Question 1

What are the options of forms of business organizations?

Accepted Answer

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. Sole Proprietorships 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. Partnerships 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. Corporations 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.

Question 2

Is forming a corporation difficult?

Accepted Answer

As long as you and close associates and family members will own all of the stock, and none of the stock will be sold to the public, the necessary documents-principally your articles of incorporation and corporate bylaws--can usually be prepared in a few hours. While most states use the term "articles of incorporation" to refer to the basic document creating the corporation, some states use the term "certificate of incorporation," "certificate of formation," or "charter." The first step is to check with your state's corporate filing office (usually either the secretary of state or department of corporations) and conduct a trademark search to be sure the name you want to use is legally available. You then fill in the blanks in a pre-printed form (available from most states' corporate filing offices or websites) listing the purpose of your corporation, its principal place of business, and the number and type of shares of stock. You'll file these documents with the appropriate office, along with a registration fee that will usually be between $200 and $1,000, depending on the state. You'll also need to complete, but not file, corporate bylaws. These will outline a number of important corporate housekeeping details, such as when annual shareholder meetings will be held, who can vote, and how shareholders will be notified if there is need for an additional special meeting. Fortunately, there are also websites that can make it easier and safe to incorporate your business without the expense of a lawyer, like LegalZoom . If you believe your situation is such that legal assistance would be useful, be sure to speak with an attorney before using a service like LegalZoom.

Question 3

How are corporations taxed?

Accepted Answer

Most types of businesses-sole proprietorships, partnerships, corporations that have qualified for subchapter S status, and limited liability companies that have not elected to be taxed as regular, or C, corporations-are pass-through tax entities. This means that all business profits and losses "pass through" the business and are reported on the individual tax returns of the owners. For example, if a sole proprietor's convenience store turns a yearly profit of$85,000, this amount goes right on his or her personal tax return. By contrast, a regular profit corporation (and any LLC that elects to be taxed like a corporation) is a separate tax entity-meaning that the business files a tax return and pays its own taxes. This corporate tax structure creates the possibility of double taxation-the corporation pays tax on its profit, then the owners pay tax again when those profits are paid to them as dividends. But corporate profits won't always be taxed twice. That's because owners of most incorporated small businesses are also employees of those businesses; the money they receive in the form of salaries and bonuses is tax-deductible to the corporation as an ordinary and necessary business expense. If the corporation pays surplus money to owners in the form of reasonable salaries, along with bonuses and other fringe benefits, a corporation does not have to show a profit, and therefore will pay no corporate income tax. In addition, most small corporations don't pay dividends, so there's no double taxation. There may be tax advantages to forming a corporation. Corporations pay federal income tax at a lower rate than do most individuals for the first $75,000 of their profits-15% of the first $50,000 of profit and 25% of the next $25,000. (Professional corporations are charged a flat 35% tax rate.) By contrast, in a sole proprietorship or partnership, where the business owner(s) pay taxes on all profits at their personal income tax rates, they could pay more. A corporation can often reduce taxes by paying its owner-employees a decent salary (which, of course, is tax-deductible to the corporation but taxable to the employee), and then retaining additional profits in the business (say, for future expansion). The additional profits will be taxed at the lower corporate tax rates. Under IRS rules, however, the maximum amount of profits most corporations are allowed to retain without an additional tax is $250,000, and some professional corporations are limited to $150,000.

Business Organizations

Permalink

Share of classified federal decisions

Circuit splits in business organizations

From the OpenJurist Bookshop

Related practice areas

Primary law

Key definitions

Frequently asked questions

Business Organizations by state

Further reading