Module 12: Types of Business Organizations

How is a sole proprietorship formed?

"At Will" start & terminate at your own discretion

One critical function for boards of directors is to appoint corporate officers. These officers are also known as ______ executives and typically hold titles such as chief executive officer, chief operating officer, chief of staff, and chief marketing officer.

"C-level"

C Corporation

The most common type of corporation, which is a legal business entity that offers limited liability to all of its owners, who are called stockholders

Corporate Veil

The personal liability shield; the corporate protection that entitles shareholders, directors, and officers to limited liability; can be pierced for improper conduct of business or fraud especially when there is intermingling of business/personal funds.

Sole Proprietorship

a business owned and managed by a single individual

Which statement is an advantage in forming a partnership versus a corporation? A partnership has a larger management base. A partnership has an easier time obtaining long-term financing. A partnership is stable. A partnership avoids double taxation.

A partnership avoids double taxation Unlike corporations, the profits from partnerships are not taxed twice.

What is liability like in a General Partnership?

Every partner in the partnership is jointly and severally liable for the partnership's debts and obligations which is a big disadv. because one partner is "punished" for another partners "bad acts".

In which type of business entity may all profits, liability, and losses be shared equally? Limited liability company General partnership C-corporation Sole proprietorship

In a general partnership, there are two or more partners. Unless by other agreement, profits are shared equally among the partners. Usually, there is a contract that outlines how profits and losses will be divided.

And an "event of dissociation" is typically defined as: a member's voluntary withdrawal, a member's assignment of the entire LLC interest, a member's expulsion, a member's,______________ a member becoming incompetent, dissolution of an entity member (as an LLC, limited partnership, or corporation), or, any other event specified in the agreement.

bankruptcy

Terminating/disolving a general partnership. This can be easily done., generally written in the Articles of partnership which typically includes a ______________ 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).

buy/sell agreement

What are the disadvantages of a sole proprietorship?

::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. ::Taxed at the highest personal income rate.

Advantages of an LLC

Can't be sued personally. Member liability is limited to amount of investment. Can be treated as a "pass through" entity for tax purposes. Members pay pers tax on received profit. Easy to form LLC. Corporations require lots of paperwork/funds/people to start up. Don't have to be U.S. citizen.

In which type of business entity may all profits, liability, and losses be shared equally? Limited liability company General partnership C-corporation Sole proprietorship

Correct! In a general partnership, there are two or more partners. Unless by other agreement, profits are shared equally among the partners. Usually, there is a contract that outlines how profits and losses will be divided.

How is a partnership formed?

Oral contract (unless statute of fraud requires), written contract, implied by conduct

Corporation Advantages

limited liability, ease of transfer of ownership, perpetual life, external sources of funds, expansion potential

S corporations cannot have more than ___________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 the "S" tax corp are reserved for only small businesses.

one hundred

How is an LLC formed?

1) Filing the articles of organization with the State Agency, typically Secretary of State. Typical LLC statutes require only the name of the LLC and the contact information for the LLC's legal agent

How is a sole proprietorship terminated?

1. Contact small bus admin to determine if paperwork is needed 2. inform employees/close down ordering pages/fulfill all orders 3. Provide notice to landlord/Notify debtor/creditors 4. Pay bills. Cancel business bank accts., cr.cards 5. Liquidate assets thru sales/donations, save $ for income tax 6. Keep records of all transactions for income tax forms.

Disadvantages of LLC

1. No stock 2. Limited life span 3. Fewer incentives 4. Taxes 5. Paperwork 1. Because LLCs are pass-through entities, LLC owners are responsible for paying taxes on their share of LLC income, whether or not they are given a disbursement. 2. Another disadvantage of pass-through taxation is that all members must wait until the LLC sends out K-1 forms to complete their personal taxes. For this reason, most investors will not fund LLCs.

Limited Liability Company (LLC)

A company similar to an S corporation but without the special eligibility requirements.

Limited Liability Company (LLC) How many members? Can they participate in day to day mgmt? Can they be foreign residents? Are there member amount restrictions?

A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership. 1 or more Yes, can be foreign residents. Nope

LLP (Limited Liability Partnership)

A limited liability partnership is a partnership in which some or all partners have limited liabilities. It therefore can exhibit elements of partnerships and corporations. In an LLP, each partner is not responsible or liable for another partner's misconduct or negligence. Reserved for professionals, ie accountants, practitioners,..

Define Limited Partnership

A partnership with at least one general partner and one limited partner. The limited partner is also known as the silent partner & whose liability is limited to the amount of their investment.

Which form of business organization has two or more owners who share the risks and the profits? Sole proprietorship Partnership Corporation Nonprofit

Partnerships. Two or more owners make the decisions for the business together and share the profits, losses, assets, and liabilities.

How is a corporation terminated?

