SELECT A TYPE 
OF OWNERSHIP
Choose the Legal Form of Your Business
Types of Businesses

STARTING YOUR OWN BUSINESS
•	Advantages of starting your own business
•	Disadvantages of starting your own business

CHOOSE THE LEGAL FORM 
OF YOUR BUSINESS
•	Evaluate the different legal forms for a business.

TYPES OF BUSINESS ARRANGEMENTS
•	Sole proprietorship
•	Partnership
•	Corporation
•	S corporation

SOLE PROPRIETORSHIP
•	A business that is owned exclusively by one person is a sole proprietorship.
•	Sole proprietorship is the most common form of ownership in the United States (most popular).
Disadvantages
•	Investment
•	Risk
Difficult to raise capital (money) from outside sources
Creditors (people who lend money) will require collateral before granting a loan (called a secured creditor).
Collateral – something valuable, such as a car or house, used to secure a loan that a creditor can take if the loan is not repaid.
Advantages
•	Owned by 1 Person who makes all decisions
•	Very little Government control
•	Simple to run
•	Difficult to raise capital to run the business
•	Greater risk to personal assets and money

A sole proprietorship is a type of business characterized by one owner. The law recognizes no distinction between the business and the owner - they are one and the same.
This form of business offers a businessperson some advantages. It's relatively simple to organize and manage when compared to other business organizations, like a corporation. It also allows for one level of taxation. Income and losses from the business are reported on the owner's personal tax return. The owner doesn't answer to other people, such as a board of directors or shareholders. It's also easy for an owner to sell the business.
A sole proprietorship also has some disadvantages. A sole proprietor is fully liable for the debts, contracts, wrongful acts and negligent acts resulting from her business. Additionally, a sole proprietorship is available to use only if there is one owner. If two or more people want to share a business together, a different form of business organization must be used, such as a partnership, corporation or limited liability company.

PARTNERSHIP
A business owned by two or more people.
•	Shared decisions
•	Shared investment
•	Shared risk
•	Very little Government control
•	Do not like sharing responsibilities and profits
•	All partners are held legally liable
•	Can lead to disagreements and end bitterly

All partnerships are business organizations consisting of at least two owners. Partners enter into a partnership agreement, which outlines the roles, duties, rights, and responsibilities of the partners. Partnerships do not generally pay income taxes at the entity level. Instead, income and losses pass through the partnership to each partner, where they report their share of income or loss on their personal tax returns.
A general partnership offers no limited liability for its partners, and partners are personally liable for the negligent or wrongful conduct of the partnership as well as debts and contractual obligations.
In a limited partnership, the general partner manages the partnership and limited partners do not. However, while general partners have personal liability, limited partners do not. Limited liability partnerships offer either full or partial protection from personal liability for all partners. Limited liability limited partnerships are like limited partnerships except that general partners are not personally liable for the negligent or wrongful conduct of other general partners that's related to the business.

Partnership Agreement
•	Name of the Business
•	Name of the partners
•	Type and value of each partners investment
•	Managerial responsibilities of each partner
•	Accounting method to be used 
•	Rights of each partner to review and audit the accounting

•	Division of profits and losses
•	Salaries to drawn by the partners
•	Duration of partnership
•	Conditions for the dissolution of the partnership
•	Distribution of assets upon dissolving the partnership
•	Partner death

A partnership is a for-profit business established and run by two or more individuals. The individuals are known as partners and serve as co-owners of the business. Each partner is responsible for the business. Each partner shares the business profits, liabilities and losses.
Partnerships are a popular form of business. They are one of the oldest types of business and are typically easy and inexpensive to form. There are no formal or legal requirements necessary when forming a partnership. However, it's advisable for partners to execute a partnership agreement. This is a written agreement stating the terms of operation for the partnership.
A partnership agreement serves to protect the interests of each partner, as well as the business. It must be in writing and signed by all partners in order to be enforceable.
A partnership agreement should include:
•	How business decisions will be made
•	How the partners will resolve disputes
•	How the partners will divide profits
•	How the partners will cover losses
•	Who can legally bind the business through contracts
•	How ownership changes will be handled
•	How to dissolve the partnership

CORPORATION
A business that has the legal rights of a person but is independent of its owners.
A corporation is a complex business structure that is completely separate from the individuals that run the business. This means that a corporation is a legal entity separate from its shareholders, directors, officers and employees.
This separation means that the corporation is subject to double taxation. The corporation's profits are taxed. These profits become the shareholders' salaries, bonuses and dividends. The shareholders must then pay tax on that income.
The separation also means that shareholders have limited liability for the corporation's business debts, taxes, liabilities and other obligations. The shareholders generally can't be held personally liable for the financial obligations of the business.
However, shareholders can be held personally responsible for the corporation's liabilities if the shareholders fail to keep a formal legal separation between the corporation and their personal financial affairs. This is known as piercing the corporate veil.

