BLAW Chapter 21: forms of business organization

chain-style business operation

-Franchisor helps franchisee establish a business (using franchisor's business name, and franchisor's standard "methods and practices") (for example, Taco Bell)

distributorship

-Franchisor licenses franchisee to sell franchisor's product in specific area (for example: Budweiser distributorships/note regulatory support for tiered sales of alchohol)

manufacturing arrangement

-Franchisor provides franchisee with technical knowledge to manufacture franchisor's product (for example: Coca-Cola, which sells the syrup to its local manufacturing companies to produce and distribute the product)

Advantages and Disadvantages of Sole Proprietorships

Advantages -Ease of creation ("start-up") -Owner has total managerial control -Owner retains profits Disadvantages -Personal liability for all business debts/obligation/losses/liabilities -Funding limited to personal funds and loans

Advantages and Disadvantages of Partnerships

Advantages -Ease of creation ("start-up") -Partnership income is partner income (called "flow through" taxation) -Business losses qualify for tax deduction and flow through to partners -Few formalities Disadvantages -Personal liability for all business debts/obligations/losses/liabilities, including those incurred by other partners on behalf of partnership -Duration is generally more limited

Advantages and Disadvantages of Limited Partnerships

Advantages -Liability of limited partner(s) limited to investment -Limited partners do not participate in management, and therefore, this may be attractive for certain types of ventures -Business losses qualify for tax deduction and flow through to partners Disadvantages -General partners have personal liability for all business debts/obligations/losses/liabilities, including those incurred by other partners on behalf of partnership - Difficult to remove general partners

Advantages and Disadvantages of Limited Liability Partnerships

Advantages -Liability of limited partner(s) limited to partnership assets/investment except for his or her own personal liability/malpractice -Business losses qualify for tax deduction and flow through to partners Disadvantages - Provides slightly less liability protection than other similar forms of organizations (such as corporation and LLC) - Formality limitations, such as prohibitions against certain persons or organizations holding partnership interests in an LLP

Advantages and Disadvantages of Limited Liability Company

Advantages -Limited liability for members/managers - Flexible tax treatment - Flexible management structure with few requires formalities -Potential for perpetual duration Disadvantages -May be limits to ability to raise capital through this structure (when compared to corporations) as some investors may not desire membership status

Advantages and Disadvantages of Corporation

Advantages -Limited liability for shareholders -Ease of raising capital by issuing (selling) stock - Generally free transferability of ownership - Can have perpetual duration Disadvantages -"Double-taxation" as a "C Corporation" if don't qualify for and elect "S Corporation" status -Formalities required in establishing and maintaining corporate existence (the corporate veil can be pierced)

franchise

Agreement between "franchisor" (owner of trade name/trademark) and "franchisee" (person who, by specific terms of agreement, sells goods/services under trade name/trademark)

coporation

Definition: A legal entity formed by issuing stock to investors (shareholders) Owners' are called "shareholders" and have liability limited to amount of investment in corporation Activities of the corporation are managed by officers and directors Profits taxed as income to corporation, plus income to owners/shareholders ("double-taxation") "S" Corporations can avoid double-taxation

*limited liability company*

Definition: An unincorporated business organization with limited liability of a corporation, yet it can be taxed like partnership *Owners are called "members"* (generally no limitation on number or type of owners permitted in LLC) Activities of LLC managed by either "members" or "managers" -Liability of members for business liabilities is limited to loss of capital contribution Can choose to be taxed as a sole proprietorship (in some instances), partnership (tax results flow through to members), or corporation (referred to as "check the box" rules)

limited liability partnership

Definition: Partnership in which all partners assume liability for his or her own actions and for any partner's professional malpractice but then, only to the extent of the partnership's assets and/or capital contributions Liability of limited partner(s) limited to partnership assets/investment except for his or her own personal liability/malpractice (i.e. if one LLP partner is guilty of malpractice, other partners' personal assets cannot be seized) Each partner pays taxes on his/her share of business income

s coporations

Definition: Special type of corporation that is permitted to be taxed like a partnership All corporations begin as a "C" Corporation, but can elect under federal law to be treated as an "S" Corporation No more than one hundred shareholders Shareholders must report income on their personal income tax forms *Note that the corporation itself is formed under state law but the approval to be treated as an S Corporation for tax purposes can only be granted by the federal government through the IRS.

general partnership

Definition: Unincorporated business owned and operated by two or more persons Each partner has equal control of business Each partner has unlimited, personal liability for business debts/obligations/losses Profits taxed as income to partners and losses qualify for deductions to partners

sole proprietorship

Definition: Unincorporated business owned by one person Owner has total control Owner has unlimited liability Profits taxed directly as income to sole proprietor *Generally operates under a Fictitious Name

limited partnership

Definition: Unincorporated business with at least one general partner and one limited partner General partner in limited partnership has managerial/operational control over business Limited partner's liability limited to extent of his/her capital contributions Limited partner has no managerial/operational control over business Parties must file form with Secretary of State's Office to create *Note these are often used in estate planning for transitions of family businesses.

cooperative

Organization formed by individuals or other businesses organizations who pool resources to gain a competitive advantage in the marketplace

creation of a corporation

Parties must file form (Articles of Incorporation) with Secretary of State to create Formalities must then be followed to hold organizational meeting, adopt Bylaws, elect directors, etc. *Note that "Close" Corporations and "Nonprofit" Corporations are also different types of corporations.

limited liability company creation

Parties must file form (Articles of Organization) with Secretary of State to create and usually adopt an Operating Agreement to govern affairs of the business Business name must include phrase "Limited Liability Company" or abbreviation "LLC" or "LC" *This is the most common business organization being used today and is also often used for estate planning / family business transition.

creation of limited liability partnership

Parties must file form with Secretary of State to create LLP Business name must include phrase "Limited Liability Partnership" or abbreviation "LLP" Some limitations on the type of partners that qualify *These are relatively new and are most commonly used in professional services business organizations (such as physician groups, law firms, and accounting firms)

joint venture

Relationship between two or more persons/corporations created for specific business undertaking (often treated like a partnership)

major forms of business organizations

Sole Proprietorship General Partnership Limited Partnership Limited Liability Partnership Limited Liability Company Corporation

specialized forms of business organiations

cooperative joint venture franchise