Corporations
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Starting a New Business
Choice of Form
General Partnership-If two people arrange to carry on a business while sharing control and profits, they automatically create a partnership.
Liability-They are liable on unlimited basis for all debts and tort liabilities related to the business, except for the amount state law allows him to keep. This includes all personal, real property to settle the debts of the partnership. See Uniform Partnership Act
Continuity of Existence-Dissolves on death or bankruptcy of any partner
Tax Treatment-Partnership files information return, the income passes through to partners, according to terms of the partnership agreement. They pay individual taxes on the profits and can deduct losses. NOTE-For tax purposes, if you have more losses, it is better to be a partnership. If you make a huge profit, itЎЇs better to be a corporation.
Creation of entity
Default Form:
A GP is formed either by a consent K or by operation of law. The Uniform partnership Act: An association of greater than or equal to 2 persons to carry on as co-owners of a business for profit
A GP may be dissolved by withdrawal of a partner, other partners have option of continuing or buying out their partner.
Transferability of Interests-are freely assignable, but assignee can share only in profits, not management. Default rule prohibits admitting new partners w/o unanimous agreement of the partners.
Management and Control
Each partner has equal management role.
Each partner may bind the partnership to debts/liabilities/contracts.
Limited Partnership-Two or more people can organize a LP in which so-called limited partners provide capital and are liable only to the extent of their investment. General partners run the business and are fully liable for partnership debts. Any partner who participates in management incurs unlimited liability. See Ўм 303 of Limited Partnership Act.
Creation of Entity
Requirements:
Filing of certificate identifying partners
Must have 1 GP and 1 LP; GP may be corporation
Dissolves only when GP withdraws
Interest Freely assignable, but assignee can exercise only rights of LP
LP has no active management role, but usually votes on major decisions
Liability-LPЎЇs liability is limited to initial contribution as long as no participation in management.
Continuity of Existence- Dissolves only when GP withdraws
Transferability of Interests-are freely assignable, but assignee can share only in profits, not management. Default rule prohibits admitting new partners w/o unanimous agreement of the partners.
Management and Control
Each partner has equal management role.
Each partner may bind the partnership to debts/liabilities/contracts.
Limited Liability Partnership: Primarily for professional corporations (accountants, lawyers, doctors). Prohibited from incorporating by state law.
Limited Liability Company-An LLC is a hybrid entity between a corporation and partnership. Like a partnership, the members of the LLC provide capital and manage the business according to their agreement. Both members and partners of LLC can participate in all business decisions w/out incurring personal liability.
Advantages over Corporation-Everyone may run the business. An LLC is very flexible, itЎЇs a pure matter of contract, thus, it is unlimited in what the parties can provide in the operating agreement. Essentially, they start w/blank slate and write an agreement as what the parties want to do.
Creation of Entity
Requirements:
Must file articles of organization
Economic interests are freely transferable
Management interests transferable only w/consent of all other members.
Members have limited liability, even if they participate in management
Role of mgmt usually proportionate to original contribution
Continuity of Existence-Can continue beyond death or bankruptcy of owner, by agreement.
Tax Treatment-Taxed as partnership whether or not has perpetual existence.
Corporations-There are two forms S and C corporations. It is a legal entity. Shareholders provide capital, and directors and officers manage the business. Corporate participants are not personally liable for corporate debts, only the corporation is liable.
S Corporation
Requirements:
Must be domestic, US Corporation
Can have no more than 75 SH, all of whom must consent to S election
Shareholders must be individuals
Class of Stock-Can have only one class of stock (common)
If there is more than one class, must be a C Corporation
If we look at LLC, we get the benefit of pass-through income taxation (the disregarding of the entity) for losses with an LLC. The LLC doesnЎЇt have limitation of only once class of stock.
Termination:
Greater than 25% of the gross receipts over 3 year period constitute passive investment income
If # of shareholder is > than 75
If 2nd class of stock is issued
By consent of shareholders
If terminated, you cannot make another S election w/in 5 yrs.
Continuity of Existence-Can continue beyond death or bankruptcy of owner, by agreement.
Tax Treatment-Corporation