Unit 1: Building Blocks - Orthelious/pdcp_2020 GitHub Wiki

Building Blocks

Professional Development for Creative Practices | Winter 2020

A primer on how to form a business and understanding your business relationships with others.

For every business in operation, there are two essential questions that must be answered: who are you and how do you work with others?

These questions form the basis on which we will build the rest of the course. That's why this unit is titled "Building Blocks."

We'll start with a primer on basic business structures, from sole proprietorships to corporations—examining the benefits and drawbacks of each—to answer the questions of "Who?".

Chapters

  1. Business Structures and Models

1. Business Structures and Models

Two topics in this chapter:

A. Introduction to business structures and models
B. Common business structures

A. Introduction to Business Structures and Models

Understanding exactly who you are conducting business with is one of the first steps to empowering yourself in everyday business interactions.

From collaborators, to customers, to competitors—there are different strategies and methodologies for success with each. So we need to know who we are dealing with.

To start making sense of things, we need to answer two initial questions:

  • What kind of business are we dealing with?
  • What does the business do?

Understanding a business's structure and model can help answer these questions.

A1 — Business Structures

Understanding how a business is structured helps understand what kind of business we are dealing with.

What is a business structure?

  • The framework and/or legal establishment of an entity for conducting business.

  • A business structure defines what the business is, but not necessarily what the business does.

  • A business structure addresses questions like “Who owns the company?”, “How can I raise money?”, "Who is in control?" and “What taxes do I owe?”

  • You will also hear the term business structure used interchangeably with “Business Entities,” “Organizational Structures,” “Operating Models,” “Business Licenses,“ and ”Business Types.” They all, generally, mean the same thing as a business structure.

What do you think are the business structures of the following creative entities?

  • A fine art gallery?
  • A metropolitan museum?
  • A Broadway theater?
  • A 10-person design firm?
  • A music producer?
  • A studio artist?

A2 — Business Models

In its simplest form, a good business model tells us what a business's primary purpose and activities are. We're going to cover business models, and business plans, in-depth in Unit 7 — Business Models.

But briefly...

What is a business model?

Let's look at those creative entities again. What do you think their business models are?

  • A fine art gallery?
  • A metropolitan museum?
  • A Broadway theater?
  • A 10-person design firm?
  • A music producer?
  • A studio artist?

B. Common Business Structures

Time to get down to business! (groan. I'll see myself out).

There are literally hundreds of different combinations of business structures. Too many to delve into in this course. So, we're going to just cover the 6 basic structures that are not only the most common—but are also the structures you will most often interact with creative practices

We're going to cover the following common business structures in this chapter:

  1. Sole Proprietorships
  2. Partnerships — General and Limited
  3. Corporations — LLC, C Corp, and Non-Profit

Additionally, at the end of the chapter, I've included some information on less common business types and some additional resources.

...but first

// HOW TO TELL BUSINESS STRUCTURES APART

We're going to focus on 5 different factors that every business structure has with FORCE.
(I wanted a handy anagram, so please keep in mind the following is not in order of importance.)

  • [F]inance and taxes — What options does a business have to raise and/or make money? What is the tax burden for the owner(s)?

  • [O]wnership — Who owns this thing? What powers and responsibilities does ownership come with?

  • [R]isk — Who's assets are at risk? Who is personally responsible?

  • [C]ontrol — How are decisions made?

  • [E]stablishment — What is the minimum requirement for forming this business structure?

Wait... the FORCE! I feel a metaphor coming on...

Star Wars Intro Card

B1 — SOLE PROPRIETORSHIPS


We open on our hero Finn, alone in the desert. Finally free of the grips of the First Order, he can make his own decisions! But on his own, he also has the most risk...

What is a Sole Proprietorship?

A Sole Proprietorship is one individual or married couple in business alone. Sole proprietorships 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, fewer legal controls, and fewer taxes. However, the business owner is personally liable for all debts incurred by the business. source(https://bls.dor.wa.gov/ownershipstructures.aspx)

Sole Proprietorships are the default starting point. You engage in some business? Boom! You are automatically a sole proprietorship. You have complete control over your business and the profits, but you also have all of the risks and losses.

Let's take a look at a Sole Proprietor's FORCE:

Finances and taxes

  • Profits are taxed once. It’s all personal income tax.
  • Profits belong entirely to the owner. But so do the debts...
  • Ability to raise funds is limited to personal capital, personal gifts, and loans.
  • Can you sell part of your business? No. Legally, a Sole Proprietorship can only have one owner. If you want additional owners, you must incorporate.

Ownership

  • Singular owner. You're the boss, buddy.
  • No legal distinction between business and the owner.
  • You cannot transfer ownership.

Risk

  • Sole Proprietorships carry the largest level of risk. Because there is no seperation between the business and the owner, your business assets and personal assets are the same.
  • Unlimited Liability. You and you alone are responsible if anything happens.

