{"id":46,"date":"2015-04-21T20:40:07","date_gmt":"2015-04-21T20:40:07","guid":{"rendered":"https:\/\/courses.candelalearning.com\/masterybusiness1xngcxmaster\/?post_type=chapter&#038;p=46"},"modified":"2017-04-18T19:52:46","modified_gmt":"2017-04-18T19:52:46","slug":"choosing-an-organizational-type","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-hccc-introbusiness\/chapter\/choosing-an-organizational-type\/","title":{"raw":"Choosing an Organizational Type","rendered":"Choosing an Organizational Type"},"content":{"raw":"<h2><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/143\/2016\/10\/31220414\/7546938258_8ed6a26ff0_k.jpg\"><img class=\"aligncenter wp-image-8165\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/143\/2016\/10\/31220414\/7546938258_8ed6a26ff0_k-300x240.jpg\" alt=\"Photo of the front of an old dry-cleaning shop.\" width=\"600\" height=\"480\" \/><\/a><\/h2>\r\n<h2>Important Considerations<\/h2>\r\nOne of the first and most important decisions a business owner makes is selecting the organizational form\u00a0under which he or she will operate. The following are some common organizational types (also called \"legal structures\"):\r\n<ul>\r\n \t<li>Sole proprietorship<\/li>\r\n \t<li>General partnership<\/li>\r\n \t<li>Franchise<\/li>\r\n \t<li>Limited partnerships and limited liability partnerships (LLP)<\/li>\r\n \t<li>Limited liability company (LLC)<\/li>\r\n \t<li>C corporation<\/li>\r\n \t<li>S corporation<\/li>\r\n<\/ul>\r\nEach form of ownership has advantages, disadvantages, risks, and rewards\u00a0that can affect\u00a0the business's chances for long-term success. The following are some of the important factors\u00a0business owners should consider when selecting a form of ownership.\r\n<h3>Cost of Start-up<\/h3>\r\nSetting up a business can involve little more than\u00a0printing some business cards, or it may entail\u00a0hiring a corporate attorney to draft corporate charters, agreements, and articles of incorporation. As the forms of business ownership become more complex, the cost associated with establishing the business also increases. Every\u00a0business owner must decide how long he\/she wants to wait before getting the business up and running and also how much of his\/her own money to invest.\r\n<h3>Control vs.\u00a0Responsibility<\/h3>\r\nOne of the primary reasons people give for wanting to start their own business is the desire to be independent and \"be your own boss.\" Different legal\u00a0structures provide the owner with more or less\u00a0control and authority. There are trade-offs in each case, though, because with\u00a0autonomy and control come responsibility. For instance, if you're the sole proprietor of a business with no employees, as a one-person show, you retain all the control, but you also have all the work and responsibility. Other forms of business (such as partnerships, for example,) may mean relinquishing some control, but, in return, the responsibility (and liability) may be spread among several principals. You'll learn more about these\u00a0trade-offs later in the module.\r\n<h3>Profits\u2014to Share or Not to Share<\/h3>\r\nMany first-time\u00a0business owners look to people like Bill Gates, Oprah Winfrey, or Ben &amp; Jerry and aspire to their level of wealth\u00a0and success. How a business's profits are shared (or not shared) is determined by the legal\u00a0structure. Some owners are willing to share the profits\u00a0in exchange for assistance\u00a0and support establishing and running the business. Other business owners make the conscious decision to limit the scope and nature of the business to avoid having to bring in others, thereby retaining all of the income themselves.\r\n<h3>Taxation<\/h3>\r\nWhen planning to start\u00a0a new business, many\u00a0people instinctively seek\u00a0the advice of an attorney as the\u00a0first step in the process. However, legal advice is not actually what's needed initially. Instead, no matter how large or small your business is going to be, it's much more important to first get the advice of a seasoned tax professional, such as a CPA. The reason for this is that each form of business ownership is treated differently by the IRS and by state and local taxing authorities. Depending on the legal structure of the business, the owner may be\u00a0taxed at a lower rate than someone\u00a0working for a large company, or the owner might see\u00a0his or her business income taxed twice, sometimes with additional speciality taxes imposed by governmental agencies. The time for a business owner to decide how heavy a tax burden he\/she is willing to bear is at the start of the business, not on April 15 when taxes are due.\r\n<h3>Entrepreneurial Ability<\/h3>\r\nAt some point you've probably known\u00a0someone with a particular knack for something (like fixing cars or baking bread) and said, \"You should start your own\u00a0business!