Essentials of Corporate Finance: Chapter 1.

Forms of Business
Organization

Basic Forms of Business

Organization
Sole

Proprietorship
Partnership
General Partnership
Limited Partnership

LLCs
Corporations
Subchapter S Corporations
Subchapter C Corporations

Key issues that drive the

business structure decision
Liability
In some forms of business, the owners have

unlimited liability for the debts of the business

In other forms, the owners are generally not
liable beyond their original investment
Taxes
Different forms of business are taxed

differently
In some business forms, the owners are liable
to pay taxes on the business income, even if
they did not personally receive any of it

The Line of Liability

Owners Personally Liable for Business Debts
Sole Proprietorship
General partnership

Owners Liability Limited to Investment

Limited
LLCsPartnerships
Corporations

Sole Proprietorship
Most

common form of business

Approximately 72% of all US businesses

Owner

and the business are legally the same

If business operates under a name that is
different than the owners name, they must file
a DBA or fictitious business name statement
All income is taxed as personal income
(schedule C for both the California and Federal
returns)
Owner has unlimited liability for the debts and
obligations of the business
Life of the business is limited to the life of the
owner

General Partnerships
Similar

to a sole proprietorship with

multiple owners
Each partner has unlimited liability for the
debts and obligations of the partnership
Written partnership agreement is not
required; but, is recommended
Income passes through the partnership
and taxes are paid on the partners
personal income tax returns
Partners have the ability to bind the
partnership to contracts

Limited Partnerships
Limited

partnerships have one or more general

partners and one or more limited partners

General

partners are involved in the

management of the business and are fully
liable for the debts and obligations of the
partnership

Limited

partners are NOT involved in the

operation of the business and their liability is
limited to their capital contribution to the
company

LLC (Limited Liability

Company)
Hybrid

between Sole Proprietorship and

Corporation (Sole member) or a
Partnership and a Corporation (Multiple
members)
Members (owners) have liability that is
limited to their investment
Not subject to some of the compliance
and red tape required of Corporations
Generally taxed as a pass through;

Corporations
Subchapter

S Corporations

Pass through income to stockholders for

tax purposes
Limited to 100 shareholders
No more than 25% of the income can be
passive
A completely separate legal entity from the
shareholders
Liability is limited to investment

Corporations
Subchapter

C Corporations

Completely separate legal entity

All publically traded US corporations
Board appoints officers and is responsible to

guard the interests of the shareholders

Formed with the filing of Articles of
Incorporation and Bylaws

Corporations
Subchapter

C Corporations

Income is taxed twice (corporate tax and

dividend tax)
Shareholders (owners) liability is limited to
investment
Shareholders elect Board of Directors
Easy to transfer interest (ownership) in company
Limited liability, ease of transfer and lack of
personal tax liability for the income of the
company make this the most popular form with
investors

How does this relate to

Finance
Key

financial issues include raising

capital and taxes
Investors often prefer C corps because

they incur no personal tax liability or any

potential other liability beyond the
investment made
Privately held businesses that expect to
pay out most of their profit may prefer
an LLC or a S Corp because of the ability
to avoid double taxation