Running head: LEGAL FORMS OF BUSINESS

Legal Forms of Business Mike Robertson LAW531 May 7, 2012 Julie Benes

LEGAL FORMS OF BUSINESS Legal Forms of Business The well-informed businessperson understands choosing the correct business form is important. The type of business form determines what type of business organized, how money flows in and out of the business, how the business and owners are taxed, and

the levels of risk to owners. There are several types of business forms. These types are sole proprietorship, partnership, Limited Liability Partnership (LLP), Limited Liability Company (LLC), S Corporation, franchise, and corporation. The businessperson needs to have an understanding of which business form is justified for their business startup. The beginning businessperson looks at the sole proprietorship a majority of times because of its simplicity (Anthony, 2011).

A sole proprietorship is the simplest form of business organization. The owner of the business, the sole proprietor, is the business. There is no separate legal entity. Sole proprietorships are the most common form of business organization in the United States (Cheeseman, 2010). One example of a business that becomes a sole proprietorship is an independent contractor. The future business owner completes work for a business, but they are not an employee of these companies, they are considered self-employed and therefore a sole proprietor. Most person call this moonlighting. For example, if an electrical contractor with a full-time job also does home electrical installation after work or on the weekends and is not representing the company for which they work for during regular hours, the home side-work is moonlighting. Many hobbyists can also become sole proprietors if their hobby becomes popular and providing orders to customers. The electrical contractor or hobbyists, enjoy their independence and self-management. The

LEGAL FORMS OF BUSINESS sole proprietorship owner decides what and when to sell, when to expand and when to scale back the business, when to seek financing, when to purchase equipment, and when to work or take-off from work (Attard, 2000). The sole proprietorship owner can track what the business trend doing and adapt more quickly than a partnership or corporation in which members must agree to make any necessary changes to meet the market. The sole proprietorship owner has an easier time with accounting. The

bookkeeping is a simple process. The small business experts suggest that owners keep separate bank accounts and record keeping for their business. This suggestion also helps with taxes for their business and personal accounts. Figuring taxes for the sole proprietorship is easy. Sole proprietorship businesses are not required to file a separate tax return. The taxes, such as Federal Insurance Contributions Act (FICA) are less for sole proprietorships than partnerships and other business forms. Last, if there is a business lost, they can file on the personal tax returns to offset any other personal income on the other hand, the business gains not shared with any other partners or owners like partnerships.

A general partnership, or partnership, is a voluntary association of two or more persons for carrying on a business as co-owners for profit (Cheeseman, 2010). A partnership is not a separate entity; rather it is an extension of its owners for tax and legal purposes. The partnership can start with a verbal agreement and in rare cases a handshake. The best way is to write a very carefully worded agreement to start up the business between persons. In a partnership, the partners are equally responsible for all debts and liabilities

LEGAL FORMS OF BUSINESS of the business. All partners have access to the business and can manage the company. The agreement wording needs to be specific in how the partners manage, unless it has be documented any partner can make obligations for the company even if the other partners are present or do not agree with the partner who made the decision.

The formation of the general partnership must have two or more persons who volunteer to form a business as co-owners for profit (Cheeseman, 2010). The contractor who started his company as s sole proprietorship company has become successful and needs help running his company due to all the work order he has currently. The contractor has decided he needs more help and more capital to expand his business. The friend which he worked with at his daytime company is looking to leave his current employer. They decide to go into business together. The two contractors draft an agreement to form a partnership, pool their money together, and start their own company. The document they draft is the partnership agreement between them. Not all states require the partnership to file with the secretary of states office. The partnership enjoys some benefits of forming a partnership business that make it desirable for some owners.

The partnership divides the responsibility of workload, management, and liability. The profits and losses shared equally, unless the partnership agreement states otherwise. The partnership is not taxed instead the taxation goes to the owners personal income taxes. The partners find that when the need for additional capital is required, they have an easier time to get loans than corporations do. The partners guarantee the loans with their personal assets making it more attractive for banks to loan money. The partners

LEGAL FORMS OF BUSINESS will find that when they become more successful, they will attract investors who will not manage but enjoy a limited liability. The partnership does share the liabilities if any of the owners either intentionally or unintentionally causes a tort or defaults on an agreement with a creditor. The partnerships do enjoy some benefits but not the protection of a Limited Liability Company offers.

The Limited Liability Company (LLC) is an unincorporated entity that combines the most favorable attributes of general partnerships, limited partnerships, and corporations (Cheeseman, 2010). The LLC first originated in 1977 in Wyoming and started catching on in 1990s in other states. It is a relatively new business form. The states are responsible for the laws governing LLCs and each state has their own requirements, so it is wise to understand the state requirements in which a LLC is to operate. The process to become an LLC is more involved than a partnership. The contractors who started a partnership have some decision to make prior to forming an LLC.

The contractors business has again become even more successful and with the addition of employees, they have some concerns of liabilities. The success comes with a price. The partners had a narrow escape with accident at a job site that could have cost them the business and their personal finances. They contacted a lawyer and discussed forming an LLC. The LLC provides protection from liabilities and creditors while offering additional benefits; however, there are more requirements to form an LLC than a sole proprietorship or partnership. The first step is to get an organizer which can be a lawyer and form an article of organization filed in the state where the LLC located

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in per that states requirements. Once the articles have filed with the state, the company operates as an LLC. The LLC must declare to the IRS how they are taxed, either as a partnership (taxed at the personal income tax returns) or as a corporation. The corporation pays a corporate tax rate and the shareholders pay a tax on dividends. The operating agreement is the next step for the formation of LLC. This agreement is the blueprint of how the LLC is to operate, how to divide the profits, and voting rights among the members. The more details that the agreement has are directly related to how well the business is operated (Mancuso, 2011). The newly formed LLC first started with some help from an organizer such as a lawyer. The lawyers who help the partnership to from a LLC were also contemplating forming a Limited Liability Partnership.

