Forms of Business Organizations

Sole Proprietorship
A sole proprietorship is a one-owner business. The development and organization of a sole proprietorship business is very easy, which is why it is so common. This type of business is not subject to prolonged federal or state regulation, and is relatively simple to manage and control. The main characteristic of a sole proprietorship is that the owner is inseparable from the business, which gives the owner complete control over the business and its procedures. Also because of this characteristic, the owner is financially and legally responsible for debts and legal actions against the business. A result from the business and the owner being the same as one is that a sole proprietorship business does not pay taxes separately from the owner; taxes on a sole proprietorship are determined and paid at the owners personal income tax rate. LIABILITY-With sole proprietorship the owner has unlimited liability. There is no difference between the owner and the business and the owner is liable for any debt and responsibilities of the business. This is a major disadvantage for this form of business.

INCOME TAXES-Sole proprietorship businesses have to file all money earned as regular personal income to the owner.

LONGEVITY/CONTINUITY-Your business will last as long as you last. When you die, your business dies. You cannot pass your business off to someone else, but you can sell your businesses assets.

CONTROL-When you have a sole proprietorship business, you are in full control. You say what goes and what does not go. Make your own hours, and develop however you so choose to.

PROFIT RETENTION-You will receive any profits made from your business and will not have to share with anyone unless you have people working for you.

LOCATION-You are able to move to another location, in a different state without all of the legal issues that come along with the other forms of businesses.

CONVENIENCE/BURDEN-Sole proprietorship is the easiest form of business to create, and you are your own boss, but on the other hand you are responsible for anything that may happen or any debts owed.

General Partnership
A partnership is a business with more than one owner, that is not incorporated and that is not a limited liability company. In a general partnership, each of the partners have unlimited liability for the debts of the business. The income and costs are reported on a separate return for tax purposes, but each partner then reports their pro-rata share of the profit or loss from the business on their personal tax return. General partnerships are considered an improvement from the sole proprietorship organization. Some differences are a bigger talent group, the liabilities of running the business are shared, and you have a stronger financial status. LIABILITYAll partners in the business are jointly and severally liable for the businesses debts and obligations. INCOME TAXES-General partnerships are taxed just like a sole proprietorship, the partners will pay the personal income tax rate for the businesses income. LONGEVITY/CONTINUITY-General partnerships can end as fast as they were made. If the agreement ends between the partners then the partnership is over. If there are three partners, the third partner can try to rebuild the partnership. CONTROL-All partners have equal control in a general partnership.

However, the partners can change this if they choose to. PROFIT RETENTION-All of the profits made from the business will be divided between all of the partners. A buy/sell agreement is made when the partnership is made, in the case that one of the partners withdraw from the partnership. LOCATION-With general partnership you can move your business from state to state or wherever you choose because there is no legal distinction. CONVENIENCE/BURDEN-General partnerships are easy to create. There is no formal participation in creating a general partnership. The partners do have to create a contract called the articles of partnership. This includes the terms and conditions of the partnership.

Limited Partnership
Limited partnerships are created when a general partnership brings in another partner for financial reasons. The limited partner contributes financially to the business but has minimal control over its management. The most that a limited partner could lose if something were to happen is the amount that the partner invested in the business. Limited partnerships have to be made in agreement with state law.

LIABILITY-If you are the limited partner in the partnership, you are just as responsible for the debts, and obligations of the business. However, the most that limited partner will lose is what the partner invested into the business.

INCOME TAXES-Limited partners are taxed just like a sole proprietorship and general partnerships, the partners will pay the personal income tax rate for the businesses income.

LONGEVITY/CONTINUITY-Just like the general partnership, once the partners no longer have an agreement the partnership is over.

CONTROL-With a limited partnership the limited partner has full control, but is not involved in the day-to-day management of the business.

PROFIT RETENTION- All of the profits made from the business will be divided between all of the partners. A buy/sell agreement is made when

the partnership is made, in the case that one of the partners withdraw from the partnership.

LOCATION- With a limited partnership you can move your business from state to state or wherever you choose because there is no legal distinction. However, your limited partnership has to be formed in compliance with state law that you chose to operate in.

CONVENIENCE/BURDEN- Same as a general partnership Limited partnerships are easy to create. You have to make sure you know the state laws on limited partnerships. Just like general partnership, the partners in a limited partnership have to create a contract called the articles of partnership. This includes the terms and conditions of the partnership.

C Corporation
A c corporation is an independent legal business that is separate from the people who own, control, and manage it. As an individual business, it is considered its own person according to the tax laws. A c corporation can also initiate lawsuits and itself be sued. It also must pay taxes. The owners of a c corporation are shareholders, who must elect a board of directors that make business decisions and oversee policies, own a c corporation. LIABILITY-C corporations have limited liability to its owners However; there are certain situations where the limited liability will not be able to

protect the owners personal assets. INCOME TAXES-The profit of a c corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as payments. Therefore, you have a double taxation. LONGEVITY/CONTINUITY- A c corporation has continuity regardless of its owners. C corporations could survive for years to come. Unlike sole proprietorship if the owner of the corporation dies the business will continue to live. CONTROL- Not all shareholders in a corporation are necessarily equal. Corporations form different classes for the shareholders. Shareholders elect directors who manage business activities. PROFIT RETENTION- The earnings and profits of c corporations are treated as dividend for U.S. tax purposes. LOCATION- A domestic corporation is entitled to operate in its state of incorporation, but you must become a foreign corporation to do business out of state. CONVENIENCE/BURDEN- There are routine requirements enforced on corporations that may prevent some businesses from choosing to incorporate. If you choose to operate in different states, you have to make sure that you are following that states laws, so you may have different laws for the same corporation, just in a different state.

