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SOLE
PROPRIETORSHIPS
Sole
proprietorships are owned by one person who is unlimited
liable for debts of the company. Sole
proprietorships are not separate entities from the owner
in terms of taxes, liability and management. They are
generally often at a disadvantage in raising capital
because outsiders are generally unwilling to risk money on
the life of an individual. Similarly, it is often
difficult to sell a sole proprietorship, and
diversification is also difficult because of the size of
the company.
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PARTNERSHIPS,
GENERAL AND LIMITED
Partnerships
are formed when two or more partners join together and
operate a business for profit. Partnership law in the
United States is generally subject to the Uniform
Partnership Act which has been adopted in 49 states, while
26 states have adopted the Revised Uniform Partnership
Act. The UPA and the RUPA operate when nothing is said in
the partnership agreement regarding a point of law.
Partners have great freedom to mange the partnership and
divide profits in just about any way that they want.
There
are two types of partnerships: general and limited.
In
a general partnership, all partners are unlimitedly
liable, while in a limited partnership only the general
partners are liable for partnership debts. Relative
to sole proprietorships, partnerships have a number of
advantages raising capital. Partnerships are more
complicated to manage and disputes among partners are
sources of litigation. Profits of both partnerships and
sole proprietorships are taxed as ordinary income to the
partners or owners. Partners owe a fiduciary duty to
each other, which means that they must put the interests
of the partners and partnership above their own.
Limited
partnerships must be registered with the state in order to
qualify for limited liability for the limited partners.
Limited Partners must refrain from management activity to
qualify for limited liability. The line between what
limited partners can do and not do to qualify for limited
liability is articulated in the Revised Limited
Partnership Act. Limited partnerships enjoy favorable tax
status. Also, transferability of ownership is much
easier than for general partnerships.
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CORPORATIONS
Corporations
are considered persons in law. They can sue and be
sued, must pay taxes, and have potentially infinite
duration. Corporations are managed by a Board of Directors
who then appoint chief corporate officers.
Shareholders of a corporation are its owners and benefit
from limited liability. Ownership of a corporation is
transferable through the sale of corporate shares.
Corporations are taxed on their income and, if dividends
are declared, shareholders are taxed on dividend
distributions. Both directors and officers are agents of
the corporation and as such owe fiduciary duties to the
corporation. In general, corporations provide shareholder
owners with limited liability, even if mistakes are made
in complying with incorporation statutes. Shareholders can
lose their limited liability if they abuse the corporate
form if they fail to comply with corporate formalities,
deal with creditors as individuals, commingle corporate
and personal funds, or are deliberately undercapitalized.
Corporations
in general are more costly to organize, subject to more
government oversight, have significant public reporting
requirements and overall have generally higher taxes due
to double taxation. S Corporations, are generally
smaller than C Corporations. S Corporations are taxed as
if they are partnerships, but there are restrictions that
make C Corporation the only alternative for corporations
with more than 75 shareholders. They however, suffer from
the double taxation penalty whereby income is tax both at
the corporate level and the individual level.
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CLOSELY
HELD CORPORATIONS
Closely
held corporations share a lot of characteristics with
partnerships. The largest shareholders are generally
also on the board of directors and are chief corporate
officers. Closely held corporations are governed by
bylaws and shareholder agreements that resemble
partnerships. Limits are placed on transferability of
ownership stocks, protections are in place to protect
minority interests and there are provisions for resolving
disputes.
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LIMITED
LIABILITY COMPANIES and LIMITED LIABITLITY PARTNERSHIPS
Limited
Liability Companies and Limited Liability
Partnerships straddle the advantages of limited liability
of corporations and the tax advantages of partnerships.
They are in essence a hybrid, which have been created as a
fiction by law. In LLCs not only do the members of
the LLC become protected from liability but so do the
Managing Members, which is an advantage over a General
Partner in a limited partnership. Like S
Corporations, LLCs. Offer the joint advantages of
corporate limited liability and the favorable tax
treatment of a partnership with earnings flowing through
to individual LLC owners’ personal income for tax
purposes. LLCs differ from S Corporations in a
number of advantageous ways. They are permitted to
have multiple classes of stock, can have any number of
stockholder members, and are not limited in the classes of
owners, so they can issue stock that will be owned by
corporations and partnerships. LLPs on the other
hand, are often selected by professionals while still
complying with ethical requirements of state licensing
board. An LLP generally provides partners with
protection against claims resulting from the malpractice
of other members or employees of the partnership. In
addition, however, partners still generally remain
personally liable for general debts of the partnership
such as those incurred for rents, repairs, bank loans,
etc.
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JOINT
VENTURES
Joint
ventures are like partnerships of two companies or
individuals that are organized to accomplish a task but do
not generally have an indefinite life. Joint venturers are
jointly and severably, and unlimitedly liable for debts of
the joint venture.
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FRANCHISES
Franchises
are a very popular way of retailing products in the United
States. Franchises are able to use trademarks of the
parent company in return for agreeing to operate the
business within the guidelines of the franchise agreement.
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NOT
FOR PROFIT CORPORATIONS
Not
for Profit Corporations are entities established for the
purpose of conducting charitable, educational or other
similar motives which allow for corporate protection from
liability, but more importantly, if they comply with local
and federal regulations are given tax exempt status and
thus pay no tax on the moneys raised for their
organizations goal. Filing with the state and receiving
approval from the IRS under a provision known as 501(C)(3)
is necessary in order to receive such tax exempt status.
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