\" But if you are a talented cake decorator, say, does that necessarily\u00a0mean you have\u00a0the requisite knowledge, skills, and abilities to open and run a successful commercial or retail bakery? It's often easier said than done. Many businesses fail despite the owner's enthusiasm and\/or talent, because the owner lacks the deep knowledge and expertise needed to transform\u00a0an interest or hobby into a commercial enterprise. Performing an honest and accurate appraisal\u00a0of one's skills, background, and entrepreneurial abilities <em>before<\/em> launching a business can prevent disappointment and failure later on.\r\n<h3>Risk Tolerance<\/h3>\r\nEveryone's tolerance for risk is different. Some people enjoy the rush of skydiving and rollercoasters, while others prefer to stick to the carousel or keep their feet on the ground. In business, one's degree of risk tolerance should be compatible with the form of ownership being considered. For example, a forty-five-year old entrepreneur\u00a0with dependents might seek to protect her accumulated assets (real estate, savings, retirement, etc.) and therefore select a legal\u00a0structure that carries less personal financial risk. Every prospective business owner must gauge what he or she is willing to risk losing and choose a form of business accordingly.\r\n<h3>Financing<\/h3>\r\nFew\u00a0business owners start a business with lottery winnings or many years' worth of savings. Many seek funding from\u00a0a bank, venture capitalist, private investor, or credit union in order to get their businesses off the ground. Lenders may be one of the greatest influences\u00a0on the choice of business ownership\u2014even more decisive than\u00a0the owner's preference or ambition. Since there is risk inherent in any business venture, especially start-ups, lenders often require the business to be structured in a way that best assures\u00a0the repayment of funds (whether the business makes it or not). Even businesses that have been established for a long time may be forced to change their legal structure when seeking funding to expand their operations. If an owner anticipates needing funding at any point during the life of the business, selecting a form of ownership that aligns with lender requirements from the start may be a wise decision.\r\n<h3>Continuity and\u00a0Transferability<\/h3>\r\nFinally, business owners need to consider if they want their business to outlive them (or carry on\u00a0after they leave). If an owner is looking to start a business that can be passed on to his or her children or other family members, then the legal structure of the business is extremely important. Certain\u00a0organizational types\u00a0\"die\" with the owner, so it's crucial\u00a0for the owner to decide how and whether a business will persist and\/or be sold to new ownership.\r\n\r\nThese are just some of the considerations business owners must weigh when selecting a form of business ownership. Many of these issues require owners to look far into the future of their business and imagine all of the \"what if's\" associated with being self-employed. Although it is possible to change legal structure once the business is established, the more complex the business operations are the more complex the change will be. In some cases, the complexity of the situation can prevent the owner from making the change that's desired. Considering as many of these factors as possible from the outset can save countless hours and great expense\u00a0down the road.\r\n\r\nIn the coming sections we will explore the possible legal structures a business owner can choose\u00a0and look at the advantages and disadvantages of each. We will begin with the simplest of all organizational types: the sole proprietorship.\r\n<h2>Check Your Understanding<\/h2>\r\nAnswer the question(s) below to see how well you understand the topics covered above. This short quiz does <strong>not<\/strong> count toward your grade in the class, and you can retake it an unlimited number of times.\r\n\r\nUse this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.\r\n\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/3003","rendered":"<h2><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/143\/2016\/10\/31220414\/7546938258_8ed6a26ff0_k.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-8165\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/143\/2016\/10\/31220414\/7546938258_8ed6a26ff0_k-300x240.jpg\" alt=\"Photo of the front of an old dry-cleaning shop.