Part A (The report) Part B (The memorandum) Student Name Western Governors University Part A (The report) Determining

what type of business venture to either start or invest in can be challenging. Over the next several pages we will evaluate the various types of business organizations and at the end of this report; you should have an initial or better understanding of the different types of business forms. Sole Proprietorship: The word proprietorship can sound intimidating. It is important to remember that most things are simplified with knowledge. If your business is a sole proprietorship then you as an individual are the owner and operator of that business. This means the sole proprietor handles everything from setting up the business, which does not require an attorney to establish the business and you only have to report the name of your business if you choose to operate under a name other than your own. Then you need to register your business with the government. Liability: All liability resides with the owner of the company and even their personal property could be implicated in a situation where the company fails due to poor market conditions, business strategy or if someone is injured as the result of company products or other. The person that owns the business is liable for all aspects of the business and could be drawn into legal actions based on outcomes of liability situations. Income Taxes: The sole proprietor also reports all earnings and losses through their individuals tax report filing. Longevity or Continuity of the Organization: Although it is simple to start a sole proprietorship and it is the most common form of a business structure for small businesses. There are many points to consider based on the long term goals of the business. A sole proprietorship is limited to the capital that is being invested by the individual and the total amount of debt being carried by the business. This can limit the potential for business development. Control: A sole proprietor has total control of the company and they make all the good decisions and they must deal with decisions that did not turn out the way they intend. The other notable factor in being a sole proprietor of a business is what would happen to the business if the owner became ill or died; typically the business would stop operations based on the structure and debts would need to be resolved as well as customer commitments would need resolving based on the type of business. Profit Retention: In addition to reaping the profits from the business, the sole individual is also responsible for all debts incurred and for paying expenditures of the business. Location: In addition to federal laws that govern business a sole proprietorship is governed by the state laws in which it operates. If the proprietor opens another business location in a different state. The new state laws will govern the other business location therefore requiring the proprietor to understand and be compliant with more than one state laws based on the location of the business. (Beatty & Samuelson, 2007, pp. 755-756) General Partnership: Occurs when two or more individuals get together to operate a business with the

intention of making profit. Each individual is a general partner of the business and all profits and losses are shared between the partners. General partnership agreements can be a written or verbal agreement. Liability: A general partnership is unincorporated. Building a business or planning for growth of a business requires the investment of each business partner or co-owner. This means that all partners share in the investments, risks, profits and losses of all business decisions regardless of whether that individual personally made the business decision. Income Tax: Each person reports their profits and losses on an individual tax return; no business tax return is filed as a collective business statement. Longevity or Continuity of the Organization: The business agreement should also specifically state the provisions to provide direction for the general partnership if one of the partners loses their life or does not want to be in the partnership. Control: Smart general partnership owners should outline the details of the business agreement, but nothing formal is required for this type of business formation. Each person can make decisions on behalf of the business independently, meaning that one partner can speak on the behalf of other partners. Each partner does not have to be present or even be consulted on business decisions. The way business decisions and strategic develop plans are handled is something that each general partnership should determine as they develop and grow their business relationships. Profit Retention: It is in the best interest of the partners to outline how the profits and losses are to be handled depending on the number of partners in the business. All profits and losses are shared by the partners and each person in the general partnership is responsible for reporting their profits and losses on their individual tax returns. Location: General partnerships have to abide by the same state laws in which their business operates. (Beatty & Samuelson, 2007, pp. 756-758) Limited Partnership: Is formed between general partners and then individuals that might only be seeking investment opportunities, therefore making them a limited partner. Therefore a limited partnership is both general and limited partners. Liability: One advantage of a limited partnership is the way liability is spread across the limited partnership agreement. The personal property or assets of a limited partner is safe in the agreement and their risk is only limited to the amount of investment they share in the limited partnership. General partners do have personal liability in the partnership and they also manage the business. Income Taxes: A limited partnership is not a taxable organization therefore a limited partner is only taxed once. Longevity or Continuity of the Organization: Limited partnership agreements outline the ability of a limited partner to share or pass their role in the partnership to other individuals. A limited partner cannot give their share of the business to another individual. A limited partnership will continue to exist as a business even when limited partners leave the partnership. Control: The process to form a limited partnership can seem casual to some, but limited partners have to file a certificate of limited partnership with their Secretary of State. The overall management of a limited partnership resides with the general partner. A limited partner cannot manage the partnership and allows a mechanism for multiple limited partners in a partnership.

