Week 1 Forms of Business

Forms of Business

In this course, we will deal with three forms of business:

Sole Proprietorship	Partnership	Corporation
One person owns everything	Two or more people jointly own everything	Owners may be any number of people who all own shares of the business (the shares are called shares of stock)

It is important to note that the corporations (most of what we discuss in this course) are a legal entity. Meaning that a corporation's owners are not personally liable for the corporation’s debts.

• Limited Liability Companies
  Limited Liability Companies (LLCs) are often described as a combination of a partnership and a corporation. LLCs combines a corporation's liability protection with a partnership's tax flexibility. Like sole proprietorships or partnerships, LLCs enjoys pass-through taxation. This means that owners (also known as "members") report their share of profits or losses in the company on their individual tax returns. The Internal Revenue Service (IRS) does not assess taxes on the company itself. (Source: LLC.com Links to an external site.)
  
  
  Video: LLC 101
  
  
• Non-profit Organizations
  The word "nonprofit" refers to a type of business that is organized under rules that forbid the distribution of profits to owners.
  
  Most nonprofit businesses are organized into corporations. Every state has provisions for forming nonprofit corporations; some permit other forms, such as unincorporated associations, trusts, etc., which may operate as nonprofit businesses on slightly (but sometimes importantly) different terms.
  
  The Internal Revenue Service (IRS) gets involved because corporations are, in general, required to pay federal corporate income taxes on their net earnings. However, the Internal Revenue Code lists several circumstances under which corporations are exempt from these taxes. Section 501(c)(3) lists two requirements for tax exemption:
  • serving charitable, religious, scientific or educational purposes
  • no part of the income of which "inures to the benefit of" anyone.
  
  Tax-exempt nonprofit organizations can, and do, operate in all other particulars like any other sort of business. They have bank accounts; own productive assets of all kinds; receive income from sales and other forms of activity, including donations and grants if they are successful at finding that sort of support; make and hold passive investments; employ staff; enter into contracts of all sorts; etc. (Source: Putnam Barber at Free Management Library Links to an external site.)