Module one
Chapter one – Types of Ventures
Additional material
Information is taken from various websites for you to read and make notes. Website
links are below each reading if you are interested in reading further.
Types of Business Ventures
One of the most important aspects of starting a business is to make sure you comply
with the law. Whether you're planning to launch an online store, a marketing agency
or a legal practice, it's necessary to choose the right business structure. This will
determine your legal rights as well as the amount of tax to be paid. The most common
business types include:
Sole proprietorship
Limited liability company (LLC)
General partnership
Limited liability partnership (LLP)
Limited partnership
Corporation
A sole proprietorship, for instance, is the easiest to form and operate. Many
entrepreneurs start with this option and register an LLC or another type of business
later on. The downside is that there's no legal or financial distinction between the
business owner and the business itself. This means that you're personally liable for all
losses and debts.
Limited Liability Companies are a blend of corporations and sole proprietorships. They
involve one or more entities or individuals who sign a business venture agreement or
another written agreement, depending on the type of business. This document
typically includes management-related provisions, economic rights and distributions,
classes of LLC interests, rules on meetings and decision making, fiduciary duties and
more.
In case you're wondering, "What is your title if you own an LLC?" you should know that
LLC founders are referred to as “members.” The maximum amount of money they can
lose from a business venture that fails is the amount they invested. This business
structure allows you to limit your personal liability in case something goes wrong.
Another popular option for business ventures is a partnership. In this case, two or
more people join forces to build and grow a company. Legal and financial
responsibilities fall upon each business owner. Basically, founders share in the profits
and losses and are legally responsible for the company's actions.
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Now let’s dig into the different forms of business organization.
Sole proprietorship
The vast majority of small businesses start out as sole proprietorships. These businesses
are owned by one person, usually, the individual who has day-to-day responsibility for
running the business. Sole proprietors can be independent contractors, freelancers or
home-based businesses.
SOLE PROPRIETORSHIP ADVANTAGES
Owner receives all the profits
Profits are taxed only once
Owner makes all decisions and is in complete control of the company (could also be a
disadvantage)
Easiest and least expensive form of ownership to organize
SOLE PROPRIETORSHIP DISADVANTAGES
Unlimited liability if anything happens in the business. Your personal assets are at risk
(including your home)
Limited in raising funds and may have to acquire consumer loans
No separate legal status
Tip: When looking at setting up a sole proprietorship, assess what type of liability you
have. Determine what you have to lose. Do you own a home or savings account? Your
personal assets could be at risk in the case of a lawsuit.
Partnerships
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 sets forth how decisions will be made,
profits will be shared, 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
Disclaimer: If you’re establishing a partnership, it is extremely important to make sure
everything is outlined in case things go sour. Seek legal advice to create a partnership
operating agreement to hash out all business decision possibilities including succession
or exit plans.
PARTNERSHIP ADVANTAGES
Easy to establish (with the exception of developing a partnership agreement)
Separate legal status to give liability protection
Profits taxed only once
Partners may have complementary skills
PARTNERSHIP DISADVANTAGES
Partners are jointly and individually liable for the actions of the other partners
Profits must be shared with the partners
Divided decision making
Business can suffer if the detailed partnership agreement is not in place
Corporations
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.
C-corporation
A C-corporation is a corporation that is taxed separately from its owners. It gives the
owners limited liability encouraging more risk-taking and potential investment.
C-CORPORATION ADVANTAGES
Limited liability
Transfer of ownership, shareholders can sell their shares
Capital is easier to raise through the sale of stock
Company paid fringe benefits
Tax benefits
C-CORPORATION DISADVANTAGES
Double taxation (corporation and shareholder earnings taxed)
Can be costly to form
More administrative duties - required by law to have annual meetings, notify
stockholders of the meeting must keep minutes of meetings and turn in
Pay corporate taxes at a different time than other forms of business
S-Corporation
An s corporation also known as subchapter S-corporation offers limited liability to the
owners. S-corporations do not pay income taxes rather the earnings and profits are
treated as distributions. The shareholders must report their income on their individual
income tax returns.
S-CORPORATION ADVANTAGES
Limited liability
Avoids double taxation
Profits taxed only once
Capital is easier to raise through the sale of stock
Transfer of ownership
S-CORPORATION DISADVANTAGES
Can be costly to form
Stockholders limited to individuals, estates or trustees
Required administrative duties
Cannot provide company paid fringe benefits
Stockholders are limited to citizens or resident aliens of the United States
Limited Liability Company
A limited liability company or LLC is a hybrid business structure that provides the limited
legal liability of a corporation and the operational flexibility of a partnership or sole
proprietorship. However, the formation is more complex and formal than that of a
general partnership.
Tip: Forming an LLC requires the business owner to file legal paperwork. You may want
to consult an attorney to assist you with the process.
LIMITED LIABILITY COMPANY ADVANTAGES
Most common business structure and specifically created for small businesses
Must have insurance in case of a suit
Separate legal entity
Usually taxed as a sole proprietorship
Unlimited number of owners
LIMITED LIABILITY COMPANY DISADVANTAGES
Can be costly to form
Yearly administrative costs
Personal tax liability
Legal and accounting assistance is recommended
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