Other Types of Business Owners
While C-corporations are the most common type of corporate ownership, there are other forms that you should be aware of. Read this section to learn about S-corporation, Limited Liability Companies, cooperatives, and non-profit organizations. Completing the exercise at the end of the section will give you a table to use as you prepare for the final exam.
Hybrids: S-Corporations and Limited-Liability Companies
Attractive and Unattractive Features of Sole Proprietorships and Partnerships
Now let's turn to the other two types of business ownership: sole proprietorship and partnership. What feature of these forms of business organization do owners find most attractive? The most attractive feature is that there is no "double taxation" with proprietorships and partnerships. Proprietorships and partnerships do not pay taxes on profits at the business level. The only taxes paid are at the personal level - this occurs when proprietors and partners pay taxes on their share of their company's income. Here are two examples (one for a sole proprietorship and one for a partnership). First, let's say you're a sole proprietor and your business earns $20,000 this year. The sole proprietorship pays no taxes at the "business" level. You pay taxes on the $20,000 earnings on your personal tax return. Second, let's say you're a partner in a three-partner firm (in which each partner receives one-third of the partnership income). The firm earns $90,000 this year. It pays no taxes at the partnership level. Each partner, including you, pays taxes on one-third of the earnings, or $30,000 each. Notice that in both cases, there is no "double taxation". Taxes were paid on the company earnings only once - at the personal level. So the total tax burden is less with sole proprietorships and partnerships than it is with corporations.
What feature of sole proprietorships and partnerships do business owners find least attractive? And the answer is…unlimited liability. This feature holds a business owner personally liable for all debts of his or her company. If you're a sole proprietorship and the debts of your business exceed its assets, creditors can seize your personal assets to cover the proprietorship's outstanding business debt. For example, if your business is sued for $500,000 and it does not have enough money to cover its legal obligation, the injured party can seize your personal assets (cash, property, etc). to cover the outstanding debt. Unlimited liability is even riskier in the case of a partnership. Each partner is personally liable not only for his or her own actions but also for the actions of all the partners. If, through mismanagement by one of your partners, the partnership is forced into bankruptcy, the creditors can go after you for all outstanding debts of the partnership.