This is the second step in Learning Module number 1 – Basic Business Organiization. By now you should have watched the You Tube video And read Chapter 1 in the text – paying careful attention to pages 1 thru 9
It is very important that you select the right type of business to meet your specific needs. You need to do this before you apply to DPOR because if you change the type of business organization you are operating – you will have to start from square one and reorganize completely. Put some thought into where you are going before you start building the road! In the You Tube video I asked you to watch, the folks at Studio 4 Learning reviewed 3 types of business organizations: Sole proprietorships, Partnerships and Corporations – Giving you some advantages and disadvantages of each.
The video neglected to mention that there are 3 types of partnerships: General partnerships, Limited partnerships, and Limited Liability Companies or LLC’s.
A general partnership is formed by 2 or more people. They can share equally in the business (50-50), or they can invest different amounts sharing different responsibilities. Sometimes partnerships are created among individuals with particular skills (like plumbing, or roofing) and others who only invest money. A general partnership works much the same way a sole proprietorship operates… just with more than one person involved.
Of course there are some “issues” with general partnerships, too. For instance all partners have unlimited personal liability for debts, just like a sole proprietor. The partnership can end suddenly with the death or personal bankruptcy of any of the partners. Many partnerships are dissolved when one partner gets mad and withdraws (takes his toys and goes home). Finally, many business decisions must be unanimous – that is everyone must agree, not majority rule. This can be problematic because you know how difficult it can be to get a group to agree about any issue!
A limited partnership is an organization where at least one general partner runs the operation. This person makes all key decisions and has unlimited personal liability for the business. Limited partners invest money, property or both and do not have a voice in the day to day operation of the business. They can, of course, make their wishes known. The general partner may or may not heed their wishes. The advantage for limited partners is that their only liability is the amount of money or property they have invested.
A Limited Liability Company, or LLC, is a special kind of partnership. Management can be set up in any number of ways – no manager, partners are share holders who directly manage the business, or however the articles of organization specify. An LLC offers the advantages of pass thru taxation where income is reported on the individual’s income tax return (no corporate tax), and liability protection from lawsuits. LLC’s are a bit more complicated to set up and require more record keeping.
Finally, there is the Subchapter S Corporation or “S Corp.” This form of organization offers most of the advantages of a regular corporation, including liability protection, while avoiding the corporate tax (taxes are reported on an individual's 1040 form). Subchapter S corporations are typically small operations (can have a maximum of 75 “partners” or shareholders) and offer very limited fringe benefits for shareholders.
Well that’s it. Look at the time! You’d better get started on your next assignment!
Basic Business Organization <ul><li>Have you watched the video? (YouTube – Basic Business Organizations) </li></ul><ul><li>Have you read the text? (Chapter 1 – Contractor’s Business Reference Manual) </li></ul>
Review of the Video <ul><li>Sole Proprietorship </li></ul><ul><li>Partnership </li></ul><ul><li>Corporation </li></ul>From Creative Commons – posted by Digg
General Partnership <ul><li>Greater financial resources </li></ul><ul><li>Additional talents for the business </li></ul><ul><li>Shared responsibilities </li></ul><ul><li>Profits taxes only once </li></ul>
General Partnership <ul><li>Each partner personally liable for debts </li></ul><ul><li>Ends with the death or bankruptcy of any partner </li></ul><ul><li>No partnership interest can be transferred without the consent of all </li></ul>
Limited Partnership <ul><li>One general partner </li></ul><ul><ul><li>Responsible for day to day operations </li></ul></ul><ul><ul><li>Makes all financial decisions </li></ul></ul><ul><ul><li>Unlimited liability for debts </li></ul></ul><ul><li>Limited partners </li></ul><ul><ul><li>Invests money, property or both </li></ul></ul><ul><ul><li>Do not participate in day to day operations </li></ul></ul><ul><ul><li>Limited liability (investment) </li></ul></ul>Image from www.InMagine.com
Limited Liability Company <ul><li>Best of both worlds </li></ul><ul><ul><li>Pass thru taxation </li></ul></ul><ul><ul><li>“ Corporate veil” protection </li></ul></ul><ul><li>But there is a downside </li></ul><ul><ul><li>More complicated to create </li></ul></ul><ul><ul><li>More record keeping required </li></ul></ul>
Subchapter S Corporation <ul><li>Liability protection </li></ul><ul><li>Pass thru taxation </li></ul><ul><li>Limited to 75 shareholders </li></ul><ul><li>Limited fringe benefits for share-holders </li></ul>Image from www.InMagine.com