4 1 15 Chapter 13 Business Organizations Three phases of setting up a business o Formation or creation Stage New idea need to create Form o Operating stage during life of business o Exit stage Selling or close business Liability Relates to question of do owners have unlimited liability not safe or limited liability personal assets are safe Transfer of Ownership How important is it to you to get in and out of business quickly o Easiest to transfer get out of stock in a publicly traded corporation because readily determined market value and because they are willingly quickly bought and sold o Other entities are more difficult to get out of Management involved in day to day running of business Continuity of life how long a business is alive o When business terminates without planning Taxes incurred get sued etc Tax paid to government Capital equity financing debt financing Large publicly traded companies earn most capital with shareholders Types of major Entities in the US generally can go from 1 type to another Sole Proprietorship no legal separate entity Very flexible or easy for you or I No formality required no license or permit No formal registration requirements Business is just you Any debt incurred you re liable Any income or loss is yours o Liability Unlimited Liability o Transfer of Ownership Difficult Have to find someone who is interested in your unique business Then have to negotiate price o Management Full management o Continuity Limited o Tax one level o Capital most difficult to raise capital Standard Partnership Uniform Partnership Acts states how to set it up Partnership Association of 2 or more people or entities that come together for owners for profit Partnership agreement states partners name and addresses capital that they ll contribute Partnership law says partners are assumed to be equal partners unless the partnership agreement states otherwise o Liability Unlimited Liability o Transfer of Ownership Difficult Boston Celtics are only publicly traded partnership interest Most agreements say you can t sell partnership to a 3rd party without every other partner s consent o Management yes o Continuity Limited if 1 of 2 partners dies goes insane goes bankrupt Ch 12 pg 1 4 1 15 o Tax one level o Capital assets or credit capacity of partners Limited Partnership Agreement that sets up the details of the partners Limited Partnership has at least 1 general partner and at least 1 limited partner A general partner has the authority to run the day to day business of the partnership A limited partner does not they are more of a passive investor A general partner is personally liable for the debts of the ownership A limited partner has limited liability can t get at a limited partner s assets for debts of an ownership can only lose the amount that they invested in the partnership o Liability General Partner Unlimited Limited Partner Limited o Transfer of Ownership hard o Management General Partners have full management o Continuity Limited if 1 of 2 partners dies goes insane goes bankrupt o Tax one level o Capital assets or credit capacity of partners Corporation Legal entity created under state law Formed by filing articles of incorporation with the secretary of state Give the details about the business name of corporation address purpose of business shareholders issue what type of stock Secretary of state makes sure no one else is using name then issue you a certificate of incorporation you are a separate legal entity Biggest advantage is that owners and shareholders have limited liability Three groups of individuals involved Shareholders owners of business publicly people buying shares of stock putting equity into the business to grow their money and hoping for dividends No obligation for business to repay that Board of Directors elected by shareholders Have overall management responsibility Managers of business hired by the board of directors make day to day decisions and run the business Law has a Business Judgment Rule The directors and the managers are immune from liability from damages resulting from honest mistakes that they make o Liability Corporation is separate legal entity Shareholders and owners have limited liability Exception pierce the corporate veil no equity not run like a business then personally liable o Transfer of Ownership o Management no o Continuity Only entity that goes on forever Unless voluntarily dissolved by a vote of the shareholders or involuntarily creditors not getting paid and forced into Ch7 Bankruptcy o Tax potential for double taxation If reinvesting profits for certain number of years not as concerned Dividends get double taxed Investors are looking for dividends o Capital publicly traded have more Professional Corporation Specialized Corporation Historically created by doctors and lawyers so they could make larger contributions to retirement plans Now in all 50 states No real retirement benefit advantage anymore Still used in an attempt to get limited liability Disadvantage some of its earnings can be taxed twice subject to tax at corporate level then again when dividends passed to shareholders If you Ch 12 pg 2 4 1 15 woefully undercapitalize the corporation or don t operate as a corporation court says you are defrauding creditors or not respecting formality of business and ignore the business piercing corporate veil o Liability limited o Transfer of Ownership o Management no o Continuity corporation o Tax Doctors and Lawyers are employees of the professional corporation Their salaries are tax deductible so they don t get taxed twice for that Rent is also tax deductible so they don t pay double for that o Capital publicly traded have more Limited Liability Corporation Owner has limited liability personal protection but only 1 level of taxation Created under Limited Liability company act It is a company and if you set it up and run it correctly it doesn t pay a corporate level tax Only taxes shareholders owners etc No size limit for LLC but make it harder to raise large amounts of capital o Liability limited o Transfer of Ownership o Management no o Continuity terminates if owner dies etc unless the other owners unanimously decide to continue the business o Tax one level o Capital publicly traded have more Sub Chapter S Corporation Specific subset of corporation So limited liability separate entity from person Cannot have more than 100 shareholders Shareholders must be US Citizens or Residents Family businesses Same taxes as