Forms of Ownership

Forms of Ownership

There are different business structures and they all have pitfalls and advantages to them. It is important to learn about your options here as they can greatly affect you.

Going into business without forming a LLC or some type of corporation structure will make you a sole proprietor and that is dangerous. Sole proprietorship leaves you open to being sued into the ground and being made held responsible for whatever events or actions relate to your business.

The business structures will affect taxes, personal security, personal privacy (documents that have phone numbers and emails), and abilities such as having stocks at all vs public stocks.

Business Structures

  • Sole Proprietorship
  • Partnership
  • C Corporation (what most people know as a corporation)
  • S Corporation
  • LLC (Limited Liability Company)
  • LLP (Limited Liability Partnership)
  • PLLC (Professional Limited Liability Company)

Sole Proprietorship

A sole proprietorship is a company that is owned by a single person. This is the most common type of business structure. This type of ownership however is very dangerous to use for a business. It leaves the sole proprietor (owner) open to litigation against themselves which means they can be sued for anything that happens in the company. This means if an employee does something terrible the owner is responsible for it. If a product fails and someone dies it is the owner that gets in trouble. If the company gets sued it means that all of the personal belongings such as houses and cars and personal belongings are now open for being sold off to pay for fines and fees incurred by the business.

Partnership

A partnership is like a sole proprietorship but now it has more than one person being an owner. A saying is said that a partnership is like a marriage but without any of the benefits. This means that anything done by one partner now affects the other partners. If one partner does something wrong it makes all partners liable for being sued and having all their things auctioned off.

C Corporation

A c corporation is what people just refer to as a corporation. They require meetings, reports, stock, etc. You are allowed to have as many owners as you want and various levels of stocks. Each stock owner is considered an owner in the company.

Corporations are nice because they offer protection against personal assets as they are considered their own entity. The corporation gets sued. (sometimes CEOs and such may be sued but those are specific situations) It is important that no owner does business for the business in their own name. By doing so they could “pierce the corporate veil” which then makes them responsible and destroys the concept of the corporation being its own entity.

Stocks commonly have two levels which are preferred stock and common stock. The preferred stock is generally owned by the decision makers while the common stock is generally held by stock holders like you and me who can sign up and buy some stock.

Preferred stock and common stock do not have to be setup that way. Some companies have chosen to flip the roles of the two stock types. There can be custom stock types as well. Corporations do not have to offer stock to the public. When they do offer stock to the public it is known as going IPO (Initial Public Offering).

Taxes done with a c corporation are sometimes known as double taxing. The business is taxed and then the dividends are taxed.

S Corporation

A s corporation is similar to a c corporation. Some ways they differ is the way they are taxed and how the stocks work. S corporations are taxed by what people call a single tax. The stocks work differently because there is a maximum amount of owners.

LLC

An LLC is a limited liability company that is taxed much like an s corporation and offers the same protections yet is a much more simplified company structure in many ways. Less meetings and such. They do not offer stock.

LLP (Limited Liability Partnership)

LLPs are typically used by organizations such as law firms and architectural firms. Limited Liability Partnerships shield partners from the negligence or civil issues of the other partners. Similar to an LLC in a way, but the entire LLC would be held liable whereas a specific partner can be liable in an LLP.

Source: http://redd.it/vuqrk

PLLC (Professional Limited Liability Company)

PLLCs are specifically for doctors, lawyers, accountants, and other professionally licensed firms. This is like a normal LLC, but allows professional licensure to be granted to the LLC itself. Many states will require a PLLC be used if a company is formed for these purposes. There are also PLLPs in some states which basically combine LLP/PLLC.Source: http://redd.it/vuqrk

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