Desk-Crits Firm Legal Structures Flashcards
Sole Proprietorship
Describe: Simplest business type owned by individual; default if no action is taken; NOT an independent entity from the individual
Advantages: Ease of set up; total control ; business expenses and losses deducted from income of business
Disadvantages:
- Owner personally liable for debts and losses
- assets and property can be seized
- credit determined by personal credit
- difficult to sell the business
Taxes:
- No separate federal tax return filed or tax incurred
- File Schedule C (Form 1040) - Profit and Losses from Sole Proprietorship every business quarter
General Partnership
Description:
-Two or more general partners practicing together, sharing management, profit, and risk
- No Formal legal steps required
Advantages:
- Partnership allows sharing of different skills
Disadvantages:
- Partners are personally liable for debts and losses, including actions of other partners
Taxes:
- Files federal return but does not incur taxes
- Flow - Through Entity: Income and losses pass to partners, taxed at individual rates
Limited Partnership
Description:
- At least 1 general partner and 1 limited partner
- GENERAL PARTNER : Invest in the business and are personally liable
- LIMITED PARTNERS: Invest, receive portion of profits, and are only liable for their own investment
Advantages:
- Partnership allows sharing of different skills
- Differentiated partnership provides a means to distribute power and risk
Disadvantage:
- General partners are personally liable for debts and losses, including actions of other partners
Taxes: Files federal tax return but does not incur taxes
- FLOW-THROUGH ENTITY: Income and losses passed to general partners, taxed at individual rates
Subchapter C Corporation
Description:
- Association of individuals that exists as a legal entity apart from its members
- Three types of members:
#Stockholders (elect directors)
# Directors (elect Officers)
# Officers (manage day to day, fiduciary duty to
Stockholders)
Advantages:
- Members personal assets are not at risk
- Taxed at lower rate than individuals
Disadvantages:
- initial cost, paperwork, formal requirements, double taxation
Taxes: Corporations are taxed twice:
1. Corporation are taxed on profits
2. Shareholders are taxed on dividends
Subchapter S Corporation
Description:
- Small business corporation (no more than 100 shareholders)
- Allocates income and losses directly to shareholders in
proportion to their holdings
Advantages:
- Members personal assets are not at risk
- Taxed at lower rates
Disadvantages:
-Inhibited corporation growth
Taxes:
Files federal tax return but does not incur taxes
FLOW -THROUGH ENTITY: Income and losses pass to partners, taxed at individual rates
Professional Corporation
Description:
- Owned by stockholders who must all be licensed
Advantages:
- Liability for malpractice is limited to the professional who committed the act
Disadavantages: Specific regulations can be cumbersome
TaxesFile deferal but does not incur taxes
FLOW-THROUGH ENTITY: income and losses pass through to stockholders, taxed at inidividual rates
Flow-Through Entity
Income and losses pass to partners, taxed at individual rates
Limited Liability Partnership
Description:
- Liability to each partner’s individual professional negligence and malpractice. Partners are considered self employed
- Frequently superseded today by LLCs
- Professional Limited Liability Partnership: Parterns must all be licensed
Advantages:
- Partnership allows sharing of different skills
- Personal assets are protected from most claims; partners are liable for only their own negligence and mal practice
Disadvantages:
- Complex formation process, must form an LLP
Taxes
- Files federal tax return but does not incur taxes
- Flow-through entity: Income and losses pass to general partners, taxed at individual rates
Limited Liability Corporation
Partners are members, liability is limited to individual professional negligence and malpractice
Advantages:
-Same as Limited Partnership with flexible taxation
Taxation can be treated as a sole propertiorship, partnership or corporation
Disadvantages:
- Complex formation process, must form an LLC
Taxes:
- Files federal tax return but does not incur taxes
-Flow Through Entity
Joint Venture
Description: Temporary alignment of 2 or more persons or firms to complete a specific project
Memorandum of Understanding is often used to fomalize agreement
- 2 partners become a third company
- Typically formed after project has been awarded
Advantages: Good for complex projects when firms have complementary experiences
Disadvantages:
- Each partner or firm is liable for the actions of the other; they can be sued individually or collectively
- Difficult to allocated responsibility and liability
Taxes:
- Pays no tax and earns no income or profit; each partner or firm taxation proceeds as separate entities