Control

  • Singular owner. You're the boss, buddy.

Establishment

  • While there are not necessarily mandatory requirements to start a Sole Proprietorship, there are best practices like having a business banking account and sometimes you will need industry-specific licenses or permits.

Which of our creative entities do you think could be a Sole Proprietorship? What are some of the advantages? Disadvantages?

  • A fine art gallery?
  • A metropolitan museum?
  • A Broadway theater?
  • A 10-person design firm?
  • A music producer?
  • A studio artist?

B2 — PARTNERSHIPS

Partnerships are just what they sound like: two or more partners. Sharing the burden, sharing the success and sharing the losses. This is the second easiest business structures to form and provides for a great deal of control, but like sole proprietorships comes with a decent amount of risk.

We're going to cover two types of partnerships: General Partnerships and Limited partnerships.

// GENERAL PARTNERSHIPS


Oh, look! Our hero Finn has met our other hero Rey! They join forces, making their liklihood of success greater, but also sharing the risk...

What is a General Partnership?

A General Partnership is composed of 2 or more persons (usually not a married couple) who agree to contribute money, labor, 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. source(https://bls.dor.wa.gov/ownershipstructures.aspx)

Finances and taxes

  • Profits pass directly to the partners
  • Each partner is responsible for their own personal taxes
  • Like Sole Proprietorships, ability to raise funds is limited to personal capital, personal gifts and loans.

Ownership

  • Requires two or more people
  • Ownership is automatically a 50/50 split unless spelled out in a partnership agreement.
  • Ownership could transfer to new partners (depending on the partnership agreement.)

Risk

  • Unlimited personal liability for partners.
  • Partners are liable for each other's actions!

Control

  • The partners are in charge.
  • Control is automatically a 50/50 split unless spelled out in a partnership agreement.
  • There are laws (vary state to state) that govern what a partner is able to do on behalf of the partnership.

Establishment

  • Like a Sole Proprietorship, there are not necessarily mandatory requirements to start.
  • The absolute best practice is to have a written partnership agreement in place! Makes the rules clear!

// LIMITED PARTNERSHIPS


Wait, who's that little ball droid?


Why, it's BB-8. It's doing his best to help out, but really it's just following these two because they can fly a ship and get it off-world. Sure, it has something to contribute but really it's a fairly limited partner.

What is a Limited Partnership?

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. source(https://bls.dor.wa.gov/ownershipstructures.aspx)

Finances and taxes

  • Profits are distributed to partners according to a partnership agreement.
  • Taxed once. Taxes pass to the individual.
  • General Partners pay self-employment tax (more on this in the Agency and Employment chapters)

Ownership

  • Requires two or more people.
  • There are two types of partners: General Partners (Major) and Limited Partners (Minor).
  • Ownership and transfers are defined by the partnership agreement(s).

Risk

  • Unlimited personal liability for General Partners.
  • Limited liability for the limited partners. Limited partners may have a limited say in what the business does, but they likewise have limited risk.

Control

  • Most often the General Partners are in charge, but Limited Partners do have some say in business operations. A partnership agreement would spell this out.
  • There are laws (vary state to state) governing what a General and/or Limited partner can do.

Establishment

  • Adding a limited partnership has to be done through a written partnership agreement to outline who is a General Partner and who is a Limited Partner.

Which of our creative entities do you think could work as a partnership? Would they have just general partners? Limited partners?

  • A fine art gallery?
  • A metropolitan museum?
  • A Broadway theater?
  • A 10-person design firm?
  • A music producer?
  • A studio artist?

B3 — CORPORATIONS

Cue ominious music...

Whereas sole proprietorships and partnerships can be formed instantaneously with a simple agreement, we're now crossing into the world of incorporation. The rest of the business structures we're going to cover have very specific filing and formation requirements.

What is a Corporation?

A Corporation is a more complex business structure. A corporation has certain rights, privileges, and liabilities beyond those of an individual. Doing business as a corporation may yield tax or financial benefits, but these can be offset by other considerations, such as increased licensing fees or decreased personal control. Corporations may be formed for-profit or nonprofit purposes. source(https://bls.dor.wa.gov/ownershipstructures.aspx)

To incorporate is to create a separate entity that could exist independent of the people who originally founded it. (For example: What happened to KFC after Colonel Sanders died?)

It's all about creating a layer of separation and protection.

Incorporation is a legal process that must be done through the government. Unlike a Sole Proprietorship or Partnership, you cannot create an incorporation on your own. Articles of Incorporation must be filed.

We're going to cover the following types of corporate business structures:

// LLC (LIMITED LIABILITY COMPANY)

Oh Han... you may play it like a handsome rogue who doesn't need anyone, but you're constantly adding people your crew! The crew of the Millenium Falcon is more than just its captain. Together they can share in the burden, the risk, the adventure! It could be a crew of one or a crew of many!

What is a Limited Liability Company?

