Chapter 15: Business Entities Business Law Chapter 15: Business Entities

Introduction to Business Organizations The way that a business is set up is often as important as how it is run and the choice of business entity often has a huge influence on the eventual success or failure of that business.

Sole Proprietorships Sole proprietorships are both the oldest, and simplest, form of business structure. In a sole proprietorship, there is a single individual who conducts all aspects of the business.

Legal Liability of Sole Proprietors If a sole proprietor is sued because of some business disagreement, his personal assets are in danger. This is true because there is no legal boundary between a sole proprietor’s business assets and personal assets.

The Advantages of a Sole Proprietorship One of the most obvious advantages to a sole proprietorship is the freedom given to the owner to make business decisions.

Tax Consequences of Sole Proprietorship One of the major advantages of a sole proprietorship concerns income taxes. When a sole proprietor sustains a major income loss during the year, he can pass this loss through on his personal income tax return.

The Disadvantages of a Sole Proprietorship Because the business is so closely associated with a single person, the death or incapacity of that person causes the business to fail. There is usually no way for the business to continue without the owner.

Sole proprietors also frequently suffer from undercapitalization. With only their personal credit and financial resources to rely on, many sole proprietors find it difficult to expand their businesses or to pay unexpected bills.

General Partnerships A partnership consists of two or more people working together in a joint business venture.

Forming a General Partnership The partners simply agree to be bound to one another in a business and to pledge their financial assets for the business. Although many partners write out a General Partnership Agreement, in most situations it is not required.

Advantages of General Partnerships The advantages of a partnership are obvious: with two or more people, the business can expand and serve more customers. Partners can also contribute more financial resources than a single individual.

Disadvantages of General Partnerships A general partner’s personal assets could be seized to pay a judgment, sometimes putting the general partnership in a precarious situation.

Limited Partnerships In a limited partnership, there are two classifications of partners. There are general partners and limited partners

General partners are responsible for the day-to-day management of the business in the same way that general partners are in a regular partnership arrangement.

Limited partners, on the other hand, have no right to control day-to-day operations, but they also enjoy a protection that the general partners do not.

Limited Liability Limited partners are protected by limited liability. This means that the extent of their financial loss in the business is limited to the extent of their financial contribution.

Limited Liability Companies A limited liability company is a cross between partnership and a corporation owned by members who may manage the company directly or delegate to officers or managers who are similar to a corporation’s directors.

Forming a Limited Liability Company In order to form a limited liability company, a company must file several documents with the state. One of the most important is the Articles of Organization.

Articles of Organization This document contains the basic information about the company, including the company name, registered agent and the names of the persons forming the company.

Naming a Limited Liability Company The name of a limited liability company must contain the phrase "Limited Liability Company" or some other easily recognizable abbreviation, such as “LLC.”

Advantages of Limited Liability Companies LLCs can take advantage of the protection of limited liability, as well as enjoying some of the flexibility of a partnership and the financial advantages of spreading investment over a larger pool of individuals.

LLCs also allow individual owners to pass through losses on their personal income tax returns.

Organization of a Limited Liability Company Individuals who own shares in limited liability companies are referred to as “members,” not partners or shareholders. The day-to-day management of a limited liability company is handled by "managers.”

Corporations An organization that is formed under state corporate law exists, for legal purposes, as a separate being or an "artificial person." The stockholders have no liability for corporate debts beyond the value of their stock.

Creating a Corporation A corporation is considered be an artificial person Once created, a corporation continues to exist separate and distinct from the people that compose it.

Types of Corporations There is a wide range of corporation types, ranging from small, privately held corporations to huge, multinational corporations with offices scattered across the globe.

Corporate Shareholders The persons who own the corporation are called shareholders. Shareholders are also entitled to an annual payment, referred to as a dividend, based on corporate profits.

Corporate Officers and Directors Corporations have officers who manage corporate affairs. These officers are responsible for negotiating with vendors, hiring and firing employees and all of the other tasks that we would associate with any business manager.

Corporate Directors Directors decide on long-term goals and strategies for the corporation which they then put into effect through the corporate officers.

Disadvantages of Corporations Shareholders do not enjoy the "pass through" provisions for income tax purposes that are seen in sole proprietorships, general partnerships, and other business structures that we discussed in this chapter. A corporation pays its own income taxes.

Advantages of Corporations As an artificial person, a corporation may own property, negotiate contracts, and, in many ways, enjoy a degree of flexibility that resembles that seen in sole proprietorships or partnerships.

Corporate Existence Corporations do not die. Although a corporation may cease to exist because of bankruptcy or by merger with another corporation, it does not cease to exist when individual shareholders, directors or officers die.

Transfer of Ownership Shares in corporations are bought and sold by millions every day on the various stock exchanges around the world. Share ownership, in the form of stock certificates, is a source of wealth for millions of people.

Steps in Forming a Corporation All states have rules about how a corporation is formed. In most situations, parties form a corporation by filing Articles of Incorporation with the state.

Articles of Incorporation The articles of incorporation set out the basic details of the corporate entity.

Articles of Incorporation The name of the corporation The number of shares the corporation is authorized to issue The classes of stock issued The name and address of the Registered Agent The names and addresses of the principal incorporators

Corporate Organizational Meeting This meeting, held among the people who create the corporation, has several purposes. The parties elect officers for the corporation and then enact by-laws for the day-to-day management of the corporation.

Piercing the Corporate Veil This doctrine holds that when a person uses corporate property interchangeably with his private property, the court may disregard the existence of the corporation and seize the person’s personal assets.

The Role of the Legal Team in Creating a Business Business people often seek out legal advice in both creating and running their businesses.

Legal professionals are often involved in every step of business activities and assist with the drafting and filing of Articles of Incorporation to bankruptcy actions if the business is not able to stay afloat.

Licenses and Permits Local ordinances may require business licenses or other permits to run specific types of businesses. If the business will be run out of the client’s home, there is also the issue of zoning permits.