Business Structures

Business Structures

Introduction

Far Horizon's owner is contemplating revising the way the business is structured. Currently the business is structure as a Sole Proprietor. Several alternate business structures may provide additional benefits for Far Horizon. One of Far Horizon's goals is to raise additional capital. The potential investors have required a forty-nine percent ownership of the business. In order for the current owner of Far Horizon to retain operating control of the business and to raise capital, four types of business organization merit investigation. Two types of corporations "C" and "S" would provide structure for gaining capital but have substantial documentation requirements. Two types of Partnerships, General and Limited provide the ability to maintain control of the operations of the business but can subject the owner to significant liability. Each of the four options is described in more detail below.

C-Corporation

In a C-Corporation, the shareholders have the protection of limited liability. The Shareholders liability cannot be greater than the amount they have invested in the business.

Dividends from a C-Corporations are taxed twice, once at the corporate level and again on the individual income taxes of the shareholders receiving the dividends.

C Corporations have to ability to change ownership of stocks and add new shareholders relatively easily. C-Corporations can have unlimited numbers of shareholders and different classes of stock. A corporation is a separate legal entity from its shareholders. A corporation has perpetual life, meaning that the corporation will continue to exist regardless of the status of the shareholders of the corporation.

With C-Corporations, the shareholders are separate from management. Shareholders do not take on management responsibilities, and management does not have owner responsibilities.

S-Corporation

In an S-Corporation, the shareholders have the protection of limited liability. The Shareholders liability cannot be greater than the amount they have invested in the business. S-Corporations do not pay taxes on profits and losses at the corporate level. Profits and losses distributed to the shareholders are reported on their individual income taxes.

S Corporations have to ability to change ownership of stocks and add new shareholders relatively easily. An S-Corporation is limited to 100 shareholders. A corporation is a separate legal entity from its shareholders. A corporation has perpetual life, meaning that the corporation will continue to exist regardless of the life or death of the shareholders of the corporation.

With an S-Corporation, shareholders actively engage in management decisions and the daily operations of the business.

Corporations are very involved to create. Articles of Incorporation and Bylaws are required. Corporations must obtain an Employee Identification Number from the IRS and provide it to the bank to set up a business account. Corporations have various State and federal filings that are required. Corporations must have at least one shareholder.

General Partnership

In a General Partnership, all of the partners share equally in the responsibility for the liability of the partnership.

Partnerships do not pay taxes on profits and losses at the corporate level. Profits and losses distributed to shareholders are reported on their individual income taxes.

If fifty percent or more of a partnership interest changes hands, the partnership must be dissolved and reformed.

Control of the operations of the business structured as a partnership is established in the Partnership Agreement. In a General Partnership, all partners can share equally in the running of the business.

Limited