TYPES and CONSIDERATIONS 19 Five Key Points to Remember • The organization type impacts how you own and run your business • Match your legal structure to business needs i.e., Tax, Liability, Management, Continuity and Expense • Most common small business type: Sole Proprietorship is same as the owner • A Partnership includes pass through taxation and personal liability • A business plan is the best way to determine the organizational structure right for your business
  18. 18. ORGANIZATIONAL TYPES and CONSIDERATIONS 20 Summary • What final questions do you have? • What have you learned? • How would you evaluate the training?
  19. 19. ORGANIZATIONAL TYPES and CONSIDERATIONS 21 Conclusion You learned about: • Five organizational types (legal structures) • Their characteristics, advantages, and disadvantages • Choosing an organizational type
  20. 20. ORGANIZATIONAL TYPES and CONSIDERATIONS 22

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