The Limited Liability Partnership (LLP) does not have a general partner who is personally liable for the debts and obligations of the partnership. All the partners are limited partners who lose only their capital contributions if the business fails (Cheeseman, 2010). The LLP is for only professionals such as doctors, accounts, or lawyers. The partners enjoy the same protection as an LLC and the same tax as a partnership while protected from liability of malpractice of a partner. All the partners can lose their capital contributions but not their personal assets. The startup is same as with the LLC and still easy to management. In fact, the LLP acts like an LLC except that it is for professions only. The LLP differs from the LLC, and one-step below the Corporation business form.

LEGAL FORMS OF BUSINESS The Corporation is a fictitious legal entity that is created according to statutory requirements (Cheeseman, 2010). A corporation, chartered by the state in which it is headquartered, is separate, and apart from those who own it. The owners of a

corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes (Residual-Rewards.com, 2010). The LLC of the contractors who started with a sole proprietorship has continued to expand their business and have decided to incorporate their business with the success they have had. The LLP law firm will act as their Incorporators to file the required documents in their state. The law firm will research to make sure there are no other corporations with the same name exist. They will file for trademark and domain names for the corporation. The partners will decide what type of corporation to form. The selections are public, private, profit, non-profit, publicly held, closely held, domestic, foreign, or alien corporation. They will also determine the article of incorporation, which determines the name of the corporation, the number of shares issued and types of stocks, the corporation address, and the incorporators. The shareholders elect a board of directors to run the corporation and establish the bylaws of the corporation. The corporation like the LLC allows protection of the owners from debt and liabilities. The officers of the corporation held responsible for their actions. For example, the withholding of employment taxes from the government. Corporation pay higher taxes, depending on the income, and it can be as high as 34%. Corporations also have double taxation. The corporation is taxed and any dividend received is taxed on the shareholder personal income tax returns. One benefit for corporations is that one can raise their own capital

LEGAL FORMS OF BUSINESS by selling their stock on the open market, and the shares are transferable to other shareholders. Corporation shareholder can profit from a successful business, but the corporation is doubled tax unless they form an S Corporation.

The S Corporation is a corporation, which has than 100 shareholders who agree to file with the IRS under the form 2553. This allows the corporation to be taxed as a partnership. The same corporation that has grown is expected to have profits, and the shareholder tax bracket is lower than the corporations is. The S Corporation is essentially the same as a C Corporation with the tax benefits of a partnership. This is the most preferred method of incorporation of small companies. The conditions to become an S Corporation are that the company first must become a corporation. The shareholders must reside in the USA, and the stock must be of one type of stock. The S Corporation cannot be a bank or insurance company and the companies not a C Corporation in the last five years. The corporation that exceeds these requirements is automatically a C Corporation and must follow the requirements of taxation of the IRS.

The corporation has yet again grown again to a large corporation, and they wish to expand their model of business across the US. One method, which this can be done, is through franchising. A franchise is an agreement when one party (the franchisor, or licensor) licenses another party (the franchisee, or licensee) to use the franchisors trade name, trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods and services. Generally, the franchisor, and the franchisee are established as separate corporations (Cheeseman, 2010). The

LEGAL FORMS OF BUSINESS franchisor provides advertising and promotion across the USA saving the franchisee cost that they may not be able to afford. The franchisor can also provide their expertise in how to operate a business to make it successful. These resources can be financial help, administrative help, inventory help, and human resources help. The buying power of the franchisor allows the franchisee to purchase inventory at reduce cost and with more franchises added the deeper the discounts. The last item that a franchisor can assist is in research and development. The franchisor can come up with new ideas and products and forecast the market trends for the franchisee.

The success of a business is first determine how and why a person wants to start a business, Understanding the different forms of business and applying the procedures and well written plans on the operation of a business can reward a business owner who works smart and within his or hers means. The knowledge of markets and the operating principle along with taxation and liabilities, allow anyone person with some entrepreneurship skills to grow a small homebased business into a large corporation that franchises around the world.

LEGAL FORMS OF BUSINESS References

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Anthony, J. (December 2011). Microsoft Bussiness for Small and Midsize Companies. Retrieved from http://www.microsoft.com/business/en-us/resources/startups/business-plansentities/sole-proprietorships-simple-but-not-very-flexible.aspx?fbid=fJwb_o26gfj Attard, J. (2000). The Home Office and Small Business Answer Book (2nd ed.). New York, NY: Owl Books. Cheeseman, H. (2010). Business Law, legal Environment, Online Commerce, and International Issues (7th ed.). New York, NY: Prentice Hall. Mancuso, A. (2011). Form Your Own Limited Liability Company (7th ed.). Berkeley, CA: NOLO Press. Residual-rewards.com. (2010). Sole Partnership vs. paretnership vs. Limited Liability Company (LLC) vs. Corporation vs S Corporation. Retrieved from http://www.residualrewards.com/business-types.html