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Types of Businesses

by: Kaylee Olson

Types of Businesses GEN BUS 311

Kaylee Olson
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Notes from week 2 - types of businesses
Fundamentals of Management and Marketing for Non-Business Majors
Class Notes




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This 3 page Class Notes was uploaded by Kaylee Olson on Monday September 19, 2016. The Class Notes belongs to GEN BUS 311 at University of Wisconsin - Madison taught by in Fall 2016. Since its upload, it has received 4 views. For similar materials see Fundamentals of Management and Marketing for Non-Business Majors in Business at University of Wisconsin - Madison.


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Date Created: 09/19/16
Sole Proprietorship Advantages  Single owner, easy to start, little regulation, most common form (71% all business in  America) but small  Owner: residual claimant: owner who has the lowest priority claim on the cash flows of  the firm. Need to pay: o Suppliers o Taxes o Creditor’s claims  Owner is at the end of the food chain  High risk, but could have large cash payout  Tax advantage: SP business income is taxed as if it’s personal income o 39.6% highest rate Sole Proprietorship Disadvantages  Unlimited Liability o Could lose your house  Difficult to sell o Asymmetric information: one party has superior information compared to another o What is the firm worth? How do you know it’s true?  Difficult to transfer ownership o Illiquidity: the state of an asset that cannot be easily sold without a substantial loss in the value o Have to find someone with similar skills to take over business  Limited access to capital  Lacking specialization  Mortality of the owner Partnerships Advantages  Two or more owners  Easy to start  Taxed at personal rate (39.6%)  Gains from specialization  Raise more capital  Partnerships Disadvantages  Unlimited liability o Creditors can go after every partner individually (Even if someone invests only  10%) o Agreements can be a handshake or simply verbal  If 90% owner dies, 10% owner can take over  Transferring ownership is extremely difficult o Need a well written partnership agreement Corporation Advantages  Fictional person o Unlimited life  Limited liability o Initial investment can be lost but no more    Ability to raise lots of capital Shares of stock: sell ownership claim Increased liquidity due to separate owners & managers  Specialization due to separation of owners & managers Corporation Disadvantages  If business is really good, they pay more taxes o Corporate Income tax: 35% o Dividend goes to flesh­and­blood owners, which is also taxed (Double taxation) Increased regulation, more paperwork Sole prop and partnerships do not have to generate quarterly audited financial statements o Expensive Principle agent problem Publicly vs privately held Another Option: Limited Liability Company (LLC) o Taxed at personal rate, but have limited liability o Requires less than 100 owners S Corporation Advantages   Avoid double taxation  Limited Liability  Profits and losses can pass through to your personal tax return o The business itself is not taxed  Shareholder must be paid fair market value or the IRS might reclassify any additional  corporate earnings as “wages”  Independent life  o Shareholders can leave the company and the S Corp can continue doing business S Corporation Disadvantages   Stricter operational processes o Scheduled director and shareholder meetings  Minutes from those meetings o Adoption and updates to by­laws o Stock transfers o Records maintenance  Shareholder compensation requirements o Low salary/high distribution combinations o Could pay a higher employment tax because of an audit LLC Advantages  Limited liability  Less recordkeeping o Less registration paperwork than S Corp  Sharing of profits o Members distribute profits as they see fit LLC Disadvantages  Limited life  o Remaining members can decide if they want to start a new LLC or part ways o But you can include provisions in your operating agreement to prolong the life of  the LLC if a member decides to leave  Self­employment taxes o Medicare & Social Security  Entire net income What Does a Board of Directors Do?  “You can be fired by your own company”  Directors represent the interests of the shareholders o Provide advice based on their experiences o Subject matter experts  CEO’s job to take advice if they see fit  o They have the ability to fire the CEO  They have legal rights and approve stock grants for employees


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