BUSINESS FORMS
1. Sole Proprietorship
o A business owned by a single individual
o No legal separation between the owner and the business
o The owner is personally liable for all business obligations
2. General Partnership
o Default form for businesses that are owned by more than one person
o General partners are each individually liable for partnership obligations
o Prevalent in service industries: law, accounting, medicine
3. Limited Partnership (LP)
o Formed at the time of the filing of the certificate of limited partnership
o Limited partners are liable only to the extent of their investment
o General partners run the business and are fully liable for partnership debts
o Uniform Limited Partnership Act of 1976 (ULPA)
· A limited partners is not liable for obligation of a limited partnership unless he is also a general partner or, in addition to the exercise of his rights and power as a limited partner, he participates in control of the business
· However, if he participates in the control of business, he is liable only to persons who transact business with the limited partnership reasonably believing that the limited partner is a general partner
4. Limited Partnership with a Corporate General Partner
o A corporation is the sole general partner of a limited partnership
o Limited partners can be officers, directors, or shareholders of the corporate general partner
o Used by both publicly held and closely held enterprises.
o Federal Income Tax now requires limited partnerships with publicly traded ownership interests to be taxed as corporations
5. Limited Liability Partnership (LLP)
o General partnership in all respects except that by statute the partners have no personal liability for obligations that exceed the assets of the general partnership.
· EXCEPTION: partners have full personal liability for claims arising from their own misconduct
o Popular with law and accounting firms, but not so much in commercial businesses
6. Limited Liability Limited Partnership (LLLP)
o Fewer than 1/2 of states allow LLLPs
· Florida does allow
o Limited Partnership with both general and limited partners, but the general partners have the protection of the LLP election
o General Partners manage while Limited Partners just have a financial interest
o Used in only certain relatively narrow situations.
7. Limited Liability Companies (LLC)
o Relatively new business form
o ULLCA
o Provides benefits of incorporation with the limitation and rules applied to corporations
· Provides limited liability for all participants, whether or not they are active in the management of the business
· Permits total flexibility in internal management
· Eligible for partnership taxation despite the fact that no participant was personally liable for firm obligations.
o Primarily replacing general and limited partnerships, and closely held partnerships to a much lesser extent
o Can also be used for non-business assets
· Investment property, Spendthrift trusts
8. Corporation
o What is it?
· An entity independent of its shareholders
§ Can itself enter into contracts, borrow money, sues and be sued, and otherwise conduct business though it were a real person
· “Publicly Held”
§ Corporation has shares that are traded on public securities markets and subject to federal regulation
· “Closely Held”
§ Corporation that does not have publicly traded shares
· Consists of three layers:
§ Shareholders
· Ultimate owners of the enterprise
§ Board of Directors
· Managers of the corporation’s affairs
· MBCA § 8.01 – all corporate power shall be exercise by or under the authority of, and the business and affair of the corporation managed by or under the direction of, its board of directors
3. Officers
· Act for the corporation to implement the decision of the directors
· MBCA § 8.41 – each officer has the authority and shall perform the duties set forth in the bylaws or, to the extent consistent with the bylaws, the duties prescribed by the board of directors of by direction of an officer authorized by the board of directors to prescribe the duties of other officers.
§ A single individual may simultaneously act as an officer, a director, and a shareholder.
o How is it formed?
· Formed by following the procedures set forth in the state’s corporation statute
· MBCA § 2.03 – corporate existence begins upon the filing of articles of incorporation (creation of a new legal entity)
§ Fla. Stat. 607.0202
· Articles of incorporation must set forth:
· Corporate name
· Number of shares authorized
· Any preemptive rights
· Articles of incorporation may set forth:
· The purpose or purposes for which the corporation is organized
· Defining limiting, and regulating the powers of the corporation and its board of directors and shareholders
o Advantages
· Provides limited liability for all investors and participants, whe
to a file a long form 1040 and a separate tax form, Schedule C, to be prepared to record gain or loss from each business owned by the taxpayer.
d. Each sole proprietor must also take into account the requirement of the Self Employment Act of 1954 (SECA)
· Imposes a tax on Schedule C income equal to 12.4% of proprietorship income up to $80,400 for Old Age Survivors and Disability Insurance (OASI)
· Additional uncapped 2.9% tax for Medicare
2. Partnerships
a. An unincorporated business entity that has at least two owners generally will be classified for federal income tax purposes as a partnership under Subchapter K
· Partnership does not pay any tax, but it does compute its taxable income and file an informational return, Form 1065, with the IRS
· The income or loss is “passed through” to the partners in accordance with the partnership agreement
· The partnership must provide each partner with a Form K-1 informing each partner of his/her respective share of the partnership income
b. “Check-the-Box”
· Alternatively, the entity may elect to be classified for federal income tax purposes as a corporation
3. LLCs
a. Secures the federal income tax advantage of partnership status while simultaneously preserving the state law benefits of limited liability for the entity’s owners
b. The IRS identifies 6 facts that are said to be considered in deciding whether an association will be taxable as a corporation:
· Associates engaged in a joint venture
· The purpose of transacting business and sharing its gains
· Continuity of life
· Centralized management through representations of its participants
· Limited Liability
· Free transferability of interest
· Determination invariably turns on the final four factors
