BUSINESS STRUCTURES AND BACKGROUND
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There are many different types of business structures available to a young entrepreneur
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Question is deciding which one is right for you
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Why go into business
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Make money
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Create value (not necessarily just money, but financial and emotional profit)
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Goal is to earn economic return, profit, or other increase in value
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Role of the CEO
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Conduct business in accordance with the desires of the employees
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CEO is the agent of the individual that owns the corporation
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What are the deciding factors
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Taxation of the business
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What are the effects on the owner(s)
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Liability of the owners
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What is the potential liability of the owner(s) for the torts of the business or employees
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Control of the business
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How much control of the business does the owner want to retain
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Profits and return
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What percentage of the profit earned does the owner want to retain
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Sole Proprietorship
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Defined
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Oldest form of business
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Owner and the business are the same entity
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Number of owners J
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One owner
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Formation J
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Started without any formalities associated with other forms
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Profits (how much return is retained by owner) J
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All profits go to the owner (the sole proprietor)
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Taxation L
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Owner and business are same entity for tax purposes
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Do not pay taxes separately
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All income of sole proprietorship are reportable as the owner’s personal income tax
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No double taxation
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Control (power of owner to make decisions) J
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All decisions are made by the owner (the sole proprietor)
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Can give up some control when entering into debt (taking loans, give bank veto power)
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Liability (risk) L
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All risks (financial and legal) are undertaken by the owner
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All of company assets and the owner’s possessions are susceptible to liability
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Owner must buy insurance to shield from liability
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Partnership
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Defined
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Business entity (usually small) that consists of multiple owners
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Number of owners
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Small, but more than one
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Profits (how much return is retained by owner)
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Shared among partners
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Taxation J
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No double taxation
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Tax entire profit as if it were the income of the partners
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Partner pays taxes on a personal level only on the share of the income distributed to that partner
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Control (power of owner to make decisions) J
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Control shared by all partners (can make agreements to give up some control)
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One partner → one vote
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Any partner can bind all partners in the partnership
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Control may be managed by an agreement among partners
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Liability (risk) L
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All partners are personally and unlimitedly liable for the debts of the partnership
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Corporation
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Defined
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Business entity that is essentially its own person
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Completely separate and distinguishable from the owners
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Formation L
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Must meet more stringent requirements
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Profits (how much return is retained by owner) L
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Owner of corporation only gets profit through dividends disbursed (shareholder)
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Taxation L
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Corporation gets taxed on profits
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Then disburses dividends to the owners
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Owners are taxed on dividends as income
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Double Taxation
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Control (power of owners to make decisions) L
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Owners essentially give up all control to the board of directors
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Liability (risk) J
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Owner is not subject to liability
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Corporation subject to the risk, not the owners
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S Corporation
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Defined
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Tax status of partnership (no double taxation)
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Legal liability of the corporation
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Formation
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Must meet very restrictive IRS requirements
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Generally for small corporations that couldn’t handle the double taxation of corporations
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Why choose a corporation
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1) Limited Liability
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Owners are not subject to liability for the actions of the corporation
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Subject to exceptions
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Piercing the corporate veil
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Employee/Owner Tort
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Employee is also owner and is sued for something done as employee
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Shareholder guarantee
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Creditor can get to shareholder that personally guarantees debt of corporation
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Go after them as guarantor of the debt, not as owners of the corporation
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2) Advantages of Corporation
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Centralized Management
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Board of directors manages corporation, not the owners
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Allows for professional managers
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Keeps owners (numerous ones) out of the running of the corporation
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Perpetual Existence
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Death or withdrawal of an owner does not affect the legal status of the corporation
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Transferability of ownership
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Owner can transfer ownership relatively easily
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1) Income Statement
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Purpose
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Computes profit during a given period based on data about revenues and costs
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Provides a useful perspective of the business
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Disadvantage
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Can’t see how much cash a business might be ge
as well
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Unless otherwise stated, these provisions apply to the corporation
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Conflicts
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Resolved in favor of statute over Articles of Incorporation
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Amending Articles
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Requires shareholder approval
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Shareholders can’t amend directly, must go through the Board of Directors
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2) Most states require establishing Bylaws
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Defined
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Set of rules that govern the internal affairs of the corporation
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Need not be filed
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Requirements
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Not as stringent as the Articles
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State corporation code less restrictive
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Created by the Board of Directors
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Usually at the first meeting
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MBCA §2.06(b)
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Bylaws “may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with laws or articles of incorporation”
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Amending Bylaws
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Can be passed by the Board of Directors without shareholder approval
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Some states allow shareholders to amend the Bylaws directly
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3) Other Requirements
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Must have a creation of the Board of Directors
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Must have a meeting of the shareholders
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Must have an issuing of stock (if applicable)
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Failure to meet the requirements
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Once Articles are filed and money is paid (dependent on jurisdiction) corporation is formed
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State may be able to come and revoke corporation status
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Corporation can’t invoke a “non corporation” defense
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Capital Structure (financing the corporation)
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Two ways to get funds for starting a corporation
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1) Enter into Debt
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Taking loans out for the corporation
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Types of Loans
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A) Notes (short term debt)
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B) Bonds (long term debt)
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Secured long term corporate debt instrument
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Going to get the money back one way or another
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C) Debentures (long term debt)
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Unsecured , Bylaws, or other Agreements (State Corporation Code) interests
Introduction
Types of Business Structures
Business Accounting
Forming and Starting a Corporation