\" width=\"600\" height=\"480\" \/><\/a><\/h2>\n<h2>Important Considerations<\/h2>\n<p>One of the first and most important decisions a business owner makes is selecting the organizational form\u00a0under which he or she will operate. The following are some common organizational types (also called &#8220;legal structures&#8221;):<\/p>\n<ul>\n<li>Sole proprietorship<\/li>\n<li>General partnership<\/li>\n<li>Franchise<\/li>\n<li>Limited partnerships and limited liability partnerships (LLP)<\/li>\n<li>Limited liability company (LLC)<\/li>\n<li>C corporation<\/li>\n<li>S corporation<\/li>\n<\/ul>\n<p>Each form of ownership has advantages, disadvantages, risks, and rewards\u00a0that can affect\u00a0the business&#8217;s chances for long-term success. The following are some of the important factors\u00a0business owners should consider when selecting a form of ownership.<\/p>\n<h3>Cost of Start-up<\/h3>\n<p>Setting up a business can involve little more than\u00a0printing some business cards, or it may entail\u00a0hiring a corporate attorney to draft corporate charters, agreements, and articles of incorporation. As the forms of business ownership become more complex, the cost associated with establishing the business also increases. Every\u00a0business owner must decide how long he\/she wants to wait before getting the business up and running and also how much of his\/her own money to invest.<\/p>\n<h3>Control vs.\u00a0Responsibility<\/h3>\n<p>One of the primary reasons people give for wanting to start their own business is the desire to be independent and &#8220;be your own boss.&#8221; Different legal\u00a0structures provide the owner with more or less\u00a0control and authority. There are trade-offs in each case, though, because with\u00a0autonomy and control come responsibility. For instance, if you&#8217;re the sole proprietor of a business with no employees, as a one-person show, you retain all the control, but you also have all the work and responsibility. Other forms of business (such as partnerships, for example,) may mean relinquishing some control, but, in return, the responsibility (and liability) may be spread among several principals. You&#8217;ll learn more about these\u00a0trade-offs later in the module.<\/p>\n<h3>Profits\u2014to Share or Not to Share<\/h3>\n<p>Many first-time\u00a0business owners look to people like Bill Gates, Oprah Winfrey, or Ben &amp; Jerry and aspire to their level of wealth\u00a0and success. How a business&#8217;s profits are shared (or not shared) is determined by the legal\u00a0structure. Some owners are willing to share the profits\u00a0in exchange for assistance\u00a0and support establishing and running the business. Other business owners make the conscious decision to limit the scope and nature of the business to avoid having to bring in others, thereby retaining all of the income themselves.<\/p>\n<h3>Taxation<\/h3>\n<p>When planning to start\u00a0a new business, many\u00a0people instinctively seek\u00a0the advice of an attorney as the\u00a0first step in the process. However, legal advice is not actually what&#8217;s needed initially. Instead, no matter how large or small your business is going to be, it&#8217;s much more important to first get the advice of a seasoned tax professional, such as a CPA. The reason for this is that each form of business ownership is treated differently by the IRS and by state and local taxing authorities. Depending on the legal structure of the business, the owner may be\u00a0taxed at a lower rate than someone\u00a0working for a large company, or the owner might see\u00a0his or her business income taxed twice, sometimes with additional speciality taxes imposed by governmental agencies. The time for a business owner to decide how heavy a tax burden he\/she is willing to bear is at the start of the business, not on April 15 when taxes are due.<\/p>\n<h3>Entrepreneurial Ability<\/h3>\n<p>At some point you&#8217;ve probably known\u00a0someone with a particular knack for something (like fixing cars or baking bread) and said, &#8220;You should start your own\u00a0business!&#8221; But if you are a talented cake decorator, say, does that necessarily\u00a0mean you have\u00a0the requisite knowledge, skills, and abilities to open and run a successful commercial or retail bakery? It&#8217;s often easier said than done. Many businesses fail despite the owner&#8217;s enthusiasm and\/or talent, because the owner lacks the deep knowledge and expertise needed to transform\u00a0an interest or hobby into a commercial enterprise. Performing an honest and accurate appraisal\u00a0of one&#8217;s skills, background, and entrepreneurial abilities <em>before<\/em> launching a business can prevent disappointment and failure later on.