14.2 Types of Legal Structures

Not-for-Profit Entities

- Not-for-profits are not technically a different form of business entity. Not-for-profit is a tax status available to corporations, LLCs, trusts, and other structures that meet specific criteria set out in the Internal Revenue Code. - All not-for-profits are exempt from income tax on their profits (so-called "surplus"), and some are also eligible to receive donations that are tax deductible to their donors. Only those companies described in Section 501(c) of the tax code are eligible; these include charitable organizations, business leagues, civic leagues, labor organizations, chambers of commerce, social clubs, fraternal organizations, cemetery companies, and the like. - Those also eligible to receive tax-deductible contributions are the smaller list of organizations in Section 501(c)(3), including religious, educational, scientific, and charitable institutions. One important condition applicable to all not-for-profits, however, is that none of the organization's earnings are permitted to benefit individuals. In other words, although not-for-profits can pay reasonable compensation to employees, they cannot have shareholders; all profit must be reinvested in the business and used for the organization's exempt purpose.

Sole Proprietorship

- a business owned by one person who has not formed a separate entity to run it. - simple, most inexpensive form of legal structure for startups - challenges include; being personally exposed to all the risks and legal responsibilities, you are also held personally liable for any debts the business incurs - Because you and your business are treated as one entity, you have to file only one personal tax return outlining your income and expenses. (You do, however, have to use a separate form, Schedule C, to report your business income.) - The business's income is added to whatever other income you (and your spouse) may have and is taxed at your personal income tax rate after a 20% deduction is allowed.

Limited Liability Company

- a business structure that combines the pass-through taxation aspects of a partnership with the limited liability benefits of a corporation without being subject to the eligibility requirements of an S corporation. - This means that profits and losses are reported on individual tax returns in the same manner as other pass-through entities; therefore, double taxation does not apply, and there is potential tax sheltering from losses while personal assets are protected - Modern limited liability company statutes allow LLCs to have continuous existence, similar to corporations - rapidly replacing s corps

Benefit Corporation (b-corp)

- a form of organization certified by the nonprofit B Lab, which ensures that strict standards of social and environmental performance, accountability, and transparency are met. - B Lab certification ensures that the for-profit company fulfills its social mission. It is available to businesses operating as any one of the business entities mentioned above (not just corporations). - In addition to the B Lab certification, many states have enacted statutes creating a new form of business entity also called a B or Benefit corporation that is not subject to the fiduciary obligations of other business corporations. Most business corporations must justify all their actions as contributing ultimately to increased shareholder wealth. - On the contrary, a statutory B corporation declares in its charter one or more social benefit goals. This protects it and its managers from lawsuits from shareholders claiming that the company is spending more time or resources on social issues than on maximizing profit. - A statutory B corporation is similar to a corporation as it also has shareholders and employees. However, the main difference lies in the fact that managers in a statutory B corporation are held responsible for ensuring the right balance is met between pure profit and its declared social benefit goals.

S Corporation (S-corp)

- corporation whose stockholders elect special treatment for income tax purposes - otherwise identical to c corp - to qualify as an s corp, must be a US domestic corporation. In addition, it must have no more than 100 shareholders, who in most cases must be individual US citizens or legal immigrants (not corporations, partnerships, or trusts), and all of whom must own only one class of common stock (ordinary shares). - S-corp does not have to deal with double taxation, as there is only one level of tax to pay. - S-corps often consider a later switch to C-corp status because their growth may be limited by the restricted number and types of shareholders permitted. - Another reason for switching to C-corp status is the fact that an S-corp's future retained earnings would be taxed to stockholders as so-called "phantom income"—earnings are taxed but not received by the individual.

General Partnership

- involves two or more people who have made a decision to co-manage and share in the profits and losses of a business - relatively low cost and straightforward - As each partner reports profits and losses on individual tax returns rather than corporate returns, a process called pass-through taxation, taxes are also paid at your personal income tax rates (after the previously mentioned 20% deduction). - important that partners have a high degree of trust

Limited Partnership and Limited Liability Partnership

- limited partnership (LP), a pass-through tax entity made up of two kinds of partners: general partners who manage the business but have personal exposure for its liabilities, and limited partners who are essentially silent investors but are protected from liability. - Recently, however, the LP has been largely replaced by the LLC. It acts as a pass-through entity, grants limited liability to all members, and does not prohibit any member from getting involved in management. - limited liability partnership (LLP). This is essentially a general partnership that, in exchange for registering with the state and paying an annual fee, gets a form of limited liability for its partners. However, the partners are still not protected from the consequences of wrongful acts committed by themselves and, in some cases, by their employees - Generally, this form is popular only among firms of licensed professionals, such as lawyers and accountants, who want to avoid classifying their partners as employees of the business. This means that these employers do not have to comply with employment laws and regulations (such as mandatory or enforced retirement) with regard to their partners

C Corporation (C-corp)

- separate legal entity created by the state government and owned by an unlimited number of shareholders - the corporation, not the shareholders is legally liable for its actions - transferrable ownership, continuous existence - con; double taxation, but maybe not really