Ownership Structure Types

You may operate your business or organization under any one of several organizational structures. Each type of structure has certain advantages and disadvantages that should be considered. A Sole Proprietorship is one individual or married couple in business alone. Sole proprietorship's are the most common form of business structure. This type of business is simple to form and operate, and may enjoy greater flexibility of management and fewer legal controls. However, the business owner is personally liable for all debts incurred by the business. A General Partnership is composed of two or more persons (usually not a married couple) who agree to contribute money, labor, and/or skill to a business. Each partner shares the profits, losses, and management of the business and each partner is personally and equally liable for debts of the partnership. Formal terms of the partnership are usually contained in a written partnership agreement. A Limited Partnership* is composed of one or more general partners and one or more limited partners. The general partners manage the business and share fully in its profits and losses. Limited partners share in the profits of the business, but their losses are limited to the extent of their investment. Limited partners are usually not involved in the day-to-day operations of the business. Note: Beginning in January 2010 a limited partnership may opt to become a Limited Liability Limited Partnership* by including a statement to that effect in its certificate of limited partnership. Status as a limited liability limited partnership provides general partners with a shield from liability for obligations of the limited liability limited partnership. A Limited Liability Partnership* is similar to a General Partnership except that normally a partner does not have personal liability for the negligence of another partner. This business structure is used most commonly by professionals such as accountants and lawyers. The Limited Liability Company (LLC)* An LLC is formed by one or more individuals or entities through a special written agreement. The agreement details the organization of the LLC, including: provisions for management, assignability of interests, and distribution of profits or losses. Limited liability companies are permitted to engage in any lawful, for profit business or activity other than banking or insurance. Doing business as an LLC may yield tax or financial benefits. A Nonprofit Company* A nonprofit corporation is a legal entity and is typically run to further some sort of ideal or goal, rather than in the interests of profit. Many nonprofits serve the public interest, but some do engage in private sector activities. If your nonprofit organization is or plans to fundraise from the public, it may also be required to register with the Charities Program of the Washington Secretary of State.

Sole Proprietorships
Most small businesses when they are first formed start out as sole proprietorships. Typically, these are businesses owned by one individual who is solely and entirely responsible for running the day-to-day operation of the business. Sole proprietors maintain full ownership of the business and typically own all of the assets and profits, but also assume complete and total responsibility for any liabilities and debts that the business may incur. Advantages of Sole Proprietorships:

Least expensive and easiest to form business structure 100% control and ownership Profits flow directly to personal tax return of the owner Easiest business form to quickly dissolve Sole proprietorships have unlimited liability risk and are solely responsible for any and all debt obligations incurred by the business. Both business AND personal assets are potentially at risk for creditors seeking repayment of debt obligations. Raising capital can be difficult and often requires the owner to utilize personal savings or consumer loans that are personally guaranteed. Recruiting and hiring capable employees to sole proprietorships is often difficult. Certain employee benefits are only partially deductible from business income.

Disadvantages of Sole Proprietorships:

Partnerships
A partnership is simply a shared ownership agreement among 2 or more partners of a single business enterprise. This type of ownership structure will require a partnership agreement that addresses the following issues: 1. How will partnership decisions be made? 2. How will be profits be divided among owners of the partnership? 3. How will disputes be addressed and resolved? 4. How will new partners be admitted to the partnership? 5. How will partner buy outs be executed? 6. How will the partnership be dissolved if necessary? 7. Advantages of Parternships:

Very easy to establish

Ability to raise capital is increased with multiple owners Profits flow directly to the personal tax returns of each partner Prospect of becoming a partner can be an attractive incentive for potential employees Complimentary skills of individual partners can greatly benefit overall business

Disadvantages of Partnerships:

All partners are both individually as well as jointly liable for actions of all the other partners Profits have to be shared Disagreements amongst partners with shared decision making responsibilities is common Certain employee benefits are not deductible from income Partnership can dissolve upon death or withdrawal of any of the partners

Corporations
A corporation is considered a unique legal entity that is completely separate and apart from its owners. A corporation has a life of its own and, unlike a partnership, will not dissolve when changing ownership. A corporation can incur tax, be sued, and enter into contractual obligations completely of its own accord. Shareholders are the owners of a corporation who elect a board of directors to oversee all corporate policy decisions. Advantages of a Corporation:

Limited liability for shareholders for debts, obligations or judgments levied against the corporation Can raise funds through the sale of stock Cost of benefits to employees is deductible A corporation continues to exist after any of its owners should die or were to sell their interest in the business

Disdvantages of a Corporation:

Incorporation is more costly and requires more time to establish than other forms of business Monitored by federal, state and local agencies that, in some instances, may require additional regulatory compliance and paperwork Double taxation: Income in the form of dividends that are paid out to shareholders are not deductible from income, resulting in taxation at both the corporate and individual levels