Unit 7
How is a corporation terminated?
1) The board must authorize a dissolution per the corporation's bylaws. These are the rules adopted by the corporation to regulate its affairs as well as the state's dissolution statute. 2) File articles of dissolution with the state's secretary of state. If the corporation operates in more than one state, notices might have to be filed in each state in which it operates. If the corporation possesses business licenses, paperwork might also have to be filed to terminate said licenses. 3) Wrap up all affairs of the corporation, including the payment of all obligations, debts, and loans to shareholders. Money should be set aside for any claims that might occur after the corporation is dissolved. Close bank accounts, terminate leases, and contracts. File final tax forms and indicate that the corporation is closing. 4) The state in which the corporation operates may require written notice of dissolution to creditors, which allows them to present any claims against corporate assets by a certain date. Some states might allow a corporation to publish a public notice to unknown creditors to make a claim within a specific time frame. 5) After creditors are paid and the state approves dissolution, distribute any remaining assets as set forth in the corporation's bylaws or state laws. Assets must be distributed to shareholders based on the number of shares that are owned. Tax paperwork must be filed with the state that reports the distribution to shareholders.
What is the difference between a C-corporation and an S-corporation?
An S-corporation is formed and treated just like any other corporation; the only difference is in tax treatment. S-corporations are not double taxed; can choose to be taxed like a partnership or sole proprietorship...Shareholders then pay personal income tax when they receive their share of the corporate profits. They cannot have more than one hundred shareholders, all of whom must be U.S. citizens or resident aliens; they can have only one class of stock; and they cannot be members of an affiliated group of companies. These restrictions ensure that "S" tax treatment is reserved only for small businesses. S-corporations do not have to pay Social Security and Medicare tax on dividend income.
What are some of the advantages and disadvantages of a corporation (including taxation and liability)? Of an S-corporation?
C-corporations: double-taxed must keep well-maintained books & minute meetings -best suited for large companies S-corporations: -not as easy to close as it was to form it -taxed only once -not as closely scrutinized for maintenance -best suited for small companies
How would you describe Flow-Through (Pass-Through) entities?
Flow-through businesses include sole proprietorships, partnerships, and S-corporations. their owners include their allocated shares of profits in taxable income under the individual income tax, which is taxed as ordinary income up to the maximum 39.6 percent rate not double taxed...taxed once the money is received by the individual...is reported and taxed by the individual who gets to keep that money individuals may deduct business losses against current income from other sources, subject to some limitations for "passive losses."
limited partnership
It must include the name of the limited partnership (which must include the words limited partnership so the world knows there are owners of the firm who are not liable beyond their contribution) and the names and business addresses of the general partners basically, some partners are not held liable for other partner's wrongful actions or torts if they sign a certificate that states they are a "limited partner" -only held liable up to the amount of capital contribution they make -they cannot be a name partner -cannot control the firm, but can offer guidance or advice -prohibited from participating in day to day management
What is a Limited Liability Company (LLC)?
LLCs are a "hybrid" form of business organization that offer the limited liability feature of corporations but the tax benefits of partnerships. Owners of LLCs are called members. Just like a sole proprietorship, it is possible to create an LLC with only one member. LLC members can be real persons or they can be other LLCs, corporations, or partnerships. Compared to limited partnerships, LLC members can participate in day-to-day management of the business. Compared to S-corporations, LLC members can be other corporations or partnerships, are not restricted in number, and may be residents of other countries.
What are the different classes of corporate shareholders?
Shareholder rights are generally outlined in a company's articles of incorporation or bylaws. Some of these rights may include the right to obtain a dividend, but only if the board of directors approves one. They may also include the right to vote in shareholder meetings, typically held annually. It is common in large companies with thousands of shareholders for shareholders to not attend these meetings and instead cast their votes on shareholder resolutions through the use of a proxy. U.S. corporate law allows for the creation of different types, or classes, of shareholders. Shareholders in different classes may be given preferential treatment when it comes to corporate actions such as paying dividends or voting at shareholder meetings. Ford Motor Company stock. The global automaker has hundreds of thousands of shareholders, but issues two types of stock: Class A for members of the public and Class B for members of the Ford family. By proportion, Class B stock is far outnumbered by Class A stock, representing less than 10 percent of the total issued stock of the company. However, Class B stock is given 40 percent voting rights at any shareholder meeting, effectively allowing holders of Class B stock (the Ford family) to block any shareholder resolution that requires two-thirds approval to pass. In other words, by creating two classes of shareholders, the Ford family continues to have a strong and decisive voice on the future direction of the company even though it is a publicly traded company.
How would you describe the concept of double-taxation as it applies to corporations?
Since corporations are separate legal entities, taxing authorities consider them as taxable persons, just like ordinary human beings. A corporation does not have a Social Security number, but it does have an Employer Identification Numbers (EIN), which serves the same purpose of identifying the company to tax authorities. As a separate legal entity, corporations must pay federal, state, and local tax on net income (although the effective tax rate for most U.S. corporations is much lower than the top 35 percent income tax rate). That same pile of profit is then subject to tax again when it is returned to shareholders as a dividend, in the form of a dividend tax
What is "derivative litigation?"
a lawsuit brought by a shareholder on behalf of a corporation...often happens when the defendant is someone close to the company such as a director or a corporate officer
What are some of the advantages and disadvantages of a sole proprietorship (including taxation and liability)?
