Forms of Doing BusinessFINAL REVIEWForms of Doing Businessa. Formation – All require money to start up.b. Taxationc. Liability – Most important, when we get sued (if we get sued) we put in peril all of the thingsthat we have accumulated over our life time. (Money, car, house). In certain types of companies this can be avoided.d. Transferability of Interesti. Over 50% of small businesses fail after 4 years of operation.e. Sole Proprietorshipi. Formation: One owner, no formalities as to what privileges you get within the company.ii. Taxation: Every dollar that you make or loose goose directly passes through to your personal tax return (called a 10-40 return).iii. Liability: If someone sues you, your personal property is liable to compensate for the injured persons losses.iv. Transferability of Interest: You can sell the assets and good will, not much else to give because they are the owner.f. Partnership (Not a separate corporate entity)i. Formation: Similar to the Sole Proprietorship except with at least 2 people (can be as many people as you would like). If something where to happen with one of your partners and there was no more formalities with the partnership agreements there could be an issue with your partners spending money in ways you would not want to.1. Law of Agency (Drawback to Partnership): If we started a partnership with the entire class and did not define an executive committee, everyone in the room would be agents and principals for the company. a. Ex: Agent signed a contract for Craig Fergusson to do the Pow-Wow.(Each of our classmates has the legal rights to make any decision that they would like).g. Limited Partnership (not a separate corporate entity)i. Formation: Creature of statute, need at least one general partner and at least one limited partner. Meant for people to shelter themselves from a business that they are currently associated with. Usually wealthier people will do this in order toprotect their assets not associated with the current business endeavor (they can only loose what they put into the company).ii. Informational return used for the IRS to double check your accounting.iii. On paper Limited partnerships usually have a lot of paper losses due to the amount of money they are putting into the company.iv. Liability: General partners have liability, whereas limited partners only have the amount of liability that they put into the company and no more.h. Corporationi. Formation: Usually formed in order to avoid corporate liability. Creating a corporation is forming a completely separate legal entity (literally like a separate person). Can now form with just one person (Delaware is really lenient on this). 1. Has to indicate in its name that the company is a corporation or not (Inc.).2. Cannot forget that both the company and the person ARE separate, you should not co-mingle funds between your company and your personal accounts.3. There are some formalities that you MUST follow such as having recorded meeting minutes. 4. Piercing the corporate veil: Causing an owner to lose the protection of the corporation an being able to hold them liable personally for damages that they might have caused (even if working as the corporation)ii. Taxation: One of the drawbacks of a large corporation, without doing anything differently, will have to be double taxed. If the company makes money, and pays some out to one of the owners it gets taxed, once the owner receives it they are taxed for their personal income as well.iii. Transferability of Ownership: Easy to give away ownership in corporations (stocks). Just as easy to do with a big company as a small company (besides the fact that places like the stock market advertise bigger company’s stocks for them).1. Amendment of Internal Revenue Code led to the creation of S corps.i. Subchapter “S” corporationi. Similar to the C corporation, however does not face double taxation. Shows the money that was made in the company and where it was sent out to the shareholders (eliminates double taxation).1. Some of the catches: As long as you have 75 or less shareholders, and everyone agrees who is a shareholder.2. Again, only treated differently with regards to IRS tax purposes. j. Limited Liability Company (LLC) (2 types of LLC)1. Member Managed: Just like the example from the classmates start up. Everyone that is in the partnership has voting rights and decision making power.2. Manager Managed: All the members would decide that a certain number of members in the group would be the executives of the company. Or they could decide to bring in someone else to manage the company (main fact is there are leaders versus completely group oriented.a. When 3rd parties come and talk to your company, they will seek out the managers. Vice-versa, if there is an issue with something, the law would seek out the managers.ii. Formation: Not a corporation, no shares of stock. If you own interest in an LCC, you are a member (not a partner, director, or shareholder) in the company.iii. Taxes: Similar to the S corporation, money passes through the company to the owners.iv. Liability: Can only loose what you put into the company.v. Transferability: Not usually big companies. Usually harder to do, since there is no stock.-Owners select directors; directors will usually select management and
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