 Profit Retention: All profits of a limited partnership are shared or passed back to the members of the partnership. Location: State regulations apply to businesses based on the location; therefore if multiple businesses exist in the partnership then each business is governed by the laws of that state or city. (Beatty & Samuelson, 2007, pp. 760-762) C-Corporation: A closed company is a privately held company and is not publicly traded on the open market. Investors or shareholders hold interest in the company. It is more expensive to start a ccorporation and requires legal assistance to ensure the appropriate forms are filed at the federal and state levels. Liability: Personal liability protection is an advantage for shareholders. They are not personally linked to the debts of the company. The Company typically outlines expected outcomes based on business behaviors for key business decisions and these agreements can protect the interests of minority shareholders. Income Taxes: A closed company is taxed as a corporation and therefore pays a higher tax rate. Taxation occurs at the company level and then shareholders have to pay taxes on corporation dividends. Closed corporations must file a company tax return. Federal guidelines determine tax status. Longevity or Continuity of the organization: Closed corporations will typically outline the process to manage dispute resolution including the rights for a shareholder to ask for the corporation to be dissolved at any time based on events or other activities. The agreement will also outline the process for legal court to oversee claims for the company to be dissolved if shareholders cannot come to agreement to dissolve the company. A closed corporation can continue to operate and remain in business for many years despite shareholders leaving the company either by choice or loss of life. Control: Shareholders typically work closely together when making key business decisions based on agreements or by-laws of the corporation. C-corporations have the control to manage decision making by forming boards, electing officers or determine shareholder meetings, nevertheless they are not required to perform all of these business management characteristics. A corporation does have to hold an annual meeting and keep official record of that meeting. Meeting minutes have to be kept forever. Profit Retention: Shareholders of the company share in the profits through the distribution of dividends. Location: There are also annual state filings that must be maintained and each state requirements could differ based on the location of the corporation. C-corporations must adhere to federal and state guidelines and expansion into other states requires legal filings in that state to operate and maintain a business presence. (Beatty & Samuelson, 2007, pp. 762-764) S-Corporation: The S-Corporation or otherwise known as S corps is a very popular method of starting a corporation. There are some key characteristics of an S corp that must be adhered too. These characteristics include limiting shareholder membership to 75 members. Shareholders cannot be a partnership or corporation, but can include individuals and estates to mention a few. Shareholders of an S-Corporation must be a legal resident of the United States and all shareholders must agree to make the company an S-Corporation. Liability: Shareholders have limited liability and is similar to that of a corporation. This means the

