What are the options of forms of business organizations?
A business may be conducted in a number of different forms. Those forms consist of a sole proprietorship, a partnership, a limited partnership, a corporation, or a limited liability company.
A sole proprietorship is a business that is owned by a single individual. If you operate your business simply in your own name, then that is a sole proprietorship. A sole proprietorship is an individual conducting business in his or her own name or under a trade name.
A trade name is sometimes called a fictitious name. It is simply a name which a person or entity uses that is different than his or her legal name. For instance, if Todd Brown owns a trucking business under the name Todd's Truckers, then the trade name is Todd's Truckers. A sole proprietorship may have employees and may have several different business locations, but the entire business is owned by a single individual.
A partnership, on the other hand, is a joint venture of two or more people in which there is a sharing of both profits and losses. Partnerships can come in different forms. The two most common forms are general partnerships and limited partnerships. A general partnership exists when all of the partners share in profits and liabilities of the partnership. This does not necessarily mean that the sharing is equal. The sharing of profits and liabilities may be governed by the partnership agreement that the parties have entered into.
A limited partnership, on the other hand, is a legal entity in which there typically is only one general partner and there may be a number of limited partners. Those limited partners are much like investors or stockholders in a corporation. The limited partners normally have no control over the operation of the partnership and also normally have no liability for the acts of the partnership. They have simply contributed funds as an investment in the partnership and then expect to receive some return on their investment when the partnership begins to make money. Typically the sole rights of a limited partner are to share in the profits according to their partnership agreement.
A corporation is a legal entity recognized by state or federal law and created under that law. A corporation can be formed by one or more individuals or by other business organizations. The principal benefits of a corporation are to shield those conducting the business from personal liability for the corporation's contractual obligations and to provide for the perpetual existence of the business.
The shield from liability only applies to contract claims and not to personal tort claims. If one of her employees is operating a company vehicle, runs a red light, and injures someone, then the parties who potentially may be liable as a result of that traffic accident are the employee who was driving and the ABC Corporation. But the owner of the ABC Corporation, would not be personally liable.
There are instances in which corporate officers, directors, and controlling shareholders can be liable for tort actions of the corporation if they have implemented a policy that is deemed to be negligent.
A second benefit of a corporation is that a corporation has perpetual existence. That is, the corporation does not die when a shareholder or the president dies, but rather it continues to exist until it is terminated under the terms of the law under which it was created.
A corporation is formed by filing the appropriate documents with the state agency that supervises corporations. That document typically contains the name of the corporation, who the initial directors are, what the purpose of the corporation is, and the name and address of the registered agent who has been appointed by the corporation for the purpose of receiving important papers or legal documents.
Once a corporate charter has been approved by the governmental agency, it is necessary to have an organizational meeting of the corporation in which a board of directors is elected, officers are elected, and bylaws approved. If it is a stock corporation, typically shares of stock are issued at that time. Corporations may be privately held (privately held corporations are frequently referred to as close corporations) or it may be publicly held. A corporation that is publicly held is one that offers its shares of stock for purchase by members of the public. Many publicly traded corporations are on the various stock exchanges such as the New York Stock Exchange or the NASDAQ Exchange. (Not every publicly held corporation is listed on a stock exchange.)
As part of the organization of a corporation, bylaws are enacted by the board of directors. Bylaws are the constitution of the corporation that set forth the basic framework as to how the corporation will be operated. In addition, the shareholders may enter into a shareholder's agreement. A shareholder's agreement is a contract entered into between the shareholders in a privately held corporation that will govern their conduct in the event of the three D's: death, disability, or deadlock. That is, the shareholder's agreement governs how the corporation is to be conducted and what will happen i the event that one of the shareholders dies, becomes disabled, or in the event that there is a deadlock between the shareholders. The shareholder's agreement may also govern a number of other rights between the shareholders. After a corporation has been duly formed, there may be periodic reporting requirements to the state in which the corporation has been formed. Those reporting requirements call for the corporation to report its current address, the name and address of its registered agent, and the name and address of its directors and/or officers.
As part of the start up of a corporation, a decision must be made as to whether the corporation should be an 5 corporation or a C corporation.
A corporation may be terminated by filing a notice or articles of termination or dissolution with the appropriate agency. The mere fact that articles of termination or dissolution have been filed with the agency does not mean that the debts of that corporation evaporate. If the persons who control the corporation have raided the corporation and stripped it of its assets and thereby defrauded its creditors, then those individuals who are the owners may become personally liable for that fraudulent behavior.
Limited Liability Companies and Limited Liability Partnerships
Other forms of business organization are limited liability companies and limited liability partnerships. A limited liability company (LLC) is very similar to a corporation, but the reporting requirements to the state agency are generally less strenuous. The limitation on liability for an LLC is generally thought to be the same as a corporation. Limited liability companies have become quite popular over the last several years because they are easier to form than a corporation and involve fewer formalities in terms of paper work and reporting requirements to the state reporting agencies.
A limited liability partnership is a partnership wherein the partners are allowed to limit their particular liability for the conduct of other partners. One of the oddities of partnership law is that each general partner is liable for the conduct or misconduct of all other partners in the course of performing their partnership duties. Through a limited liability partnership, the partners can limit their liability.
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