An election is made to dissolve the company. The board must authorize a dissolution File dissolution with secretary of state(s) Terminate any liscenses Pay debts/close accounts/notify & pay creditors/file taxes distribute assets

Key differences between C-Corporations & S-Corporations

C-Corp pays double taxes, S-corp pays taxes once like a partnership or sole proprietorship

In which type of business entity is there double taxation? Limited partnership C-corporation Sole proprietorship S-corporation

C-Corporations. Corporations are more highly taxed. Profits are taxed first, as the income of the corporation (except S-corporations) and again as personal income when the dividends are distributed to stockholders.

legal entities like partnerships, limited liability companies, and S corporations that do not pay income tax. Income and losses from flow-through entities are allocated to their owners. These business's are called?

Flow-through entities

What are the different classes of shareholders?

Founders of a corporation may reserve a special class of stock for themselves with preemptive rights (maintains ownership; prevents dilution)

What are the common forms of business organizations?

Franchises could be a sole proprietorship, general partnership, limited partnership, or limited liability company (LLC). Corporations can be: c-corporation or s-corporation, professional corporation or non-profit.

What are the advantages of a sole proprietorship?

It is easy to create, have autonomy (set own hours, grow as fast as they want), and total ownership of business finances.

Which example is not a key advantage of a corporation? Corporations offer limited personal liability to its owners. Corporations may issue stock to raise money. Corporations can exist indefinitely, so they do not cease to exist when an owner dies or leaves. Corporations are not expensive to start and have few government regulations.

It is expensive to start a corporation due to paperwork. Corporations are required to follow government regulations.

What is an advantage of corporations? Limited liability Minimal government regulation One owner Short life span

Limited Liability. Shareholders are generally protected from liability and can lose only the money they have invested in the corporation.

What are the rules to a limited partner?

Limited liability, only liable up to capital contribution, generally prohibited from participating in day to day management of the business.

venture capital

Money that is invested in new or emerging companies that are perceived as having great profit potential. Some sole proprietorships may get money from them, but typically get money from banks as personal loans.

What is a general partnership?

Owners agree to share in the profits and losses of the business together, formed formally, with partners writing down their agreement in a special type of contract known as the articles of partnership

Which type of business entity is easiest to form? Sole proprietorship General partnership S-corporation Limited liability company

Sole proprietorship

Which type of business is easy to start, has an owner who is his/her own boss, and has an owner who keeps all the profits? Corporation Franchise Partnership Sole proprietorship

Sole proprietorship. When you are in business by yourself, you reap all these benefits.

Module 12: Wrap-Up Most economists and public policy officials believe that the American economy is a key anchor to American society and values. Private enterprise and the profit motive allow innovation and entrepreneurship to flourish, leading to prosperity and peace. Underlying the strength of American business enterprises is a flexible and easy-to-manage legal system that allows business owners many options in choosing how to organize their operations. Business organizations are an important part of a business's structure. Different organizations provide different advantages and disadvantages in creation cost and simplicity, ongoing maintenance requirements, dissolution and continuity, fundraising, managerial control, public ownership, tax planning, and limited liability. The type of business being conducted (for-profit, nonprofit, franchise) has little to do with the business organization in which the business is conducted. Many business organizations take the form of separate legal entities, which the law recognizes as nearly like persons for purposes of legal rights.

Sole proprietorships are the most common way of doing business in the United States; however, a sole proprietorship, which provides autonomy and ease in creation, is a dangerous way to do business because of unlimited liability. Legally, there is no difference or distinction between the owner and the business. The legal name of the business is the owner's name, but owners may carry on business operations under a fictitious name by filing a d.b.a. filing. Sole proprietors enjoy ease of start-up, autonomy, and flexibility in managing their business operations. On the downside, they have to pay ordinary income tax on their business profits, cannot bring in partners, may have a hard time raising working capital, and have unlimited liability for business debts. A general partnership is formed when two or more persons agree to share profits and losses in a joint business venture. A general partnership is not a separate legal entity, and partners are jointly and severally liable for the partnership's debts, including acts of malpractice by other partners. Income from a general partnership flows through to the partners, who pay tax at the ordinary personal income tax rate. In most states, general partners can also bring in limited partners, creating a limited partnership. Limited partnerships must be formed in compliance with state statutes. While general partnership allows business partners to do business together, it similarly carries unlimited liability whereas limited partners enjoy limited liability and generally cannot participate in day-to-day management of the business. Limited partners' liability is limited to the loss of their investment, unless they exercise so much control of the firm as to become general partners. A corporation is a separate legal entity. Owners of corporations are known as shareholders and can range from a few in closely held corporations to millions in publicly held corporations. Shareholders of corporations have limited liability, but most are subject to double taxation of corporate profits. Certain small businesses can avoid double taxation by electing to be treated as S-corporations under the tax laws. State law charters corporations. Shareholders elect a board of directors, who in turn appoint corporate officers to manage the company. The limited liability company (LLC) represents a new trend toward business organization. It allows owners, called members, to have limited liability just like corporations. Unlike corporations, however, LLCs can avoid double taxation by choosing to be taxed like a partnership or sole proprietorship. Unless a business wishes to become publicly traded on a stock exchange, the LLC is probably the most flexible, most affordable, and most compatible form for doing business today. The limited liability partnership (LLP) is similar to the LLC, except it is designed for professionals such as accountants or lawyers who do business as partners. Flow-through entities, also known as pass-through entities, are designed for sole proprietorships, partnerships, LLCs, and S-corporations for federal income tax purposes. These types of entities are not subject to income tax; however, the owners are directly taxed individually on the income while taking into account their share of profits and losses.

