BCOR 320 1nd Edition Lecture 35 Chapter 19 Starting a business Sole Proprietorship An unincorporated business owned by one person Advantages Can run a business without taking any formal steps to create an organization Not required to register with the government Not required to file a separate tax return Disadvantages Owner responsible for all of the business s debts Owner of a sole proprietorship has limited options for financing the business Corporations Limited liability Protects managers and investors from personal liability for the debts of the corporation and the actions of others Transferability of interests Provide flexibility for enterprises small and large Duration Perpetual existence Can continue without their founder Logistics Corporations involve a lot of expense and effort to create and operate Taxes Because corporations are taxable entities they must pay taxes and file returns S corporations Shareholders of S corps have The limited liability of a corporation The tax status of a partnership Restrictions faced are There can only be one class of stock There can be no more than 100 shareholders Shareholders cannot be partnerships or other corporations Shareholders must be U S citizens or residents Shareholders must agree that company should be an S corporation These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Close Corporation A company whose stock is not publicly traded Common provisions of close corporations Protection of minority shareholders Transfer restrictions Flexibility Dispute resolution Limited Liability Companies An LLC offers the limited liability of a corporation and the tax status of a partnership Limited liability Members are not personally liable for the debts of the company Tax status Income flows through the company to the individual members avoiding double taxation of a corporation Formation To organize an LLC charter and operating agreement is necessary Flexibility Can have members that are corporations partnerships or nonresident aliens Transferability of interests Members must obtain the unanimous permission of the remaining members before transferring ownership rights Duration LLC can continue in operation even after a member withdraws Going public Loses its favorable tax status and is taxed as a corporation not a partnership Changing forms Not considered a sale and does not have the same adverse tax impact Piercing the LLC veil If corporate shareholders do not comply with the technicalities of the law May be held personally liable for the debts of the corporation Legal uncertainty New form of organization and the issues of law are not clear Lawsuits are expensive in both time and money Choices LLC v corporation Tax status of an LLC is a major advantage over a corporation Reasons for venture capitalists to prefer C corporations Arcane tax issues C corporations are easier to merge sell or take public Corporations can issue stock options General legal uncertainty involving LLCs Socially Conscious Organizations Hybrids are called Flexible purpose organizations Benefit corporations Low profit limited liability companies Community interest companies Such businesses focus on the interests of Stakeholders Community Environment General Partnership Partnership An unincorporated association of two or more co owners who carry who operate a business for profit Each co owner is a general partner Taxes Profits flow through the owners Liability Partner is personally liable for the debts of the enterprise Whether or not she caused them Management rights Partners share both profits and losses equally Each partner has an equal right to manage the business
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