There are basically three
ways of taking ownership in a business.
Proprietorship or sole proprietor is the
simplest to take. You and the business are
essentially one. You as the sole proprietor are
the owner of all the assets. You also assume all
the liabilities. The profits become your income,
business taxes are charged, as in all the
expenses, as operating costs against the gross
profit of the business. Because all operating
expenses are deductible in one manner or
another, your net profits become your net
income.
Having an accountant is
important in making certain that you don't pay
too much (or too little) in taxes. It doesn't
matter if you operate your business from home or
in a large office, a tax accountant is a
necessity.
You might also consider
counseling with an attorney for the purpose of
determining if one business ownership method is
preferable over others for your particular
needs. An attorney and accountant can assist you
in other ways with regard to ownership. The
disposition of the business, in the event you
decide to sell it, is one determining factor.
Another is survivorship in the event of death.
As a proprietor, selling your
business and it's assets becomes very possible.
Transfer of ownership is not much more
complicated than the sale of any personal
property involving a contract of sale. There are
exceptions of course in certain states with
regard to protecting the rights of your
creditors. An attorney and accountant could play
an important role in a transfer.
In the event of death, the
business and all of its' assets could be passed
on to the heirs by virtue of a “Living Trust.”
The Living Trust has become increasingly popular
because it can be completed by the owner, cannot
be contested, and eliminates probate costs.
The employer-employee
relationship is another important facet of your
operation and requires the advise of a
professional. Involved are state and federal
income tax withholding, FICA deductions, state
unemployment, health benefits, and other
considerations peculiar to certain states.
Basically, the employer is
responsible for the actions of his or her
employees and can be named for any adverse acts.
The employee-employer method of doing business,
while basically the same under any form of
ownership, has certain advantages or drawbacks
under each form. As sole proprietor you will
bear the responsibility of all acts if they are
legally binding upon you. Seeking the advise of
an attorney regarding details, as to your state
laws, would be wise.
Partnerships
Partnerships are formed for
several reasons. The most common reason is
because it allows additional funding and
expertise. Another is that the business,
overall, is more than one person can handle. The
end result is referred to in business as a
general partnership.
Equal partners share the
initial investment, and each has the same amount
of control as the other. However, even though
financial arrangements may be equally shared,
one partner may agree to allow the other to
operate the business. Of course, the profits may
also be divided according to how much effort
each puts into the business, as well as actual
dollars invested.
Partnerships do not vary too
much from sole ownership in many respects. The
profits from the business represents the income
of the partners and are taxed as personal
income. Liabilities are charged to the partners
even though they may exceed the original
investment. The main purpose of partnerships is
to share the load and therefore create an
enterprise whereby the sum of the parts is
greater than the individual values.
Partnership may be composed
of more than two general partners. Multiple
general partnership are frequently formed by
professional people such as attorneys or
physicians. It is not uncommon for several
attorneys to join together to form a law office
to handle many different types of legal matters.
Physicians and dentists will often join in
establishing a clinic or medical building where
patients and doctors both benefit by the
convenience of having the special medical
services in one location.
Limited Partnerships
In addition to general
partnerships there are limited partnerships.
Limited partnerships are composed of investors
who do not want to participate actively in the
business operation, but do want a part of the
profits. Each limited partnership must have at
least one general partner who actively manages
the venture. Usually limited partnerships are
formed for a shore term enterprise, often 2-5
years. Others may be ongoing with the venture
changing. For example, real estate investment
trusts ate generally organized as limited
partnerships. If they develop a shopping center,
for example, the venture may dissolve, and the
participants will divide up the profits
according to the agreement under which the
partnership was formed. Others may simply move
from one project to another under the same
organization with some of the partners
withdrawing, and new partners entering. Where
the venture is of a continuing nature, dividends
are paid periodically when it is successful, and
demands are made upon the partners for
additional capital when the project may require
it.
A contractor may use the
limited partnership as a method of raising
capital to finance the development of a
residential tract, a shopping center, or any
type of building development. It isn't necessary
that a limited partner know anything about
construction or development. The limited partner
invests his money with the hope that the risk
will result in a repayment that is more
profitable than bank certificates, etc. In most
cases they risk only what they invest, and share
according to the ratio of their investment.
The liability of the limited
partner is limited to the amount invested.
Limited partnerships are generally required to
be registered or recorded with the state.
Corporations
A corporation is a legal
person, as opposed to a natural person.
Corporations can do most business acts that a
natural person can do. The organization of a
corporation is such that the shareholders are
delivered of liability in most cases.
In order to form a
corporation certain documents must be filed with
the state in which incorporation is sought. It
isn't necessary to incorporate in the state
where the business is to be located.
As with other forms of
ownership, incorporation has advantages and
drawbacks, One of the disadvantages to a
corporation is the double taxation. The
corporation profits are taxed and then the
individual income is taxed. However, this is not
as bad as it may appear and we will explore it
further in the chapter on taxation.
The advantages of
incorporating are the ability to capitalize the
venture through the sale of stock shares. Those
who invest in shares do so with the hope of
receiving a return on that investment.
Another consideration is the
limited personal liability. Unpaid taxes are
collected from the owners if the corporation is
unable to pay, otherwise the liabilities of the
corporation are not passed on to the owners. As
a separate legal person, the corporation can sue
or be sued. The corporation can also enter into
contracts and buy shares in other corporations.
If profits are good, the corporation may also
accumulate untaxed earnings as long as the IRS
does not consider the accumulated earnings
excessive.
The sale and purchase of
shares in a corporation can be an ongoing
transaction. Large corporations trade their
shares on the stock exchanges across the country
and the world. Smaller organizations sell and
trade share "over the counter." A stockbroker
will bring the buyer and seller together.
Closed corporations do not
trade shares with the public, but hold the
corporation to a few select shareholders. Each
of the shareholders may sell their shares to
another, or with permission, to an outsider. A
corporation may be sold to new owners without
any change in corporate structure simply by
transferring stock shares. Also, a corporation
does not die with the owners. The death of an
owner of the corporation has no effect on the
business itself. The shares pass to new owners
and "business as usual" continues.
Stock shares are an excellent
method of creating an estate and continuing
ownership of the corporation within the family.
By giving shares to members of the immediate
family, the income tax on dividends is reduced
resulting in higher spendable income. If the
corporation finds it necessary to generate more
capital, additional shares of stock may be
issued. There is no tax on the moneys received
from the sale of stock shares. Therefore, the
money raised can be used to update equipment,
increase inventory, or any number of capital
improvements to the organization. And if a
corporation is unsuccessful, the owners have all
the advantages of incorporation.
If a corporation is
unsuccessful the owners have all the advantages
of incorporation plus the fact that the IRS
allows a $25,000 deduction on an individual tax
return, or a $50,000 deduction on a joint return
of money invested in the venture.
If thorough research has
convinced you that incorporation is feasible and
will provide the best type of ownership for your
enterprise, the next step is to decide if you
will use the services of an attorney. In either
case, the following steps are necessary.
First, a certificate of
incorporation is prepared by the incorporators.
Most states require three incorporators. The
incorporators are legally qualified persons. The
incorporators may or may not be stockholders. It
may be more expeditious to employ dummy
incorporators. An agent or attorney may act in
this capacity. When the certificate of
incorporation is issued, the incorporators hold
an election meeting. At this meeting the
stockholders elect officers and a board of
directors, and the incorporators formally
resign.
The standard form of
incorporation may be obtained from the state
official designated to act as corporation
commissioner.
RoDI
ISOC
IWA
ARTT
RTS
WQC 2003 
ISAQ 2005