Major Forms of Business Organizations
- Sole Proprietorship
- General Partnership
- Limited Partnership
- Limited Liability Partnership
- Limited Liability Company
- Corporation
Sole Proprietorship
- Unincorporated business owned by one person
- Owner has total control
- Owner has unlimited liability
- Profits taxed directly as income to sole proprietor
***Generally operates under fictitious name
Advantages of Sole Proprietorship
-Ease of creation ("start-up")
-Owner has total managerial control
-Owner retains profits
Disadvantages of Sole Proprietorship
-Personal liability for all business debts/obligations/losses
-Funding limited to personal funds and loans
General Partnership
- Unincorporated business owned and operated by two or more persons
- Each partner has equal control of business
- Each partner has unlimited, personal liability for business debts/obligations/losses
- Profits taxed as income to partners
***Generally oper
Advantages of Partnerships
-Ease of creation ("start-up")
-Partnership income is partner income (called "flow through" taxation)
-Business losses qualify for tax deduction
Disadvantages of Partnerships
-Personal liability for all business debts/obligations/losses, including those incurred by other partners on behalf of partnership
Termination of Partnership
Occurs through two stages:
- Dissolution
- Winding Up
Dissolution
Change in relation of partners caused by any partner's ceasing to be associated with carrying on of business
Winding Up
Completing unfinished partnership business, collecting and paying debts, collecting partnership assets, and taking inventory of business
Reasons for Rightful Dissolution of a Partnership Pt1
- The term established in the partnership agreement expires
- The partnership meets its established objectives
- A partner withdraws from the partnership at will
- A partner withdraws in accordance with the partnership agreement
- A partner is expelled fr
Reasons for Rightful Dissolution of a Partnership Pt2
- The business of the partnership becomes illegal
- A partner is adjudicated insane
- A partner becomes incapable of performing the duties as established by the partnership agreement
- The business of the partnership can be carried on only at a loss of pr
LLC's
-Can choose to be taxed as a sole proprietorship (in some instances), partnership, or corporation (referred to as "check the box" rules
Corporations
- Profits taxed as income to corporation, as well as taxed as income to owners / shareholders ("double-taxation")
- Qualification and application for "S" Corp tax status can avoid double-taxation and result in taxation similar to the LLC taxation result a
Limited Partnership
Unincorporated business with at least one general partner and one limited partner
General partner in limited partnership has managerial/operational control over business
Limited partner's liability limited to extent of his/her capital contributions
Limite
Advantages of Limited Partnerships
-Liability of limited partner(s) limited to investment
-Limited partners do not participate in management, and therefore, this may be attractive for certain types of ventures
-Business losses qualify for tax deduction and flow through to partners
Disadvantages of Limited Partnerships
-General partners have personal liability for all business debts/obligations/losses/liabilities, including those incurred by other partners on behalf of partnership
- Difficult to remove general partners
Limited Liability Partnership
- Partnership in which all partners assume liability for his or her own actions and for any partner's professional malpractice but then, only to the extent of the partnership's assets and/or capital contributions
- Parties must file form with Secretary of
Advantages of Limited Liability Partnerships
- Liability of limited partner(s) limited to partnership assets/investment except for his or her own personal liability/malpractice
- Business losses qualify for tax deduction and flow through to partners
Disadvantages of Limited Liability Partnerships
- Provides slightly less liability protection than other similar forms of organizations (such as corporation and LLC)
- Formality limitations, such as prohibitions against certain persons or organizations holding partnership interests in an LLP
Limited Liability Company
- An unincorporated business organization with limited liability of a corporation, yet it can be taxed like partnership
- Parties must file form (Articles of Organization) with Secretary of State to create and usually adopt an Operating Agreement to gover
Advantages of LLC
-Limited liability for members/managers
- Flexible tax treatment
- Flexible management structure with few requires formalities
-Potential for perpetual duration
Disadvantages of LLC
-May be limits to ability to raise capital through this structure (when compared to corporations) as some investors may not desire membership status
Corporation
A legal entity formed by issuing stock to investors (shareholders)
Parties must file form (Articles of Incorporation) with Secretary of State to create
Owners' are called "shareholders" and have liability limited to amount of investment in corporation
Act
Advantages of a Corporation
-Limited liability for shareholders
-Ease of raising capital by issuing (selling) stock
- Generally free transferability of ownership
- Can have perpetual duration
Disadvantages of a Corporation
-"Double-taxation" as a "C Corporation" if don't qualify for and elect "S Corporation" status
-Formalities required in establishing and maintaining corporate existence (the corporate veil can be pierced)
S" Corporation
Special type of corporation that is permitted to be taxed like a partnership
All corporations begin as a "C"
Corporation, but can elect under federal law to be treated as an "S" Corporation
No more than one hundred shareholders
Shareholders must report in
Specialized Forms of Business Organizations
- Cooperative
- Joint Venture
- Franchise
Types of Franchises
Chain Style Business Operation
Distributorship
Manufacturing Arrangement
Chain Style Business Operation
-Franchisor helps franchisee establish a business (using franchisor's business name, and franchisor's standard "methods and practices") (for example, Taco Bell)
Distributorship
-Franchisor licenses franchisee to sell franchisor's product in specific area (for example: Budweiser distributorships)
Manufacturing Arrangement
-Franchisor provides franchisee with technical knowledge to manufacture franchisor's product (for example: Coca-Cola, which sells the syrup to its local manufacturing companies to produce and distribute the product)