04 01 2015 April 1st Chapter 12 American Business Organizations Three phases of any business Creation Operating Stage years when you re hopefully making profits and the business is doing well Exit Stage at some point during the life of the business if you decide you want to close or sell maybe it s not doing well maybe you want to retire Types 1 Sole Proprietorship Very easy to set up and form a business you can start tomorrow if you wish Almost no formalities registration to set up The person is not separate from the business the person who started it is liable for all debts You ll be taxed when it makes money This type of business is the hardest to raise capital for Two ways to raise capital debt financing loans or selling stock there is no stock so you can t really do this yet o All you can do to raise money is put your own money into it or borrow money which is all based on your own borrowing power 2 Partnership You have to have at least 2 partnerships to set this up by law The Partnership Act tells you how to form a partnership usually a written partnership agreement names and addresses of the partners what s the purpose of the partnership partners capital contributions and how the partner s will share profits This will be assumed to be 50 50 in both contribution and profits unless specified otherwise in the agreement If one of the two partners dies or goes bankrupt the business is terminated because you can t have a partnership with one owner Partners are personally liable for the debts of the partnership This means your personal assets can be seized by creditors 3 Limited Partnership Limited Partnership Act says you can have both general partners and limited partners You need to have at least one general partner and you can have as many limited partners as you want General partner is personally liable for all debts and is in charge of running all the day to day operations of the business A limited partner is not liable for the debts all they can lose is what they initially contributed to the business They however do not have the authority to make business decisions or run the day to day operations Usually set up by a partnership agreement specifies who put in what types of capital contributions and specifies if it s supposed to last a certain amount of time or if it s indefinite If the general partner dies or goes bankrupt the business terminates If you have more than one limited partner and one limited partner dies the business goes on 4 Corporation Created under state law by creating articles of corporation that tell the name purpose capital contributions shareholders and file this with the Secretary of State State makes sure no one is already using your name and then issues use a certificate of corporation recognizing you as a legal corporation Separate legal entity from the owners Advantages owners shareholders get limited liability which means creditors can t get at their personal assets if the corporation goes under Disadvantage income can be potentially taxed twice US Federal Income Tax would affect the corporation and then some states might have a separate income tax Then if they decide to give out dividends to shareholders they ll get taxed to the shareholders at whatever tax bracket the individual shareholder is in Three groups of people involved in a corporation Shareholders people who own the corporation If you re publically traded the people who buy stock are shareholders and thus technically owners Shareholders elect a board of directors Board of directors overall managers of the corporation They hire the managers of the business Managers in charge of the day to day business operations Business Judgment rule board of directors and managers are immune from liability if problems arise due to honest mistakes and they re trying to run the business well This means they can t be sued by shareholders for losses A corporation is the only entity by law that can exist indefinitely Typically the only way it terminates is voluntarily if the shareholders vote to dissolve or involuntarily forced into bankruptcy Has greatest ability to raise capital if it s publically traded anyone can buy stock and help finance it Professional Corporations historically came into existence for professionals like doctors and lawyers and such The ability to make contributions ot retirement plans is greater than if they operated as individuals This is much different now most individuals can contribute just as much to their retirement Separate legal entity owners have limited liability Professionals still use this because it s easy to have employees and set up a payroll and they can get around double taxation by registering themselves as employees and paying themselves a salary which is taxed less heavily Limited Liability Corporation these came around because people wanted a business option that would only put at risk their personal contributions without double taxation Shareholders assets are protected It s taxed like a partnership Doesn t pay a corporate level tax income flows through to owners and only gets taxed to them There s no limit on the size of this business Court s have a piercing the corporate veil rule where if they look at the company and it s mostly financed by debt and has almost no equity contributions or they don t really run the business like it s a corporation then the courts won t give limited liability Every partner is equal under an LLC An LLC can t last perpetually by law But all it takes is one owner who isn t happy with the way things are going to end up terminating the business Sub Chapter S Corporation typically used to run a family owned business By law it cannot have more than 100 shareholders Treated just like a partnership income losses and taxes flows to shareholders and is taxed just to them Shareholders get limited liability Joint Venture two or more individuals companies with one specific goal in mind that combine resources to complete the goal under a Joint Venture Agreement Once goal is done it dissolves Not a separate legal entity Cooperative Normally has members that pay a membership fee that is used to pool purchasing power Costco and Sam s probably started off as Cooperatives Syndicate not a separate legal entity Normally 2 or more people or companies coming together to finance a specific project like financing a building or something usually for large real estate projects Characteristics of Types of Organizations 1 Liability if you re an owner of a