Week Four Chapter 3 Forms of Small Business Ownership

Your textbook describes three legal forms of ownership (page 58): Proprietorship, Partnership and Corporation Because California has authorized LLCs, we will also include Limited Liability Company in our discussion. Before I begin the discussion on the advantages and disadvantages of the four forms of ownership, I want to give you some information you will not find in your textbook. In order to open up a sole proprietorship or general partnership you will need a business license which you will purchase from your City Clerk or from the Tax Collector in your county. For example: www.Roseville.ca.us/gov/finance/licensing Or www.placer.ca.gov/departments/tax/license

You will pay approximately $30 to $250 for your business license depending on location, type and size of your business.

In addition, if your business does not include your surname, (your last name or family name) you will need to file for a Fictitious Name Statement, also called a DBA (Doing Business As). You need to file for the form at your County ClerkRecorders Office. In Placer County you will go to www.placer.ca.gov/Departments/ Recorder/ Fictitious In Placer County the fee is about $30.
NOTE: I highly recommend that the name you chose is indicative of your business. For example, XYZ Company or Eden Valley does not give a clue what the business is about. However, Sunny Maids indicates housecleaning, just as Rocklin Kennels indicates boarding for dogs.
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More

In addition, if you are engaged in business in California and intend to sell tangible, personal property which is subject to sales tax when sold retail, you will need a Sellers Permit or Resale License.

You will go to the CA State Board of Equalization at http://www.boe.ca.gov/info/reg.htm.

There is no fee for a Sellers Permit. However, a security deposit may be required to cover any unpaid taxes that you could owe in the future

Even more.

To form a Corporation or LLC you will need to file with the Secretary of State in California at www.ss.ca.gov/business An attorney is not required to form a corporation or LLC, but if you are unsure of the procedures, it might be a good idea to hire an attorney to help you. It could cost you hundreds of dollars to form a corporation or LLC.

And more.

If you are going to hire employees you will need to apply for a Federal Tax and Employer ID number (employer identification number) from the IRS Go to www.irs.ustreas.gov You will also have to apply for a State ID number from the EDD Employment Development Department Go to www.dfeh.ca.gov And, if you have employees you will need to provide Workers Compensation Insurance Visit the State Compensation Insurance Fund www.scif.com for more information.

Proprietorship (page 59)

A proprietorship is a business that is owned by one person or a legally married couple. The vast majority of businesses start out as sole proprietorships. It is the most common type of business ownership.

The advantages are: Easy to start (not expensive) and dissolve Owner can maintain privacy about his/her business Owner does not have to share profits THE BIG ADVANTAGE: Owner has freedom to make decisions; he or she is the boss Pass-through taxation the business is taxed at the owners personal tax rate. Some also consider this a disadvantage. The disadvantages are: Limited financing because there is only one owner sometimes the ability to raise cash depends on the owners personal financial situation Difficulty in obtaining credit for the same above reasons

Growth of business can be limited because of the same reasons mentioned above Limited life because the business and owner are legally the same. If the business owner dies so does the business. The heirs can take over, but they must obtain a new license and DBA. Lack of management skills. The owner must do it all. He or she must be a Jack or Jill of all trades. The business can take up a lot of time and energy especially in the beginning. Pass through taxation. No tax deduction for the owners withdrawal. The owner pays taxes on profits at his/her personal income tax rate. THE BIG DISADVANTAGE: Unlimited Liability. This means all the owners assets are subject to claims of creditors or lawsuits. Because the proprietor and business are considered one legal entity the owner is liable for lawsuits and unpaid bills incurred by the business. What do you do about this? (1) Pay your bills on time and (2) Purchase enough insurance to limit your liability.

General Partnerships (page 61)

A partnership is an association of two or more persons to carry on as coowners of a business. There are two main types of partnerships: (1) General Partnerships means the partners are active in the business and can make decisions and manage the business as equals. All general partners have unlimited liability. (2) In a Limited Partnership there must be at least one general partner. The limited partners cannot be active and make decisions. They can contribute capital and earn profits. They cannot participate in management. They cannot be held liable for any debts or lawsuits incurred by the business. For our discussion we will focus on General Partnerships.

General Partnership
Two or more people All partners are active and assume unlimited liability (that means all general partners are liable for all debts and business lawsuits contracted by the partnership; do you remember what you can do to protect yourself?)

Please Note: Unfortunately, conflicts can arise easily in partnerships. People have different values, working attitudes, philosophies, etc. Therefore, partnerships have the shortest life. If you form a partnership its a good idea to draft a Partnership Agreement. Nolo self-help legal and business books can help. You will find various books with all the forms you need from www.nolo.com

Now lets discuss advantages and disadvantages of general partnerships

 Advantages of general partnerships: (p 61)

Easy to start and generally not very expensive for license and DBA, etc. Labor and management is shared Specialized skills available for individual partners Greater ability to raise more capital

Disadvantages:
Uncertain life death or withdrawal of one partner ends a general partnership Each partner is responsible for the business acts of every other partner Can be partner conflicts, therefore, general partnerships have the shortest life Unlimited liability for all general partners

Pass-Through Taxation Like a sole proprietorship, the partnership does not pay the income taxes. The income passes through the business to each partner who pay taxes on a share of the profit.
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Corporation p. 63

A corporation is a separate legal entity from its owners. Therefore, the owners have limited liability. (yea!) The corporation can be taxed, sued and it can enter into contractual agreements. A corporation is chartered by the state in which it is headquartered. The corporation needs Articles of Incorporation and Bylaws. As a small business owner, if you started a corporation if would probably be a small privately held corporation. This is much easier to manage than the big publicly-held corporations you are familiar with i.e. Microsoft, Dell, P&G, Ford, etc. There are regular corporations (C Corp) and S corporations. They are very different especially when it comes to paying taxes. But both offer limited liability. Its not necessary, but it would probably be a good idea to have a lawyer help you set up a corporation.

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LLC Limited Liability Company p.67

LLCs offer the same protection against personal liability that a corporation offers. To form an LLC you must file Articles of Organization with the CA Secretary of State. It might be a good idea to have an attorney assist you with forming an LLC. The annual LLC fee is about $800, so, again it will be more expensive for you to set up and operate an LLC or Corporation versus a partnership or proprietorship. The IRS also considers an LLC a pass-through entity. The income passes through the business so the LLC does not pay any taxes. Each LLC owner (member) pays taxes on the share of the profit.

I have attached a file called Major Forms of Business Ownership. It is a one-page chart that highlights all the attributes of the various forms of business.
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Assignment for Chapter 3 Week Four

Please go to the Discussion Board to answer these questions: 1. What type of business ownership would you take for your business? Why? 2. What would you name your business? Why? Note: This assignment is due on Saturday at midnight. Please respond to another students post to earn the five points.

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