shareholder cannot be sued for the debts of the company unless they are an officer and the corporate veil has been pierced. Income Taxes: The tax status structure is similar to that of a partnership. This means the Scorporation is not a taxable entity. This structure avoids the excessive taxation or double taxing which is typical of a C-corporation. Because the shareholder of an S corporation receives profits of the business and losses of the business directly, they will record these outcomes on their individual tax return filings. Longevity or Continuity of the Organization: Some companies that start out as an S corp typically convert to a regular corporation as they begin to grow or become burden by all of the rules around the status of an S corp. Because an S company operates very similar to a regular company, there are typically provisions in the agreement of the company on how to handle business disputes and transferring shareholder ownership in the event a shareholder dies or wants to dissolve the business. Control: The management of an S corporate if very similar to a regular corporation and the governance set forth in the agreement of the company determines overall daily management, board of directors, compliance, etc. Profit Retention: Shareholders receive all profits and losses of the company. Location: An S corp has to maintain and comply with the same state filings and reporting structures as outlined by federal and the state law governing the S-corp. (Beatty & Samuelson, 2007, pp. 762-765) Limited Liability Company: Identified with letters LLC can include various types of members including a corporation, partnership, or multiples of each. There are many laws that have to be understood at the federal level as well as at the state level when forming an LLC. The actual task of forming an LLC is simply the actions of creating a charter and operating agreement for the business. The tax status structure of a partnership and the limited liability of a corporation make an LLC a favorable choice for business entrepreneurs. Liability: Members have personal liability protection and are not liable for the debts of the LLC. Their individual risks are limited to the investments made in the LLC. Income Taxes: Taxation is similar to a partnership and members are not double taxed like a corporation. If a LLC decides to become a publicly traded entity they take on the tax structure of a corporation verses a partnership. Longevity or Continuity of the Organization: The longevity of an LLC depends on the operating agreement. Most LLCs will continue to operate if a member dies, becomes bankrupt or wants out of the arrangement. There is typically language in the operating agreement to provide guidelines or structure around how to handle the exiting members interest and in some situations, the remaining members must unanimously vote on the decision. Control: Members of the LLC operating agreement should agree on the contents within the agreement, but most state laws have default agreements that will be invoked if a LLC does not come to terms with their own operating agreement. Profit Retention: All earnings or income is shared with individual members. Location: The LLCs charter must be filed with the governing Secretary of State. There are not a lot of standard laws that govern LLCs therefore it is critical that members consult legal support to ensure they understand and follow state guidelines. (Beatty & Samuelson, 2007, pp. 765-767)

MEMORANDUM TO: Owner FROM: Student Name RE: Business Organization Recommendation DATE: January 23, 2011 __________________________________________________________________________ After reviewing the current company sole proprietorship structure and better understanding the owners overall business and personal concerns related to personal and company liability, taxation, business expansion strategies, investment needs and the desire to create a company in which family members could maintain control of the corporation. The recommendation is to form a limited liability company (LLC). When the owner converts the company from a sole proprietorship into a LLC, there are several benefits and risks to learn and manage through the new LLC form. The owner would be able to create a charter that supports the overall missions and values of the corporation. In addition the new LLCs operating agreement could define the transfer of interests to ensure the control of the company remains with the family members that choose to participate in the LLC in the event the current owner becomes decease or retires. The personal liability concerns related to employees becoming injured on the job or injuring others in the act of performing their job duties will be reduced and/or eliminated because the members of the LLC would not be personally liable for employee actions while performing their job. Although the corporation might experience liability risks, the members of the LLC would not have personal liability and their personal asset should be safe from legal action if a suit were filed against them. The tax status of the corporation will be the same as a partnership and the company will not experience the double taxation of that of a regular corporation. Lower taxation means more income to the members of the LLC. This tax status will remain in effect as long as local state laws do not change based on locations of future manufacturing plants as part of the company business development plan. The other factor that would change the tax status is if the company elected to become a publicly traded entity. Then the taxation would be the same as a corporation. This is something the owner will need to be aware of as the business continues to grow. Legal counsel will need to help determine state laws and documentation requirements of the LLC.

An LLC business form will allow for the members of the new corporation to include other corporations or partnerships that could bring the necessary human, materials, equipment and supply resources based on investments to jump start the new company. This strategy would be an effective means to balance the capital needs for the expansion of the company and also share the investment liability with other members of the LLC. Because you have a concern about longevity and keeping family ties to the business. This business structure will allow you to strategically place various family members in key leadership roles across the primary or outlier companies as the business grows to ensure the interest of maintaining family leadership for the future is achieved in many levels of the company. You are probably already thinking about the future of the company structure beyond this recommendation. After the business model is stable and you are ready to take the company to the next level of a corporation, there are many options that will allow the business to scale to the growing market climate. Depending on whether the company needs more capital, demands for services is forcing the company to scale or the leadership of the company is ready to become a publically traded company on the stock market. There are options that we can discuss, but for now, a Limited Liability Company, LLC, is the best recommendation. (Beatty & Samuelson, 2007, pp. 755-767) For additional information or if you have questions or concerns about this recommendation, please feel free to contact:

References Beatty, J. F., & Samuelson, S. S. (2007). Business law and the legal environment (pp. 755-767). Thomson West.