CHAPTER 5 LEGAL FORMS OF BUSINESSES

Entrepreneur of the Day  Korvi Rakshand  Law school graduate – lives on the floor of a classroom  Has 10,000 volunteers, including folks from U.S. dignitary families  Jaago School – 1200 students, in slums of Dhaka and Chittagong  Focus on English, hygiene, healthy living  Children come from families with <$40/month income  National Children’s Day National Children’s Day  Jaago Concept Jaago Concept

Start It Off Right – With a Great Name!  The single-most visible attribute of your business!  Should portray the firm’s personality and image.  Also should:  Be short and memorable  Only conjure positive images  Avoid geographical or personal name reference  Great business names: Brownie Points, Pull-A-Part, Facebook, Edible Arrangements

What Next?  See if your name is taken at the Secretary of State’s web site. (No matches found is good)Secretary of State’s web site  See if your name is taken at the US Patent and Trademark Office.US Patent and Trademark Office  Select a legal form of business: Sole proprietorshipPartnership Limited PartnershipC-Corporation S-CorporationLLC

Sole Proprietorships  Most common form of business (71%)  Very inexpensive - $22 at the Rutherford Co. Clerk’s office for a business license; additional business license for city  Can be started in a day  Tax flows to personal income  Only one owner, dies with that owner  No limitations on debt and lawsuit judgment liability – personal assets are considered business assets  Also must pay 15% self-employment tax on earnings  Hard to finance because you can’t attract investors

Partnerships  Allow for resources to be pooled from 2 or more owners  More likely to survive than sole proprietorship  Earnings are taxed as personal income.  Profits are divided between owners  No limitations on personal liability (joint and several)  Owners who accept limited partnerships do have limits on their liability, but agree to work no more than 500 hours per year in the business  Difficult to leave without dissolution of partnership and liquidation of the assets

Partnership Agreements  Help to avoid business-wrecking conflict  Include sections on:  Contributions made by each  Profit distribution  Agreement on salaries  Bringing on new partners  Leaving the partnership  Absence or disability of a partner

A Partnership Test (for any legal form) 1. Do you share mutual goals about what you’re in business to do? 2. Are you both, when not together, hard workers? 3. Are you both, when together, hard workers? 4. How do you feel about taking up each others’ slack in various situations? 5. How open are you with your communication, that is, how long does it take you to mention that something is bothering you about what the other is doing? 6. Discuss each others’ strengths and weaknesses. Does the expertise of one partner make up for weaknesses of the other? From Robert Kiyosaki, author of Rich Dad, Poor Dad

Corporations  Exist separately from owner  Owners are ONLY liable for their investment, unless they personally sign for debts, or unless a court finds otherwise!  Represent 64% of U.S. revenues and 45% of U.S. profits, but only 7% of the total companies.  Why do corporations make a disproportionate percent of profit and revenue?  Two types: S and C corporations  Different tax treatment and ownership allowances  Perpetual life – can be passed on or down to others

C-Corporations  Can attract capital by “going public”  Google did this and earned their company $1.67 B!  Can continue indefinitely by buying and selling shares  Double taxation  Earnings taxed first at corporate tax rate (35%) THEN  Divided for shareholders, who are taxed personal income tax on their shares (25-39%)  More red tape to start and maintain

S-Corporations  Limit personal liability  Allow for income to be counted on owners’ personal taxes  Owners must take a salary or pay payroll taxes as if they are.  Cannot have more than 100 owners  Cannot have foreign owners  Could result in owners paying taxes on income that wasn’t distributed (not unique to this form of company, though – LLC and C-Corporation are the samway )

Limited Liability Companies (LLCs)  Offer limited personal liability  Allow for profits to be taxed as personal income  Can be owned by foreigners or other companies  Can have any number of owners  Have flexible distribution of profit  Must have approval of other owners to sell out  May have limited life span (not in TN)  Owners must self-employment tax on profits because you don’t have to take a salary like in an S-corporation

Careful Consideration Should Be Taken to Pick the Right Form !!  Forms differ in terms of:  Liability concerns  Tax concerns  Future growth considerations  Cost to start up  Ability to split profit flexibly  Ease of exit from business  Register at the Tennessee One-Stop Business ResourceTennessee One-Stop Business Resource

The Corporate Veil: A Myth?  Increasingly, owners and corporations are finding themselves personally named plaintiffs in business-to-business cases!  Must prove malice or injustice, or undercapitalization. OR  Must prove that corporation was formed illegally OR  Could be that the owner simply signed his or her name to a loan document, and did not include their position and the company’s name!!  Typically, in all corporate cases, the officers and directors will be named, and the plaintiff will go for piercing of the veil.  If the case doesn’t get you, the attorney’s fees might!  Basically, corporate formalities must always be upheld!