OVERVIEW OF BUSINESS ORGANIZATIONS. Introduction Sole Proprietorship Partnerships –General...

OVERVIEW OF BUSINESS ORGANIZATIONS

Introduction

• Sole Proprietorship• Partnerships

– General Partnership

– Limited Partnership

– Limited Liability Partnership

• Corporation– Close Corporation

– Publicly Held Corporation

– S Corporation

• Limited Liability Company

Factors to C

onsider in C

hoosing Form

s of B

usiness Organizations

• Creation

• Control

• Limited liability

• Taxation

• Duration

• Ability to raise capital

• Advantages

• Disadvantages

SOLE PROPRIETOR-SHIP

C CORPORATION

PARTNERSHIP S CORPORATION

LIMITED LIABILITY COMPANY

CREATION

CONTROL

LIABILITY

ABILITY TO RAISE CAPITAL

SOLE PROPRIETOR-SHIP

C CORPORATION

PARTNERSHIP S CORPORATION

LIMITED LIABILITY COMPANY

TRANSFER-ABILITY OF OWNERSHIP

CONTINUITY

TAX PAYING ENTITY?

TAX FORM

SOLE PROPRIETOR-SHIP

C CORPORATION

PARTNERSHIP S CORPORATION

LIMITED LIABILITY COMPANY

ADVANTAGES

DISADVAN-TAGES

SOL

E

PR

OP

RIE

TO

RSH

IP

• Creation

• Control

• Limited liability

• Taxation – Tax Form: Schedule C

• Duration

• Ability to raise capital

• Advantages

• Disadvantages

PARTNERSHIPS

Types of Partnerships

GeneraGenerall

GPGP

GPGP

GPGP

GPGP

LimiteLimitedd

GPGP

PassivePassiveInvestorInvestor

PassivePassiveInvestoInvesto

rr

PassivePassiveInvestorInvestor

GENERAL PARTNERSHIPS

The U

NIF

OR

M

PA

RT

NE

RSH

IP A

CT

defines a partnership as:

• an association of 2 or more persons

• carrying on a business

• as co-owners

• for profit

GE

NE

RA

L P

AR

TN

ER

SHIP

• CREATION:• CONTROL:• LIABILITY:• TAXATION: Form 1065• DURATION:• ABILITY TO RAISE

CAPITAL:• ADVANTAGES:• DISADVANTAGES:

LIMITED PARTNERSHIPS

Georgia Filing Procedures

LIM

ITE

D P

AR

TN

ER

SHIP

• CREATION:• CONTROL:• LIABILITY:• TAXATION:• DURATION:• ABILITY TO RAISE

CAPITAL:• ADVANTAGES:• DISADVANTAGES:

Corporations

Incorporation

• Where to Incorporate• Steps in Incorporation

– Preparation of the articles of incorporation

– Signing and authenticating the articles by one or more of the incorporators

– Filing the articles with the Secretary of State and paying all required fees

– Issuance of the certificate of incorporation by the Secretary of State

– Holding an initial organizational meeting

Corporate Managerial Control

ShareholdersShareholders

Board OfBoard OfDirectorsDirectors

OfficersOfficers

EmployeesEmployees

ElectedElected

HiredHired

Duties of Directors and Officers

• Duty to Act within Authority– Ratification

• Duty of Due Care and Diligence– Prudent Person Standard– Business Judgment Rule– The Business Judgment Rule in the Takeover

Context– Deal Protection Devices– Legislative Responses to Increased Director

Liability• Charter Option Statutes• Self-executing Statutes• Cap on Monetary Damages Statute

Duties of Directors and Officers

• Duty of Loyalty and Good Faith– Self-Dealing– Usurping Corporate Opportunities– Freeze-Outs, Oppression, and Bad

Faith– Trading on Inside Information

• Director’s Right to Dissent

Corporate Taxation• Business Profit Tax Form 1120 (or Form 1120-A)

• Shareholder/Dividend Distribution Tax• Avoiding Double Tax

– Closely Held- Reasonable Officer Salary– Employee/Shareholder Expense Account– Capital Structure- Equity v. Debt– Accumulate Earnings- No Dividend– File Subchapter S

Corporate

Characteristics

• LIABILITY– Limited for investors (unless

corporation is a sham.)– Officers & directors may have

some liability

• DURATION/CONTINUITY– Can outlive its creators/owners– Ownership can be sold subject to

security laws & shareholder agreements

Corporate

Characteristics

• ADVANTAGES– Practical means of bringing large

number of investors together.– Limited liability for investors – Perpetual existence– Shareholders can also be

employees

Corporate

Characteristics

• DISADVANTAGES– Cost of forming & maintaining– License fees & franchise taxes– Double taxation– Must be qualified in all states

where it is doing business– More government regulation

Organizational Form Hybrids

• S Corporations– Legal Characteristics Of Corporation– Can Elect To Be Taxed As Partnership

• Limited Liability Company– Nontaxable Entity– More Flexible Than S Corp.– Shareholders = “Members”

S Corporation

• Domestic

• Not a member of affiliated group

• Shareholders can be individuals, estate, & certain trusts

• 100 or fewer shareholders

• Only one class of stock

• No nonresident aliens

S Corporation

• Tax Form 1120s

Historically, for tax purposes, an organization with at least 5 of the following characteristics was considered a CORPORATION

• Association of owners

• Carrying on business

• Continuity of life

• Separation of ownership & management

• Limited liability

• Free transferability of ownership interests

• Starting in 1997, “check the box” rules became effective.

Lim

ited Liability

Com

panies

• Creation– Filing of articles of organization

with secretary of state• Legal Status

– Separate entity• Operation

– Separate and distinct from members

• Transferability• Dissolution

Lim

ited Liability

Partnerships

• Creating an LLP– File LLP form with the state

• Managing the LLP– Equal voice in management

unless altered by agreement

• LLP Taxation– LLP pays no income tax– Partners report share of LLP’s

profit on personal return

Which form

of business organization should

they use?

• Adam, Bonnie, and Carl want to open a Thai restaurant.– Adam has no money to invest,

but he has a bartender’s license and was an assistant manager at a restaurant for 10 years.

– Bonnie is a dentist who is looking for an investment.

Which form

of business organization should

they use?

– Carl has $20,000 in savings. He can invest some, but needs the rest to send his daughter to cosmetology school. He has tried several business ventures in the past, but they have all been failures. He hopes this one will make it and he is counting on his best friend, Adam, to help him.

Which form

of business organization should

they use?

• Before forming their business, Adam and Carl learn that Bonnie has been performing some unauthorized procedures while her patients are anesthetized. She is now being hit with dozens of lawsuits. Should they consider different form of business entity?