How is LLC taxed?

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. Or it may choose instead to have income "flow through" the corporate form to the member shareholders, who then pay personal income tax just as in a partnership.

How does a corporation form?

The corporate founders must file the articles of incorporation with the state agency charged with managing business entities. The founders must also state how many shares the corporation will issue initially, and the par value of those shares. List as for profit/not for profit. Must pay fees; filing, liscense, attorney,.....

Which statement is not an advantage of starting a sole proprietorship? There are fewer government regulations. It is relatively easy to start. A sole proprietor keeps all the profits from the business. There is an abundance of money to start up and/or expand the business.

There is an abundance of money to start up and/or expand the business.

What is an advantage in forming an S-corporation? It can have many stockholders. It is only taxed once. It is easy to terminate. It has absolute control over decision making. .

There is only a tax on the personal income of the owners, whether or not the profits are distributed

S Corporation

a form of corporation (like a small family run business) that avoids double taxation by having its income taxed as if it were a partnership. It is taxed only once when a dividend is declared, shareholders then pay personal income tax with the profit received.

How is a sole proprietorship taxed?

all the income generated by the business is treated as ordinary personal income to the owner

How is a partnership terminated?

by an agreement among partners or by operation of the law (bankruptcy,death,unlawful business)

A shareholder suit is a lawsuit brought by a shareholder on behalf of a corporation against a third party. Often, the third party is an insider of the corporation, such as an executive officer or director. This is called __________.

derivitive litigation

Corporations possess one very unattractive feature for business owners: _____________. Corporations are separate legal entities which are taxed like a person. Profit is then subject to tax again when it is returned to shareholders as a dividend, in the form of a ____________.

double taxation, dividend tax

One of the most important functions for shareholders is to ______________________for a corporation.

elect the board of directors

How is a LLC terminated?

expiration of the LLC's term as per its agreement; events specified in the agreement; written consent of all members; an "event of dissociation" of a member, unless within ninety days of the event all remaining members agree to continue, or the right to continue is stated in the LLC; the entry of a judicial decree of dissolution; a change in membership that results in there being fewer than two members; or, the expiration of two years after the effective date of administrative dissolution.

How are general partnerships taxed?

income "flows through" the business to the partners, who then pay ordinary income tax on the business income just like a sole proprietorship

Forming your business as a limited liability company helps to protect you against_____, significantly cuts down on paperwork compared to corporations and other legal entity types, prevents your company from being taxed twice, and helps to present your business as more credible.

lawsuits

By now you should understand how easy, yet dangerous, it is to do business as a sole proprietor, and why many business organizations are drawn to the corporation as a form for doing business. As flexible as the corporation is, however, it is probably best suited for larger businesses. Annual meeting requirements, the need for directors and officers, and the unattractive taxation features make corporations unwieldy and expensive for smaller businesses. What is a good solution to this problem?

limited liability company (LLC) is a good solution to this problem.

C-corporations have______ to the number of shareholders. Also, medical reimbursement plans can go through C-corporations unlike S-corporations. C-corporations are taxed differently than S-corporations; however, a loss experienced by a C-corporation should be carried forward, cannot be written off, and goes against future gains. C-corporations must "zero out" books annually or the company will face double-taxation. Shareholders will have to take a salary if all other efforts are exhausted to clear the books, and they will have to pay Social Security and Medicare tax. Alternatively, S-corporations ____________ Social Security and Medicare tax on dividend income.

no limit, do not have to pay

A related entity to the LLC is the limited liability partnership, or LLP. Be careful not to confuse limited liability partnerships with limited partnerships. LLPs are just like LLCs but are designed for _______________ who do business as partners. They allow the partnership to pass through income for tax purposes, but retain limited liability for all partners. LLPs are especially popular with doctors, architects, accountants, and lawyers. Most of the major accounting firms have now converted their corporate forms into LLPs.

professionals

A corporation is a _______ legal entity, separate and distinct from its owners. It can be created for a limited duration, or it can have perpetual existence. Since it is a separate legal entity, a corporation has continuity regardless of its owners.

separate

Flow-through businesses include ______<________&________. Profits from flow-through businesses are taxed just once, at the owner's individual tax rate for ordinary income.

sole proprietorships, partnerships, and S-corporations

What is a Sole Proprietorship's liability?

the owner is personally liable for all the business's debts and obligations.

T / F: In a general partnership, if there are more than two, the remaining partners can reconstitute the partnership if they wish.

true

General partnerships have _______ liability whereas limited partnerships have limited liability. Partners share proportion on profit distribution based on interest whereas limited partners share proportion based on interest but receive their share _______.

unlimited first

under most statutes' default position, if a member dies, becomes insane or bankrupt, retires, resigns, or is expelled, the LLC will dissolve unless __________the rest of the members unanimously agree to continue.

within ninety days