<\/p>\n<h3>Risk Tolerance<\/h3>\n<p>Everyone&#8217;s tolerance for risk is different. Some people enjoy the rush of skydiving and rollercoasters, while others prefer to stick to the carousel or keep their feet on the ground. In business, one&#8217;s degree of risk tolerance should be compatible with the form of ownership being considered. For example, a forty-five-year old entrepreneur\u00a0with dependents might seek to protect her accumulated assets (real estate, savings, retirement, etc.) and therefore select a legal\u00a0structure that carries less personal financial risk. Every prospective business owner must gauge what he or she is willing to risk losing and choose a form of business accordingly.<\/p>\n<h3>Financing<\/h3>\n<p>Few\u00a0business owners start a business with lottery winnings or many years&#8217; worth of savings. Many seek funding from\u00a0a bank, venture capitalist, private investor, or credit union in order to get their businesses off the ground. Lenders may be one of the greatest influences\u00a0on the choice of business ownership\u2014even more decisive than\u00a0the owner&#8217;s preference or ambition. Since there is risk inherent in any business venture, especially start-ups, lenders often require the business to be structured in a way that best assures\u00a0the repayment of funds (whether the business makes it or not). Even businesses that have been established for a long time may be forced to change their legal structure when seeking funding to expand their operations. If an owner anticipates needing funding at any point during the life of the business, selecting a form of ownership that aligns with lender requirements from the start may be a wise decision.<\/p>\n<h3>Continuity and\u00a0Transferability<\/h3>\n<p>Finally, business owners need to consider if they want their business to outlive them (or carry on\u00a0after they leave). If an owner is looking to start a business that can be passed on to his or her children or other family members, then the legal structure of the business is extremely important. Certain\u00a0organizational types\u00a0&#8220;die&#8221; with the owner, so it&#8217;s crucial\u00a0for the owner to decide how and whether a business will persist and\/or be sold to new ownership.<\/p>\n<p>These are just some of the considerations business owners must weigh when selecting a form of business ownership. Many of these issues require owners to look far into the future of their business and imagine all of the &#8220;what if&#8217;s&#8221; associated with being self-employed. Although it is possible to change legal structure once the business is established, the more complex the business operations are the more complex the change will be. In some cases, the complexity of the situation can prevent the owner from making the change that&#8217;s desired. Considering as many of these factors as possible from the outset can save countless hours and great expense\u00a0down the road.<\/p>\n<p>In the coming sections we will explore the possible legal structures a business owner can choose\u00a0and look at the advantages and disadvantages of each. We will begin with the simplest of all organizational types: the sole proprietorship.<\/p>\n<h2>Check Your Understanding<\/h2>\n<p>Answer the question(s) below to see how well you understand the topics covered above. This short quiz does <strong>not<\/strong> count toward your grade in the class, and you can retake it an unlimited number of times.<\/p>\n<p>Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.<\/p>\n<p>\t<iframe id=\"lumen_assessment_3003\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=3003&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_3003\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-46\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Reading: Selecting a Form of Business Ownership. <strong>Authored by<\/strong>: Linda Williams and Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><li>Check Your Understanding. <strong>Authored by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>One Hour Never. <strong>Authored by<\/strong>: Pete Zarria. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.flickr.com\/photos\/toby_d1\/7546938258\/\">https:\/\/www.flickr.com\/photos\/toby_d1\/7546938258\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc\/4.0\/\">CC BY-NC: Attribution-NonCommercial<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":78,"menu_order":3,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Reading: Selecting a Form of Business Ownership\",\"author\":\"Linda Williams and Lumen Learning\",\"organization\":\"\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"One Hour Never\",\"author\":\"Pete Zarria\",\"organization\":\"\",\"url\":\"https:\/\/www.flickr.com\/photos\/toby_d1\/7546938258\/\",\"project\":\"\",\"license\":\"cc-by-nc\",\"license_terms\":\"\"},{\"type\":\"original\",\"description\":\"Check Your Understanding\",\"author\":\"Lumen 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