S CORPORATION
•	An S corporation is a corporation organized under subchapter S of the Internal Revenue Code whose income is taxed as a partnership.

S-Corps Vs. C-Corps
Tom and Tim sit down with their accountant to discuss whether to form a C-corporation or an S-corporation. Their accountant explains that the only difference between a C-corporation and an S-corporation is the way the IRS treats the corporation for tax purposes.
A C-corporation is subject to double taxation as we discussed. However, if a corporation qualifies to elect S-corporation status, it is not subject to a double taxation. The income and losses of an S-corporation flow through the corporation to each shareholder, who reports his share of the loss or income on his personal tax return.
Not every corporation qualifies for S-corporation status. Generally, a corporation can only elect S-corporation status if it is a domestic corporation, has only the type of shareholders allowed under IRS regulations, has no more than 100 shareholders and has one class of stock. Some corporations, such as insurance companies, are ineligible to elect S-corporate status. Luckily for Tim and Tom, their corporation is eligible.

Nonprofit Corporation

A legal entity that makes money for reasons other than the owners’ profit such as businesses that benefit a certain cause in the community.
A non-profit business, also known as a not-for-profit organization or NPO, is a tax-exempt organization formed for religious, charitable, literary, artistic, scientific, or educational purposes. It is an incorporated business from which its shareholders or trustees do not benefit financially. Any money earned must be retained by the organization, and used for its own expenses, operations, and programs. A few well known non-profit organizations include Habitat for Humanity, Red Cross, and United Way.

Limited Liability Company (LLC)

Many companies are structured as limited liability companies, or LLCs. The LLC is a newer business structure that provides several benefits to its members. LLCs are governed by the individual states and are recognized in all states. They are organized by filing with the appropriate state government office, though state laws regarding LLCs vary. In all states, an LLC is a combination of a partnership and a corporation, though it's technically neither. An LLC allows the pass-through taxation of a partnership with the limited liability of a corporation.
Note that the owners of the company are referred to as members. An LLC can usually be started with just one member, and there's no upper limit on the number of members an LLC may have. Unlike limited partners, LLC members can fully participate in everyday business operations while still enjoying limited liability.
Many well-known companies are structured as LLCs. For example, Anheuser-Busch, Blockbuster and Westinghouse are all organized as limited liability companies. Let's take a look at how LLCs work by looking at an example. Let's say that Ben, Bob and Brandi are starting a company. They'll be opening The Book Nook, LLC.

•	provides the benefits of partnership taxation and limited personal liability  
•	not subjected to the rules of an S corporation
•	members can participate in business management
•	LLCs have restrictions

CHARACTERISTICS OF THE LEGAL FORMS OF BUSINESS
Types of Businesses
•	Manufacturing Businesses
--	converts raw materials into goods for processing
		Industrial – sold to other manufacturing businesses
		Consumer – sold to public

Example of Manufacturing business
Wholesale Business
•	Buys in large quantities from manufacturers and resells in smaller quantities to retailers (middlemen)

Wholesale business - example
Retail Business
•	Sells directly to consumers

•	A business that is:
•	Wholesale
•	Retail 	
•	  referred to as a TRADE Business

Retail business - example
Service Business
•	Sells services to consumers. (legal, medical, dry cleaning, auto repair, etc.)

Special Types of Businesses
•	Farm

Online Privacy 
When you shop online, you are asked to provide personal data, including your address, phone number, e-mail address, and credit-card information. 
 
Many online companies make no guarantee that they will use your personal information only to process your order.

Many online companies sell their customers’ personal information to other businesses that will use it to market their own products and services. 
 
Selling personal data has become big business on the Internet.

