Business Structures Flashcards
Sole Prop
- No formal paperwork required
- no legal distinction between owner and business
- Schedule C
Partnerships
- 2 or more people carry on business for profit
Transfer of Ownership
- assignment of ownership interest
- current partner assigning rights to next individuals
- restricted only in partnership interest (that assignee does not make them a partner)
- All are pass-thru for income
- All can hold assets in partnership name and these belong to the partnership and not any one partner
- Can sue and be sued in the partnership name
- all require a partnership requirement, but not filed with state
Partnership Agreement
Capital Contribution: assets and resources each partner is contributing
Profit and Loss Distribution: how profit and loss is divided among partners
Management and Decision Making: roles and responsibilities for each partner
- usually any partner has authority to enter into binding contracts or agreements on behalf of the partnership
- each partner is an agent of the partnership
Admission and Withdrawal of Partners: Process for handling new partners and withdrawal, death or incapacity of partner
Dispute Resolution: How disputes will be resolved within the partnership
Dissolution: How assets will be distributed upon dissolution
Non-Compete Clause: Prevent partners from competing with the partnership during and sometimes after the partnership ends
Confidentiality: What information would be confidential during and after the partnership
General Partnership
- all owners are personally liable for business debts
Limited Partnership
- at least one general partner - manages the business
- one or more limited partners - passive investors
- limited partner is limited to the extent of investment
- require special filings ‘Registration Application’
- popular with real estate
Limited Liability Partnership (LLP)
Also LLLP - Limited Liability Limited Partnerships
- NO personal liability for all owners
- require special filings ‘Registration Application’
LLP is for professionals - doctors, lawyers, CPA’s
Corporations
Separate Legal and Tax Entity
- owned by shareholders
- C-corp - does not passthrough and subject to double taxation
- allow for the easiest transferability of ownership interest
- some are ‘publicly traded’ and stock is sold on a national exchange
Corporate Triangle
- Stockholders at bottom - limited to their investment
- Board of Directors - elected by stockholders
- Officers - hired by board of directors, day to day
Articles of Incorporation
Certificate of Incorporation or Charter - filed with state to legally establish
- Name of Corp
- Purpose of Crop
- Authorized Shares: number of shares that corp is authorized to issue (type and par value)
- Registered Agent and Office: responsible for receiving legal docs on behalf of the corp
- Name and Address of Incorporator
- Details of Board of - Directors: names and addresses
- Duration of the Corp: perpetuity or specific length of time
Corporate Bylaws
Basic Guidelines for operation of corp after incorporated
- created by board of directors, can be changed by board
- Structure of the corp: number of officers and directors, titles and responsibilities
- Roles and Responsibilities of Officers and Directors
- Procedures for electing and removing directors and officers
- procedures for holding meetings: how often held, who can call a meeting, what constitutes quorum for decisions
- How corp will handle financial matters and record-keeping: how audits are conducted, who has access to corp records and corps fiscal year
Types of Corp
Domestic Corp - company that conducts business in state it is incorporated
Foreign Corp - Operates outside of the state it is incorporated in
- register in each state in which they do business
Professional Corp - doctors, lawyers accountants, engineers, etc
- provides owners with limited liability, but not on personal negligence
Close Corporation - smaller with few shareholders who often serve as the directors and officers
- not publicly traded
- closely held
S Corp - Legal liability structure like c-corp
- tax status with IRS is different
- pass through entity to shareholders
- avoid double taxation
Pierce the Corp Veil
- limited liability protection is lost
- personal assets can be used to satisfy corp obligations and debts
- courts can determine if shareholders or directors committed fraud
- co-mingling personal and corp business assets, failing to keep corp records, undercapitalization (not enough funding) or putting employees at risk and not carrying workers comp ins.
LLC
Hybrid - limited liability of corp with flexibility of partnership
- owners are referred to as members
- no max of members
- can be single member LLC
- passthrough
- file 1065 partnership, Schedule C for single
Formation
- at state level by filing Articles of Organization (Certificate of Formation or Organization) critical doc
- operating agreement outlines how business will be run, including provisions for management structure, process of adding and removing members, how profits and losses will be allocated and procedures for resolving disputes
- if operating agreement is silent or there is none - everything will be split equally
Types of LLC
Member-Managed: all members participate in the day to day management of company
- majority bot
- each member acts as an agent
Manager-Managed: members appoint one manager to handle day to day
- manager can also be an outside individual or another company
- authority to make decisions on behalf of LLC
- No requirement for board of director or hold annual meetings, although they may do so