A Limited Liability Company (LLC) is formed by 1 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 and losses. LLCs are permitted to engage in any lawful, for-profit business or activity other than banking or insurance. source(https://bls.dor.wa.gov/ownershipstructures.aspx)

Finances and taxes

  • Profits pass to members according to the operating agreement.
  • Profits are taxed once as personal income tax. You'll hear this referred to as pass-through income.
  • In addition to loans, personal gifts and personal capital, LLCs can sell percentages of ownership in the company (Please note: this is not the same as stock!). Think of the show Shark Tank—the investors are buying an entire portion of the company that is pitching a product.

Ownership

  • One or more people can own. Percentages of ownership spelled out at incorporation.
  • Transfer of ownership to others is possible.

Risk

  • LIMITED (finally). With an LLC, personal assets are considered separate from business assets. (i.e. if you get sued, they can't go after your personal assets like your house or car)
  • LLCs are popular business structures because of the protections and flexibility they offer.

Control

  • Decisions can be made by owners or by appointed members (employees, agents, etc).
  • Decision-making and management would be best defined by an Operating Agreement.

Establishment

  • You must file Articles of Incorporation with the state government in which your business resides. The rules are different state to state.

// C CORPORATIONS


Ok, this one should be obvious.

What is a C Corporation?

A corporation, sometimes called a C corp, is a legal entity that's separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable. source(https://www.sba.gov/business-guide/launch-your-business/choose-business-structure)

Finances and taxes

  • Profits are taxed TWICE. The corporation pays corporate taxes. Individual owners pay personal income taxes. This is the major drawback of a C Corp.
  • In addition to loans, startup capital and investments, C Corporations can sell limited ownerships in the company through the issuance of common stock.

Ownership

  • One or more people can own. Initial percentages of ownership spelled out at incorporation.
  • Transfer of ownership to others is possible.
  • Additional, limited owners can be added through the selling of common stock.

Risk

  • Personal assets are considered separate from business assets.
  • C Corp’s are popular to investors because of these protections.
  • Risk is the most limited! C Corp's are literally considered separate entities. This concept is called Corporate Personhood:

Corporate personhood is the legal notion that a corporation, separately from its associated human beings (like owners, managers, or employees), has at least some of the legal rights and responsibilities enjoyed by natural persons. Source(https://en.wikipedia.org/wiki/Corporate_personhood)

Control

  • Board members and appointed officers have control of the company. This is spelled out in the Articles of Incorporation and Corporate Bylaws.
  • Depending on the industry, there are tons of state and federal laws and regulations to follow.

Establishment

  • You must file Articles of Incorporation with the state government in which your business resides. The rules are different state to state.
  • Additionally, you must create Corporate Bylaws (rules of the corporation). While not required, it is nearly impossible to run a C Corp without bylaws.

// NON-PROFIT CORPORATIONS



It's the Resistance! Those scrappy do-gooders. They're not in it for the money, they are driven by a mission for good.

What is a Non-Profit Corporation

Nonprofit corporations are organized to do charity, education, religious, literary, or scientific work. Because their work benefits the public, nonprofits can receive tax-exempt status, meaning they don't pay state or federal taxes income taxes on any profits it makes. source(https://www.sba.gov/business-guide/launch-your-business/choose-business-structure)

Finances and taxes

  • Because of their charitable mission, non-profits do not pay income tax.
  • Additionally, when someone makes a charitable gift to a non-profit it is considered a gift, not an investment. Gifts do no grant ownership the way that an investment or stock purchase does.
  • There are no profits as well! All profits must go back into the organization to pay for programs and salaries, etc.

Ownership

  • Technically not owned in the traditional sense. Non-profits are considered public charities and are intended to have lives beyond their founders.

This is Important to remember. When you form a non-profit you are surrendering ownership to a corporate entity.

Risk

  • Personal assets are considered separate from business assets.
  • Very low personal risk! This is why many creative practices from non-profits (though, we will discuss why this is not always the best strategy).

Control

  • One or more appointed officers + a board of directors for oversight.
  • All non-profits have a board. They are responsible for general governance of the organization.
  • There are a ton of rules and regulations to follow.

Establishment

  • You need a minimum of three board members to form a nonprofit!
  • File Articles of Incorporation + Bylaws with the state government.
  • Plus additional filing with the Internal Revenue Service.

One last time, let's look at our creative entities. Where could a nonprofit corporate structure work?

  • A fine art gallery?
  • A metropolitan museum?
  • A Broadway theater?
  • A 10-person design firm?
  • A music producer?
  • A studio artist?

B4 — BONUS STRUCTURES

The business structures covered above are far and away the most common in US business, but there are many more structures available (though not all are recognized in all 50 states).

Here are just a few:

For the purposes of this course (and my sanity), we're going to stick to only the most common structures.

B5 — SOME RESOURCES

Here are some sites that I have found easy to comprehend and that further define the concepts from this unit.