Business Law # 2
Sole Proprietorship
-A business organization in which s sole owner (sole proprietor) is in sole control of the business -Most common business organization. -Easiest entity to form as no legal filing/paperwork is required -This is helpful for many people who do not have (or do not think that they have) the capital necessary to invest in structuring a different type of business entity -A sole proprietor is not a separate legal entity -Extension of sole proprietor -It cannot sue or be sued in its own name -It cannot enter into agreements in its own name -Sole proprietor has sole control over the business -Sole proprietor retains 100% of profits -May employee persons that are paid for services but cannot share profits or a partnership may be presumed (even if that was not the intent) -Sole proprietor's income from the profit is taxed as normal income -Sole proprietorship is not its own entity so sole proprietor taxed as individual and entity is not taxed separately -Sole proprietor has unlimited personal liability
Limited Liability Partnership
-A partnership in which one or all partners (depending on jurisdiction) have limited liability. -Parties must file a certificate of partnership with the appropriate state office to create a limited liability partnership -Must use the word "limited liability partnership" in its title (or immediately thereafter in the form of L.L.P.) -Some states (CA, NY and NV) only allow LLPs to be formed for professional uses (lawyers, doctors, accountants, etc.) -A limited liability partnership may be treated as a separate entity for certain purposes -Limited partners may take a more active role in management so this is a good option for investors who want to take more of a management role -Share profits similar to a general partnership. -In the absence of agreement, the partners will split profits equally -Enjoy the pass-through taxation similar to a general partnership as each partner pays taxes only on the share of profits he/she receives -Liability can vary from state to state but ultimately, the partners enjoy limited personal liability from the actions of the partnership and its partners -Minority of states hold that such liability is only shielded in negligence claims and that partners are liable for intentional torts of the other partners
General Partnership
-An association between two or more people to carry on as co-owners a business for profit -An association between two or more people to carry on as co-owners a business for profit -UPA governs most partnerships -Easy entity to form as no legal filing/paperwork is required -This is helpful for many people who do not have (or do not think that they have) the capital necessary to invest in structuring a different type of business entity -A written partnership agreement - although not required - is always recommended to clarify capital contribution, profit sharing, and liability sharing, etc. -A general partnership is typically not treated as a separate legal entity; however, there are exceptions -Partnership creditors have first priority on "partnership assets" while individual creditors have first priority on the assets of individual partners -Each partner is an agent of the partnership and each has a fiduciary duty to others -Each partner entitled to control -In the absence of an agreement, the partners will split management, profits, and debts equally -Profits are taxed as individual income of the partners (pass-through taxation) -Each partner has unlimited liability for the debts, defaults, or judgments against the partnership -Each partner also has liability for the action of other partner(s) - even torts -Limited by life of partners -Dissolution the change in the relation of the partners caused by any partner's ceasing to be associated with the carrying on of the business by act of the court, act of a partner or operation of law -Once a partnership has been liquidated, the partners begin the process of winding up, the process of completing unfinished partnership business (collecting and paying debts, collecting assets, taking inventory, etc.)
Limited Liability Company
-An unincorporated business that combines the taxation structure of a partnership with the members paying personal income taxes and the limited liability of a corporation -First recognized in Wyoming in 1977 and is now recognized in every state (ULLCA adopted in 1995) -ULLCA was revised in 2006 which provides a model for states to follow; however it has not been uniformly adopted so you always want to check the laws of the state in which you are considering formation -Less stringent requirements -Formed by filing Articles of Organization in the state in which members want to establish the LLC -Must include the name limited liability company or LLC -Requires the designation of a registered agent for service -Required to register in each state in which they want to do business (process known as qualification) -LLC considered a "citizen" of every state in which its members reside -An operating agreement is typically drafted upon establishment that spells out the rights and duties of the owners (re: division of profits and losses, management, dissolution, etc.) -A separate legal entity for purposes of liability but not always for taxes -Owned by members (similar to shareholders of corporations) -Members may participate in management -Also does not share the same "corporate formalities" as are required by corporations so there is much more flexibility -Unlike a corporation, profits and losses do not need to be allocated in proportion to ownership interests -Arguably the biggest benefit of an LLC is that it can be taxed like a sole proprietorship or partnership with members individually reporting and paying taxes according to their profits and losses -Business can also elect to be taxed as a corporation -Biggest benefit is that members have a choice! -Liability typically limited to loss of capital contribution -Members and Officers are typically shielded from personal liability for the debts of the corporation -Intentional or grossly negligent actions may not be protected from personal liability if the veil is pierced -LLC dissolved in accordance with operating agreement
Piercing the Corporate Veil
-Despite the limited liability offered by corporations, at times the court is willing to deny limited liability protection -This occurs when shareholders have used the corporation to engage in illegal or wrongful acts (which can include being lax about corporate formalities) -The thought is that shareholders are normally entitled to hide behind a "corporate veil" to protect themselves from personal liability -When the court "pierces the corporate veil" it finds that the shareholders are unable to hide behind such veil
Corporation
-Legal entity formed by issuing stock to investors who are essentially the owners of the corporation. -Most dominant form of business organization. -Filing an Articles of Incorporation in the state in which the corporation seeks to do business -Requires the assignment of a registered agent in the state in which it is registered -Corporations are considered a separate legal entity created under state law. -Can sue and be sued in its own name. -Can face criminal action or regulatory action on its own (although you cannot put a corporation in jail which is why there are more laws now seeking to punish officers and directors who cause the corporation to commit criminal acts) -Owners of a corporation are shareholders (investors who own "shares" of the corporation) -Shareholders elect a Board of Directors who are responsible for managing the business (high level) -Board of Directors hire officers to run the day-to-day operations (President, Treasurer, Secretary, etc.) -Certain corporate "formalities" are required (annual meetings, minutes, etc.) -Officers are typically paid a salary while shareholders are paid dividends -Profits and losses are allocated in accordance with ownership interest -Corporation, as a separate legal entity, pays its own taxes on earnings -Shareholders then pay taxes on dividends they are paid. -Known as double taxation. -Double taxation can be avoided by forming an S-Corporation (under federal tax law). -Corporation can enjoy perpetual existence and will continue even if the shareholders die
Limited Partnership
-Limited Partnership Agreement between at least one general partner and at least one limited partner . -While general partners act as agents of the partnership, limited partners are not -Parties must file a certificate of partnership with the appropriate state office to create a limited partnership -Must use the word "limited" in its title (or immediately thereafter in the form of L.P.) -A limited partnership may be treated as a separate entity for certain purposes -Management duties are shared between/among the general partners -Limited Partner CANNOT partake in management functions or risk losing shield from liability -Limited partner may share in profit (may not be equal split depending on capital contribution) -Enjoys the same pass-through taxation of a general partnership -General Partners have same joint and several liability that they have in a general partnership -Limited partners have no liability beyond the capital contribution