Forms of Business Flashcards
Score a bitchin grade on Bus Orgs Exam
Sole Proprietorship
- Structure: one person, one business
- Liability: personally liable for everything [CGL Insurance]
- Advantages: (1) complete control over decision-making; (2) sale or transfer of business at owner’s discretion; (3) no corporate tax
- Disadvantages: (1) sole liability for debts and acts by employees; (2) impermanence; (3) little chance of outside investment
General Partnership
- Structure: two or more persons doing business for profit as co-owners
- Liability: partners are jointly and severally liable
- Advantages: (1) shared financial commitment; (2) flexibility in deciding profit distribution among owners; (3) limited start-up costs; (4) each partner can bind the whole business (“agency authority”
- Disadvantages: (1) personal difference on business goals; (2) reverse liability; (3) get out ability
Limited Partnership
- Structure: general partner and limited partners
- Liability: GP (reverse liability); LP (limited liability unless name used in business)
- Advantages: (1) can add as many limited partners as you wish
- Disadvantages: (1) LPs cannot participate in management; (2) LPs name cannot be used in business; (3) life of LP depends on life, solvency and willingness to stay of GP; (4) GP is subject to full contract and tort liability
Corporation
- Structure: a legal entity consisting of a person or group of persons who become shareholders, controlled by a board of directors
- Liability: limited liability for owners; corporation is different entity for purposes of liability, taxes, etc.
- Advantages: (1) limited liability for owners; (2) corporate tax treatment means owners themselves pay taxes only on salary paid to them, bonuses & dividends; (3) easier to attract investment; (4) owner can operate as employee; (5) perpetual existence (outlives owner); (6) shares can be transferred at will; (7) unlimited number of owners
- Disadvantages: (1) cost and complexity of setting it up; (2) double tax bite; (3) costly to dissolve; (4) government regulation (filing annual forms, etc.); (5) no possibility of filtering losses to shareholders
Corpnership
- Structure: severing ownership from business itself
- Liability: GP has same liability as a corporation
- Advantages: (1) permanent because GP is a corporation; (2) no reverse liability; (3) limited liability of everyone because everyone is LP; (4) LPs can engage in management (by being appointed to BOD); (5) avoids double tax bite (treated as LP); (6) all losses/profits accrue to LP
- Disadvantages: (1) dangerous and not permitted in all states (may have case in a state that it is not allowed); (2) DELANEY - public can assume that if LP manages then LP is GP for purposes of liability AND conflict of interest because partner owes fiduciary duty to partnership and corporation (but see FRIGIDAIRE - no conflict of interest because interests of corpnership will always coincide with partnership ONLY IF corporation existed before LP)
Limited Liability Company (LLC)
- Structure: a legal entity that combines several aspects of corporate and general partnership structures; members own percentages of business, take part in management which is also flexible
- Liability: limited liability for members (personal assets not at risk)
- Advantages: (1) can elect to be taxed as a partnership via “check the box” form (no double tax bite); (2) all profits/losses accrue to members in any amount chosen; (3) all members can participate in management; (4) unlimited number of owners; (5) no formal meeting requirements
- Disadvantages: (1) harder to “go public” than corporation; (2) more complex start-up than partnership; (3) more paperwork and expensive than partnership; (4) laws govern investments
Limited Liability Partnership (LLP)
- Structure: general partnership, but limits liability for partnerships in certain jurisdictions (DE)
- Liability: (1) individual partners not liable for other partners (no reverse liability) UNLESS partner was (a) involved, (b) supervised, or (c) had notice but didn’t take action
- Advantages: (1) no joint and several liability of other partners unless under 3 exceptions
- Disadvantages: (1) because of 3 exceptions, states require LLPs to buy insurance; (2) costs are usually prohibitive
Professional Corporation
- Structure: corporate entities for which statutes heavily regulate use by attorneys, doctors and others which relationships are based on trust; may have single or multiple directors
- Liability: unlike corporation, does not absolve professional from personal liability for negligence or malpractice (must purchase malpractice insurance)
- Advantages: (1) MAIN REASON PEOPLE CHOOSE P.C. = unlike GPs, owners are not personally liable for malpractice of other owners; (2) allow members to have retirement benefits
- Disadvantages: (1) personal liability of individual owners
Subchapter (S) Corporation
- Structure: (1) a business that has made an S selection with the IRS (a tax accounting classification); (2) does not have to be a corporation; (3) often a “family company” or “closely held company”; (4) must have less than 100 shareholders; (5) no more than one class of stock; (6) no assignment of profits/losses (flow to shareholders according to % of stock owned)
- Liability: normal limited liability of a corporation
- Advantages: (1) limited liability; (2) single-tier taxation (no corporate-level tax); (3) no federal income tax (except for certain capital gains and passive income); (4) filters losses to shareholders in % of stock owned
- Disadvantages: (1) restricted; can’t go public; (2) more costly start-up than partnership; (3) owners must be U.S. citizens or permanent residents; (4) dividends must be distributed to owners on basis of ownership stake; (5) only common stock (no preferred) = (a) right of dividends, (b) right of liquidation, (c) right to vote
Why is a LLC better than a partnership and sole proprietorship?
(1) No liability to any individual member
(2) It is permanent; members are like shareholders in that there is no reverse liability
Why is a LLC better than a LP?
(1) No need for general partner
(2) All members can participate in management
(3) Can use members’ names in the name of the firm without exposing them to liability
Why is a LLC better than a corporation?
(1) No double tax bite
(2) Can pass through losses to the individual members in any percentage desired
(3) No restrictions on form of management
Why is a LLC better than a Sub (S) corporation?
(1) No limitation on number of members
(2) No limitation on types of memberships (can have foreign investors)
(3) Can have more than one class of stock (profits/losses do not have to flow through in lockstep)
Compare LPs with LLPs
(1) Both businesses with more than one owner but unlike GPs, they both offer some of their owners limited liability for business debts
(2) LP – at least one of the owners is a GP who makes business decisions and is personally liable and at least one LP who invests and have limited personal liability but minimal control over daily business decisions & operations
(3) LLP – similar business structure but has no GPs; all of the owners have limited liability
How is a LP different from a GP?
(1) LPs do not play an active role in business
(2) LPs are not personally liable
(3) LPs don’t have to pay self-employment taxes because not active in business decisions but can still get income
