Supplement Chapter 11 © Jeffrey Pittman

 We begin our discussion of business organizations by examining issues of business and owner responsibility  Also, see my Business Enterprises ChartBusiness Enterprises Chart Business Organizations J. Pittman, Instructor2

The following slides review business enterprise law and provide a comparison base for examining corporations 3 Comparison J. Pittman, Instructor

 There are a variety of legal forms a business may take  The “best” legal form for a given business depends on a variety of factors  Which form is best may change over time 4 Business Enterprises J. Pittman, Instructor

A sole proprietorship is a business owned by one person  Generally, there is no state regulation of sole proprietorships except:  Licenses required for all business  Fictitious name filings  There are more sole proprietorships in the U. S. than any other business organization 5 Sole Proprietorship J. Pittman, Instructor

 The sole proprietorship owner has unlimited liability for business torts or contracts and s/he pays taxes on income earned 6 Sole Proprietorship J. Pittman, Instructor

A partnership is an association of two or more persons to carry on as co-owners a business for profit (UPA §6)  Partners have individual and joint unlimited liability for partnership torts and contracts  Partnership income passes through to individual partners, who are responsible for income taxes 7 Partnerships J. Pittman, Instructor

A limited partnership is a specialized form of a partnership, with general and limited partners  The firm must have at least one limited partner and one general partner 8 Limited Partnerships J. Pittman, Instructor

 Unlike regular (general) partnerships, limited partnerships can exist only after successfully filing a certificate of limited partnership with the appropriate state official  Losses for limited partners are generally limited to the amount of their capital contribution 9 Limited Partnerships J. Pittman, Instructor

A limited liability company (LLC) is a hybrid legal entity combining corporate and partnership characteristic  LLCs provide the limited liability of a corporation and the tax attributes of a partnership 10 Limited Liability Companies J. Pittman, Instructor

 Owners are called members, and LLCs are managed either by members or outside managers  Members liability is limited to the amount of their investment 11 Limited Liability Companies J. Pittman, Instructor

Definition of a corporation from old England – “[A] collection of many individuals united into one body, under a special denomination, having perpetual succession under an artificial form, and vested, by policy of the law, with the capacity of acting, in several respects, as an individual, particularly of taking and granting property, of contracting obligations, and of suing and being sued, of enjoying privileges and immunities in common, and of exercising a variety of political rights, more or less extensive, according to the design of its institution, or the powers conferred upon it, either at the time of its creation, or at any subsequent period of its existence.” - A Treatise on the Law of Corporations, Stewart Kyd ( ) Corporations J. Pittman, Instructor12

Selected comparison factors include the following:  Difficulty of forming the organization  Liability exposure  Tax considerations  Continuity of existence/ability to transfer ownership  Management and control  Financing  Licenses  Location 13 Factors to Consider When Comparing Business Enterprises J. Pittman, Instructor

2. a) A business is liable for employee torts under respondeat superior; b) A business is liable for contracts under agency law principles 3. Business owners are potentially liable for business debts, depending on the business form 1. A plaintiff sues the defendant claiming a tort or breach of contract occurred 14 Liability Principles J. Pittman, Instructor

We have a single taxpayer who owns a business but does not work in the business; the business net income is $75,000 and the taxpayer has outside employment income of $95,000.  If a sole proprietorship is used as the business form, federal taxation is at the personal level only  For 2011, the federal personal income tax on $75,000 in additional income (beyond the $95,000 salary) would be assessed at a marginal rate of 28%, approximately $21,000, leaving $54,000 in after-tax business income 15 Simple Tax Illustration J. Pittman, Instructor

Using the same taxpayer as in the previous slide,  If a corporation form of business is used, the corporation will pay federal tax of approximately $13,750 (see the following slide for corporate tax information)  If the remaining $61,250 is distributed as dividends to the shareholder, an additional personal income tax of approximately $17,150 will be assessed (28% * $61, 250; this is the essence of double taxation, as the money was first taxed at the corporate level)  The total federal tax bill with the corporation structure will be $30,900 ($13,750+$17,150), leaving $44,100 after tax income ($75,000-$30,900) 16 Simple Tax Illustration J. Pittman, Instructor

Selected Corporate Tax Rates Taxable income over Not overTax rate $ 0$ 50,00015% 50,00075,00025% 75,000100,00034% 100,000335,00039% 335,00010,000,00034% 17J. Pittman, Instructor

The prior slides provided an illustration where the corporate form could result in additional taxes of $9,900  There are a variety of strategies to reduce this additional tax bill  One tax strategy is selection of the S Corporation status, if possible 18 Reducing the Effects of Double Taxation J. Pittman, Instructor