Chapter 9-Legal Structures for Ventures
Sole Proprietorship
A business that is owned and operated by one person. The enterprise has no existence apart from its owner. This individual has a right to all of the profits and bears all of the liability for the debts and obligations of the business. -unlimited libility
limited liability limited partnership
A variant of the limited partnership. An LLLP has elected limited liability status for all of its partners, including general partners
Corporation
An entity legally separate from the individuals who own it, created by the authority of state laws, and usually formed when a transfer of money or property by prospective shareholders takes place in exchange for capital stock in the corporation.
Corporations that do business in more than one state must
comply with federal laws regarding interstate commerce and with the varying state laws that cover foreign (out-of-state) corporations.
owner liabilitof a sole proprietorship
unlimited
Most popular form of business
sole proprietorship
The procedures ordinarily required to form a corporation are
(1)subscriptions for capital stock must be taken and a tentative organization created, and (2)approval must be obtained from the secretary of state in the state in which the corporation is to be formed.
Benefits of an S Corporation
-when the corporation has losses, Subchapter S allows the shareholders to use these losses to offset taxable income -when the stockholders are in a tax bracket lower than that of the corporation, Subchapter S causes the company's entire income to be taxed in the shareholders' bracket, whether or not it is distributed -
Limited liability partnership
A form of partnership that allows professionals the tax benefits of a partnership while avoiding personal liability for the malpractice of other partners. If a professional group organizes as an LLP, innocent partners are not personally liable for the wrongdoing of the other partners.
Revised Uniform Limited Partnership Act (RULPA)
An act that governs limited partnerships and contains 11 articles and 64 sections of guidelines covering areas such as (1) general provisions, (2) formation, (3) limited partners, (4) general partners, (5) finance, (6) distributions and withdrawals, (7) assignment of partnership interest, (8) dissolution, (9) foreign limited partnerships, (10) derivative actions, and (11) mescellanous
S corporation
Formerly termed a Subchapter S corporation, an S corporation takes its name from Subchapter S of the Internal Revenue Code, under which a business can seek to avoid the imposition of income taxes at the corporate level, yet retain some of the benefits of a corporate form (especially the limited liability)
S corporation guidelines
The corporation must be a domestic corporation. The corporation must not be a member of an affiliated group of corporations. -The shareholders of the corporation must be individuals, estates, or certain trusts. Corporations, partnerships, and nonqualifying trusts cannot be shareholders. -The corporation must have 100 or fewer shareholders. The corporation must have only one class of stock, although not all shareholders need have the same voting rights -No shareholder of the corporation may be a nonresident alien
Disadvantages of Sole Proprietorship
Unlimited liability. The individual proprietor is personally responsible for all business debts. This liability extends to all of the proprietor's assets. Lack of continuity. The enterprise may be crippled or terminated if the owner becomes ill or dies. Less available capital. Ordinarily, proprietorships have less available capital than other types of business organizations, such as partnerships and corporations. Relative difficulty obtaining long-term financing. Because the enterprise rests exclusively on one person, it often has difficulty raising long-term capital. Relatively limited viewpoint and experience. The operation depends on one person, and this individual's ability, training, and expertise will limit its direction and scope.
Advantages of a corporation
Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital
Duration of Sole Proprietorship
Terminates on death or withdrawal of sole proprietor
Unlimited Liability
The individual proprietor is personally responsible for all business debts. This liability extends to all of the proprietor's assets.
Disadvantages of a partnership
Unlimited liability of at least one partner. Although some partners can have limited liability, at least one must be a general partner who assumes unlimited liability. Lack of continuity. If any partner dies, is adjudged insane, or simply withdraws from the business, the partnership arrangement ceases. However, operation of the business can continue based on the right of survivorship and the possible creation of a new partnership by the remaining members or by the addition of new members. Relative difficulty obtaining large sums of capital. Most partnerships have some problems raising a great deal of capital, especially when long-term financing is involved. Usually the collective wealth of the partners dictates the amount of total capital the partnership can raise, especially when first starting out. Bound by the acts of just one partner. A general partner can commit the enterprise to contracts and obligations that may prove disastrous to the enterprise in general and to the other partners in particular. Difficulty of disposing of partnership interest. The buyout of a partner may be difficult unless specifically arranged for in the written agreement.
formation of sole proprietorship
When one person owns a business without forming a corporation or LLC
The taxable income of an S corporation is taxable only to those who
are shareholders at the end of the corporate year when that income is distributed
A corporation is created by the
authority of state laws and usually is formed when a transfer of money or property by prospective shareholders (owners) takes place in exchange for capital stock (ownership certificates) in the corporation.
Federal Income Taxation for sole proprietorship
only sole proprietor
Articles of partnership (partnership agreement)
outline the financial and managerial contributions of the partners and carefully delineate the roles in the partnership relationship, including such items as: duration of agreement; character of partners (general or limited, active or silent); division of profits and losses; salaries; death of a partner (dissolution and windup); authority (individual partner's authority on business conduct); settlement of disputes; and additions, alterations, or modifications of partnership.
An s corporation is taxed similar to a
partnership
To establish the sole proprietorship
person merely needs to obtain whatever local and state licenses are necessary to begin operations. If the proprietor chooses a fictitious or assumed name, he or she also must file a certificate of assumed business name with the county.
Revised Uniform Partnership Act (RUPA)
An act that governs limited partnerships and contains 11 articles and 64 sections of guidelines covering areas such as (1) general provisions, (2) formation, (3) limited partners, (4) general partners, (5) finance, (6) distributions and withdrawals, (7) assignment of partnership interest, (8) dissolution, (9) foreign limited partnerships, (10) derivative actions, and (11) miscellaneous.
Partnership
An association of two or more persons acting as co-owners of a business for profit.
formation of a partnership
By agreement of owners or by default when two or more owners conduct business together without forming a limited partnership, an LLC, or a corporation
formation of a corporation
By agreement of owners; must comply with corporation state; must elect S Corporation status under Subchapter S of Internal Revenue Code
formation of limited partnership
By agreement of owners; must comply with limited liability partnership statute
limited partnership
By agreement of owners; must comply with limited liability partnership statute
management of sole proprietorship
Completely at owner's discretion
Advantages of a partnership
Ease of formation. Legal formalities and expenses are few compared with those for creating a more complex enterprise, such as a corporation. Direct rewards. Partners are motivated to put forth their best efforts by direct sharing of the profits. Growth and performance facilitated. It often is possible to obtain more capital and a better range of skills in a partnership than in a sole proprietorship. Flexibility. A partnership often is able to respond quickly to business needs in the form of day-to-day decisions. Relative freedom from governmental control and regulation. Very little governmental interference occurs in the operation of a partnership. Possible tax advantage. Most partnerships pay taxes as individuals, thus escaping the higher rate assessed against corporations.
Advantages of Sole Proprietorship
Ease of formation. Less formality and fewer restrictions are associated with establishing a sole proprietorship than with any other legal form. The proprietorship needs little or no governmental approval, and it usually is less expensive than a partnership or corporation. Sole ownership of profits. The proprietor is not required to share profits with anyone. Decision making and control vested in one owner. No co-owners or partners must be consulted in the running of the operation. Flexibility. Management is able to respond quickly to business needs in the form of day-to-day management decisions as governed by various laws and good sense.Relative freedom from governmental control. Except for requiring the necessary licenses, very little governmental interference occurs in the operation. Freedom from corporate business taxes. Proprietors are taxed as individual taxpayers and not as businesses
