Business Organizations

What is the basic function of a business?

At its most fundamental level, a business exists to make a profit for its owners.

What are the factors that determine entity selection?

Business professionals must consider: • How much it costs to create the entity and how hard it is to create • How easy it is for the business to continue if the founder dies, decides to retire, or decides to enter a new business altogether • How difficult it might be to raise money to grow or expand the business • What sort of managerial control they wish to keep on the business, and whether they are willing to cede control to outsiders • Whether or not they wish to eventually expand ownership to members of the public • Tax planning to minimize the taxes paid on earnings and income • Whether or not they wish to protect their personal assets from claims, a feature known as limited liability

What are the traditional entity choices?

Franchises are a very common type of business (especially in the food and services industries), but there is no typical form of business for a franchise. Depending on the needs of the franchise owners, a franchise could be a sole proprietorship, a limited liability company (LLC), or a corporation.

What is the importance of sole proprietorships in our economy?

It is the most common form of doing business in the United States.

Discuss the development of limited liability entities.

LLCs are a "hybrid" form of business organization that offer the limited liability feature of corporations but the tax benefits of partnerships.

How are limited liability entities created?

LLCs are formed by filing the articles of organization with the state agency charged with chartering business entities, typically the Secretary of State. Starting an LLC is often easier than starting a corporation.

Why are limited liability entities heavily favored?

Taxation of LLCs is very flexible. Essentially, every tax year the LLC can choose how it wishes to be taxed. It may want to be taxed as a corporation, for example, and pay corporate income tax on net income.

What are some issues surrounding corporate governance?

Under the business judgment rule, board members are generally immune from second-guessing for their decisions as long as they act in good faith and in the corporation's best interests.

What is limited liability?

Whether or not a business wishes to protect their personal assets from claims

What are the advantages and disadvantages of corporations?

• A corporation can be created for a limited duration, or it can have perpetual existence. • A corporation has continuity regardless of its owners. • Corporations can be quite complicated to manage and typically require attorneys and accountants to maintain corporate books in good order.

What are major advantages and disadvantages to doing business as general or limited partnerships?

• A general partnership is taxed just like a sole proprietorship. Every partner in the partnership is jointly and severally liable for the partnership's debts and obligations. • As a limited partner, the most one can lose is the amount of his investment into the business, nothing more. Limited partners are generally prohibited from participating in day-to-day management of the business.

How are corporations taxed?

• 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). • S corporations provide the limited liability feature of corporations but the single-level taxation benefits of sole proprietorships by not paying any corporate taxes.

What are the available entity choices when conducting business?

• Manufacturers • Retailers or Franchisers • Business consultants

How are general and limited partnerships are formed?

• Most general partnerships are formed formally, with partners writing down their agreement in a special type of contract known as the articles of partnership. • Limited partnerships have to be formed in compliance with state law.

Explain the roles and duties of shareholders, directors, and officers in corporations.

• Shareholders are the owners of a corporation • The board of directors is responsible for declaring and paying a corporate dividend to shareholders; authorizing major new decisions; appointing and removing corporate officers; determining employee compensation; and issuing new shares and corporate bonds. • Officers are involved in everyday decision making for the company and implementing the board's strategy into action.

What are the disadvantages and dangers of doing business as a sole proprietorship?

• Since a sole proprietorship can have only one owner, it is impossible to bring in others to the business. • Raising working capital can be a problem for sole proprietors, especially those early in their business ventures. • Since there is no difference between the owner and the business, the owner is personally liable for all the business's debts and obligations.

Explain the major differences between general and limited partnerships.

• 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. • Limited partnerships have both general partners and limited partners.

What are the advantages presented by doing business as a sole proprietorship?

• There is no creation cost or time, since there is nothing to create. • Another key advantage to sole proprietorships is autonomy, and total ownership of the business's finances