advantages: 1)easy to create a sole proprietorship -no creation cost or time, since there is nothing to create; entrepreneur in charge of the business simply starts doing business, charging money, and providing goods or services -may need a license (food service or liquor license) 2) autonomy: financial, set own hours, grow as slow or fast as wants to, expand or not, take vacation disadvantages: 1) only one owner; if owner dies, business dies with him/her....business assets can be given away, but the business can't be transferred 2) raising capital/money is difficult...the person who gives money can't partly own the business, but can profit-share; Many sole proprietors resort to running their personal credit cards to the maximum limit, or transferring balances between credit cards, in the early stage of their business. 3) taxation...Since there is no legal distinction between the owner and the business, all the income generated by the business is treated as ordinary personal income to the owner. personal income typically suffers the highest rate of taxation 4) liability: Creditors of the business include landscaping supply stores, employees, and outside contractors such as the company that prints business cards and maintains the business website. Lily is personally liable to pay these bills, and if she does not she can be sued for breach of contract. With unlimited liability, all it takes is one successful personal injury lawsuit, not covered by insurance or exceeding insurance limits, to wipe out years of hard work by an individual business owner.
What are some of the advantages and disadvantages of an LLC (including taxation and liability)?
an LLC can be taxed differently from year to year...as a C-corp or S-corp...depends on what the owners want it is always limited liability...the owner's personal property and assets will not be collateral against company suits...the company is treated as a separate entity...the owner can lose invested money but not personal bank accounts -less paperwork, no shareholder meetings, no annual reports -not hard to convert to a corporation disadvantages: -hard to raise money -can't sell stock
What is a sole proprietorship?
an unincorporated business with a single owner who pays personal income tax on profits earned from the business
How is a corporation formed?
formation: -To start a corporation, the corporate founders must file the articles of incorporation with the state agency charged with managing business entities -the founders must state the name of the company and whether the company is for-profit or nonprofit. The name has to be unique and distinctive, and must typically include some form of the words "Incorporated," "Company," "Corporation," or "Limited." The founders must state their identity, how long they wish the company to exist, and the company's purpose. The founders must also state how many shares the corporation will issue initially, and the par value of those shares. (Of course, the company can issue more shares in the future or buy them back from shareholders.) -Filing fees are due at the time of incorporation, and there are typically annual license fees, franchise fees and taxes, attorney fees, and fees related to maintaining minute books, corporate seals, stock certificates and registries, as well as out-of-state registration. - must register as a foreign corporation to do business out of state. Imagine filing as a foreign corporation in all fifty states
How is a sole proprietorship formed? How is it terminated?
formation: If Lily's Landscaping wants to open a bank account to accept customer payments or to pay bills, then Lily will actually own the account. When Lily's Landscaping enters into a contract promising to pay a worker to mow lawns or lay mulch, it is actually Lily that is entering into that contract. Lily can even apply for a "doing business as" or d.b.a. filing in her state, so that her business can carry on under the fictitious name "Lily's Landscaping." Note, however, that legally Lily's Landscaping is still no different from Lily herself and she will be held personally liable for any and all liabilities of her business. Any fictitious name therefore cannot have any words in it that suggest a separate entity, such as "Corp." or "Inc." termination:
How is an LLC formed? How is it terminated?
formed by filing the articles of organization with the state agency charged with chartering business entities, typically the secretary of state. Typical LLC statutes require only the name of the LLC and the contact information for the LLC's legal agent (in case someone decides to file a lawsuit against the LLC) Unlike corporations, there is no requirement for an LLC to issue stock certificates, maintain annual filings, elect a board of directors, hold shareholder meetings, appoint officers, or engage in any regular maintenance of the entity. Most states require LLCs to have the letters "LLC" or words "Limited Liability Company" in the official business name. Of course, LLCs can also file "doing business as" (d.b.a.) filings to assume another name. it is advisable for the LLC members to enter into a written LLC operating agreement. The operating agreement typically sets forth how the business will be managed and operated. It may also contain a buy/sell agreement just like a partnership agreement. The operating agreement allows members to run their LLCs any way they wish to, but it can also be a trap for the unwary. LLC law is relatively new compared to corporation law, so the absence of an operating agreement can make it very difficult to resolve disputes among members.
How is a partnership formed? How is it terminated?
formed with a contract (see image #5) Since the central feature of a general partnership is an agreement to share profits and losses, once that agreement ends, the general partnership ends with it. In a general partnership with more than two persons, the remaining partners can reconstitute the partnership if they wish, without the old partner. A common issue that arises in this situation is how to value the withdrawing partner's share of the business. Articles of partnership therefore typically include a buy/sell agreement, setting forth the agreement of the partners on how to account for a withdrawing partner's share, which the remaining partners then agree to pay to the withdrawing partner (or the spouse or heir if the partner dies).
What is the difference between a general partnership and a limited partnership?
general partnership: most general partnerships are formed formally, with partners writing down their agreement in a special type of contract known as the articles of partnership. they agree to share in the profits and losses of the business. The articles can set forth anything the partners wish to include about how the partnership will be run. The agreement itself is a contract and should follow the principles and rules spelled out in Unit 4: Contracts. there is no state involvement in creating a general partnership because there is no separation from the business and the partners—they are legally the same Every partner in the partnership is jointly and severally liable for the partnership's debts and obligations. This is a very unattractive feature of general partnerships. One partner may be completely innocent of any wrongdoing and still be liable for another partner's malpractice or bad acts.
What are some of the advantages and disadvantages of a general partnership (including taxation and liability)? Of a limited partnership?
general partnership: taxed like a sole proprietorship, both partners absorb all liability even if one not at fault limited partnership: doesn't absorb all liability; only liable for money amount contributed