Privacy Policy 
To earn your trust, a business can voluntarily post a privacy policy on its Web site. 
How is Personal Information Secured?
*	Starbucks takes reasonable steps to maintain appropriate physical, technical and administrative security to help prevent loss, misuse, unauthorized access, disclosure or modification of personal information.

*	While we take these reasonable efforts to safeguard your personal information, no system or transmission of data over the Internet or any other public network can be guaranteed to be 100% secure.

The federal government has taken various steps to protect consumers’ rights on the Internet. 
 
The Federal Trade Commission has pursued a number of cases to enforce the promises in privacy statements.

The federal government enacted the Privacy Act of 1974 to protect individuals’ privacy when dealing with the federal government. 
 
The Privacy Act regulates the ways in which the government can obtain personal information.

Exemptions:  congressional investigations, law enforcement purposes, statistical purposes such as US Census, etc.

The federal government enacted the Electronic Communications Privacy Act of 2000 to give businesses and organizations the right to monitor e-mail and Internet use on their computers.

The Federal Trade Commission (FTC) enforces the Children’s Online Privacy Protection Act of 1998, also known as COPPA.
 
This legislation gives parents control over the information that is collected from their children online and how such information is used.

Privacy-protection groups have been organized to inform citizens of the need to protect their personal information. 

If you ever go on the Internet, you’re probably familiar with spam. 

Spam costs organizations billions of dollars in lost productivity and resources used to combat the problem. 
 
Spam can also carry viruses and other dangers that can damage computer systems.

Section 6-2 
Review
When is it permissible for a company to monitor an employee’s e-mail?

Why was the Privacy Act of 1974 created?

What is the intended goal of the Children’s Online Privacy Protection Act of 1998? 

What is spam? Why is it considered harmful? 
Section 6-3
Why It’s Important 
Computer systems are compromised daily by those seeking confidential information for illegal purposes. 

Protecting against this type of activity is crucial for all computer users. 
Section 6-3
Key Terms 
*	hacker
*	cybersquatter
*	firewall
*	Internet filter 
*	encryption
*	virus
*	worms
*	logic bomb 

Digital Protection 

E-businesses are connected to the Internet 24 hours a day, seven days a week. 
 
Maintaining the security of corporate data is one of the highest priorities of any e-commerce business.

Security of Data
 
Though a company may spend millions of dollars to secure sensitive data, a hacker may still be able to break in to the company’s computer system. 

There is no typical description of a computer hacker. 
 
Some virus attacks have been perpetuated by people who were unhappy about a job loss or who had a personal grudge against a company or organization. 
 
Another problem 
e-businesses face is cybersquatters.

The failure of e-businesses to adequately protect consumer data has led to an increase in identity theft. 
 
Identity theft is the practice of running up bills or committing crimes in someone else’s name. 

Any computer that is always connected to the Internet needs a firewall. 

The packet-level firewall --a software firewall used mostly in home settings
Application level firewall
*	A more advanced security system with a more complex set of rules, allowing traffic to pass through only after a rigorous hurdle of tests.
*	SSL allows sensitive information such as credit card numbers, social security numbers, and login credentials to be transmitted securely. 

An Internet filter limits or blocks access to certain Web sites and Internet destinations.

E-commerce sites use encryption to secure credit-card data transmitted by customers.

Pretty good privacy (PGP) is the most popular program for encrypting and decrypting e-mail messages. 
 
Both sender and recipient must have the software to encrypt and decrypt the message’s information. 

Security of Data 
Computer virus infections harm computer systems, causing a loss of productivity and sales. 

Worms usually come through e-mail messages.

Sends the worm file out to everyone listed in your email address book

Causes your computer to crash and reboot 

A logic bomb can perform actions such as reformatting a hard drive, or deleting, altering, or corrupting data.

Bastion host
*	A heavily fortified computer server that handles all incoming requests over the Internet 

What are hackers? How can they damage computer systems? 

What is encryption? Why is it necessary?

What is PGP? 

Why would a hacker want to destroy computer databases and hard drives? What type of people take part in this?

Companies’ computer databases need protection from hackers, viruses, worms, and logic bombs.

Firewalls block potential hackers from gaining access to computer systems.

Hackers can use the data they obtain to steal consumers’ credit-card numbers or even their identity.

Firewalls, Internet filters, encryption, and antivirus software are tools that can be used to protect computer systems of all sizes
from illegal acts.