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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?