S corporation
An s corporation is a corporation that has elected to have its profits passed through to its shareholders, just like a partnership or sole proprietorship. The shareholders of an s corporation receive the benefit of limited liability, and are treated as partners for tax purposes. An s corporation is formed and treated just like any other corporation; the only differences are in tax treatment, and the limit on how many shareholders it is allowed.

LIABILITY-S corporations have limited liability to its owners. However; there are certain situations where the limited liability will not be able to protect the owners personal assets.

INCOME TAXES-An s corporation chooses to be taxed like a partnership or sole proprietorship. S corporations file all money earned as regular personal income to the owner.

LONGEVITY/CONTINUITY- An s corporation has continuity regardless of its owner. An s corporation can keep this status until it no longer qualifies or most of the shareholders withdraw the s corporation status. Unlike sole proprietorship if the owner of the corporation dies the business will continue to live.

CONTROL-S corporations can only have one class of stock. Shareholders elect directors who manage business activities.

PROFIT RETENTION-Profits the shareholder receives are only taxed once and not twice like the c corporation.

LOCATION- A domestic corporation is entitled to operate in its state of incorporation, but you must become a foreign corporation to do business out of state.

CONVENIENCE/BURDEN- S corporations cannot have more than one hundred shareholders, and cannot be members of an affiliated group of companies. All shareholders must sign the form making the S Corporation election.

Limited Liability Company

A limited liability company is a form of business organization that provides the ease and effortlessness of sole proprietorships, but the limited liability of corporations. With a limited liability company, you are able to have just one member, which is the owner. Every year the LLC can choose how it would like to be taxed. The company can choose to either be taxed as a corporation, or pay personal income tax rates.

LIABILITY-Liability for a LLC is the same as a corporation. LLC have limited liability to its owners.

INCOME TAXES-Every year the LLC will choose how it will be taxed. These companies can choose to pay personal income tax rates, or can

choose to be taxed as a corporation.

LONGEVITY/CONTINUITY-LLCs have a limited life. If the member of the company dies or goes bankrupted the company is dissolved.

CONTROL-The member, who is the owner controls the business and does not have to elect a board of directors.

PROFIT RETENTION-Profits that the LLCs make can go straight to the member or members of the company. Then in which they choose how they want to be taxed that year.

LOCATION- Under state law a business founders must apply to their respective state agencies to start their companies. Just like a corporation.

CONVENIENCE/BURDEN-LLC members need to form a written operating agreement, which includes the limited liability companies rights and duties. Funding a limited liability company can be difficult considering it is the same as a sole proprietorship.

Memo
To: From: Date: Re:
Ray Shipe, Owner of Rays Wood Works

Sherina White

6/17/2012

Suitable Form of Business Organization

Currently Rays Wood Works is operated as a sole proprietorship. Since you want to expand your business, I would recommend that you change your form of business to a limited liability company. This form of business is very similar to what you have now, and only a few things might change. A limited liability company is a form of business organization that provides the ease and effortlessness of sole proprietorships, but the limited liability of corporations. If the business is planning to profit at least $600,000 this would come in handy for you, because you can choose which way you want your business to be taxed each year. Making that much money you would want to be taxed as a corporation instead of paying personal income tax rates for the profits earned. You also have concerns about liability and that is great, with a limited liability company you will have limited liability, which will be better for you than the sole proprietorship which has unlimited liability. This will help you out if any of the incidents happen that you are worried about. You did say that you have not run into any of those issues, but it is always good to be prepared for it if you do. Raising your capital will be a little difficult, but you can always go to a bank and get a loan for your business. This way you do not have to worry about how much of the profits you have to share with an investor or bring in any partners. You will still have full control. You will need to have a written operating agreement. This will help the company out, because it includes how you

want the company to be managed and operated. You would also include the contingency in your operating agreement, so you would know that your business would continue if anything were to happen to you. I feel that the best form of business for this particular business would be limited liability company, because it provides the best tax breaks for you and you will still be in control of your business, to where you are involved in the day-to-day management of the business. Changing into a limited liability company will also save you time and money, because becoming a corporation can be very expensive, and involve a lot more meetings and regular maintenance of the entity. The best part about becoming a LLC is that you can keep the name of your business. You will just have to file d.b.a. filings to assume another name so that you do not have to include the LLC with Rays Wood Works. With all of that inconsideration, you should look over the business report that I made for you about the forms of business, and see if there is another one that you feel that best suits your business. Limited Liability Company is my professional chose for your business.

Sherina L. White 217-209-0930 sherinalwhite@gmail.com