Vocabulary Terms Ch #7, Types
of Businesses
Sole proprietorship
Partnership
Corporation
General Partner
C-Corporation
Limited Liability
Preferred Stock
Non-profit Corporation
S-Corporations (Subchapters)
Limited Liability Corporations (LLC)
Limited Partner
Shareholders
Unlimited Liability
Common Stock
Generally there are three types of
Business Ownership
Sole Proprietorship
Partnership
Corporations
The amount of Liability and
Ownership of a business
Depends on that type of business.
Liability is the
debt of a business. Liability protection is the
insurance needed to protect the business
from problem lawsuits.
Unlimited liability is:
The full responsibility for debt incurred
from the actions of a business.
Sole Proprietorship
Ownership by only one person.
(Accounts for most businesses in US, 76%)
Advantages of a Sole
Proprietorship
• Ease of start-up
• Allows a great amount of authority over business
activity.
• This is the least regulated type of business.
• The business is not taxed, only the owner is
taxed.
Disadvantages of Sole
Proprietorships
• Unlimited Liability for all debts relating to
the business, including personal assets,
such as your car and home.
• Limited amount of skills brought into the
business
• Death of the business occurs with the
death of the Sole Proprietor.
Two types of Partnerships
• General Partnerships
• Limited Partnerships
General Partnership
General Partners have complete control and is
responsible for all liability. Law requires that
there be least one partner as a General Partner.
Limited Partnership
Not all partners are equal. Partners may be
limited to the amount of capital invested in
the business, often as a percent, for
liability as well as for profit.
Advantages of Partnership
 Inexpensive to create
 General Partners have control of business activity
 Partners can share ideas, two heads are better than
one.
 Greater amount of investment capital, than a Sole
Proprietor.
Disadvantages of Partnership
Partnership fragments the organization
It is difficult to dissolve a partner’s interest.
More owners means more personality
conflicts.
Corporations
Are ownership by shareholders
Corporations
And owners are separate entities.
Owners have Limited Liability.
Corporation are treated as though they are
individuals and have a different tax rate.
Corporate Shield
is the greatest advantage of forming a corporation. It
protects owners from lawsuits against the business.
Because corporations are separate entities, owners are
not responsible for what the corporation does. To pierce
a corporate shield, however, lawyers must show that
personal assets were purchased by the corporation.
Often entrepreneurs choose to become employees of
their corporation, retaining management of the business
and having the protection of the corporate shield.
Three types of Corporations.
• C – Corporation
• S – Corporation
• Nonprofit Corporation
C – Corporations
 Are the most common type of Corporation
 The “C” stands for stock Certificates
(Ownership)
 There must be a Board of Directors (With small
corporations this can be family members)
C-corporations are entities
That pay taxes only on the earnings (profit) of the
corporation. The shareholders (owners) pay taxes as
well on the dividends, if offered. Dividends (% of $
earned) are given to the shareholders from profits of the
corporation, this is usually only offered on Preferred
Stock owners. Common Stock does not usually have
dividends. Both types of stock usually have voter rights.
% of shares owned in a
Corporation is important
Whoever controls majority interests controls the
board of directors by voter rights. The board of
directors is elected to their posts and hires the
management, whom makes policy decisions.
Corporation status makes it easier to:
Get financing, loans and can pull in money
from the sale of issuing stock .
Corporations have Limited Liability
Owners (shareholders) are only liable for the
amount of the personal investment.
Corporation are taxed at a higher
tax rate.
And can pay as much as double of other types of
businesses. But are taxed only on the profits (EBIT)
Earning Before Interest and Taxes.
S Corporations, Subchapter
This type of Corporation circumvents the
double taxation which occurs when an
entrepreneur is an employee of the
corporation. S Corporations are taxed the
same as a partnership or the shareholder’s
personal tax rate.
S Corporations
There must be no more than 75 shareholders for
a business to become a S Corporation. S
Corporations are often cash businesses, like
restaurants and can issue only one class of
stock.
Non-profit Corporations
Must be a charitable cause, for public benefit.
They include trade associations, sports leagues
and political groups. Making this corporation
eligible for public and private grants
Nonprofit Corporations
Examples of this type of corporation is the Red
Cross, Salvation Army, various religious groups
and government agencies. Profit remains in the
Corporation to do more public good.
Limited Liability Company (LLC)
LLCs were originally created to allow high-risk businesses
with high liability to exist. Examples of this are medical
corporations or law firms.
Now, however, almost any business can become an LLC.
Each state has their own laws regarding LLCs.
Limited Liability Company
An LLC is a company that enjoys the limited
liability and some tax benefits, but it avoids
the restrictions associated with S
corporations.
The benefits of an LLCs
• Simpler to set up than a corporation
• Allows for the flexibility of a partnership
• Protects the owners as if it were an corporation.
Members of LLC are not liable for the company’s debts
• Not subject to double taxation. Profits are taxed personally.
• There is no limitations on the number of members of the LLC