Corporations

Corporations:

• The most common form of business organization, and one which is chartered by a state and given many legal rights as an entity separate from its owners.
• This form of business is characterized by the limited liability of its owners, the issuance of shares of easily transferable stock, and existence as a going concern.
• The shareholders of corporations have limited liability protection, and corporations have full discretion over the amount of profits they can distribute or retain.
• Corporations are incorporated businesses.
• Incorporation which is the process of becoming a corporation, gives the company separate legal standing from its owners and protects those owners from being personally liable in the event that the company is sued (a condition known as limited liability).
• Corporations can be organized for profit or non-profit.
• Corporations are presumed to be for-profit entities, and as such they can have an unlimited number of years with losses.
• Corporations must have at least one shareholder. It is normally owned by multiple shareholders and is overseen by a board of directors, which hires the business’s managerial staff.
• In addition to privately-owned corporate models, there are state-owned corporate models.

The Incorporation process:
1. Selecting the company’s name.
2. Writing the articles of incorporation.
3. Paying fees and taxes.
4. Holding an organizational meeting.
5. Adopting bylaws, electing directors.

There are a few types of Corporations:
1. General Corporation.
2. Close Corporation.
3. S Corporation.

Advantages:

• Limited liability.
eg. Owners’ personal assets are protected from business debt and liability.
• Unlimited life.
eg. Corporations have unlimited life extending beyond the illness or death of the owners.
• Tax deductions.
eg. Tax free benefits such as travel, insurance, and retirement plan deductions.
• Ease of transferring ownership.
eg. Transfer of ownership facilitated by sale of stock.
• Change of ownership need not affect management.
• Abilty to attract financing.
• Easier to raise capital through sale of stocks and bonds.

Disadvantages:

• Double taxation on profit.
• Cost and complexity of formation.
• Termination difficulty.
• Stockholder and Board Conflict.
• More government restrictions, such as state and federal rules and regulations.

1. General Corporation:
   
   • This is the most common corporate structure.
   • The corporation is a separate legal entity that is owned by stockholder.
   • A general corporation may have an unlimited number of stockholders that, due to the separate legal nature of the corporation, are protected from the creditors of the business.
   • Consequently, it is usually chosen by those companies planning to have large public stock offerings.
   • A stockholder’s personal liability is usually limited to the amount of investment in the corporation and no more.
2. Close Corporation:
   
   • There are a few minor, but significant differences between general corporations and close corporations.
   • In most states, close corporations are limited to 30 to 50 stockholders.
   • Not all states recognize close corporations.
   • In addition, many close corporation statutes require that the directors of a close corporation must first offer the shares to existing stockholders before selling to new shareholders.
   • This type of corporation is particularly well suited for a group of individuals who will own the corporation with some members actively involved in the management and other members only involved on a limited or indirect level.
   • Is the most appropriate for the individual starting a company alone or with a small number of people.
3. S Corporation:
   
   • One of the highly desirable entity for corporate tax purposes.
   • It is a special tax designation applied for and granted by the Internal Revenue Service (IRS) to corporations that have already been formed.
   • Many entrepreneurs and small business owners are partial to the S Corporation because it combines many of the advantages of a sole proprietorship, partnership and the corporate forms of business structure.
   • S Corporation avoid “double taxation” (once at the corporate level and again at the personal level) because all income or loss is reported only once on the personal tax returns of the shareholders.
   • S Corporation shareholders are exempt from personal liability for business debt.

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Partnership

Partnership:

• A partnership is a legal form of business with two or more persons agree to carry on a business together.
• This agreement can be written or oral.
• There are two types of partnerships:
  
  1. General partnership.
  2. Limited partnership.
• In the words of Solomon, “Two can accomplish more than twice as much as one. If one fails, the other pulls him up, but if a man falls when he is alone, he’s in trouble. Besides, one standing alone can be attacked and defeated, but two can stand back-to-back and conquer.”
• A partnership business can be a relationship disaster or a positive experience.
• To have a successful partnership, there are a few criteria:
  
  1. Have the same vision.
  2. Divide business roles according to each individuals strengths.
  3. Avoid the 50-50 split.
  4. Hold a monthly partner meeting.
  5. Create a partnership agreement.
• Partnership by estoppel, which means a person may be considered a partner even if not formally included in the partnership.
• “Estoppel”  means that one is not permitted to deny. In the context of partnerships, it means that a person cannot deny being a partner if he permits the partnership use his name.
For example: - A situation in which partner A and partner B start a business and offer non-partner C a profit interest in the company if they can use C’s name in the business. If a bank lends money to the partnership and the partnership becomes insolvent, C would be considered a partner and could be held liable.

Advantages of partnership:

• Ease of formation.
• Availability of capital.
• Diversity of skill and expertise.
• Flexibility.
• No special taxes and only single level of taxation.
• Relative freedom from government control.
• Shared burdens.
• Different views. As problems are looked at from different angles, it can arise in more creative ways of meeting difficulties in a business.
• Effective decisions.

Disadvantages of partnership:

• Unlimited liability.
• Potential for conflicts between partners because many disagreement might arise.
• Conflict of opinions.
• Complexity of profit-sharing.
• Difficulty exiting or dissolving.
• All partners are potentially personally liable for all business debts and lawsuits.
• Uneven ambition.
• Reduced autonomy.

General Partnership:

• A partnership in which all owners share in operating the business and in assuming liability for the business’s debts.
• Consists of two or more individuals who jointly own the assets, liabilities, revenues and losses.
• Each partner enjoys the benefits of certain tax allowances and each has legal ownership of the assets of the business.
• Each of the two or more partners will have unlimited liability for the debts of the business.
• The income and expense is reported on a separate return for tax purposes, but each partner then reports his or her pro-rata share of the profit or loss from the business as one line on his personal tax return.

Limited Partnership:

• A partnership with one or more general partners and one or more limited partners.
• Limited partners have no personal liability and stand to lose only the amount which he has contributed and any amounts which he has obligated himself to contribute under the agreement.
• Limited partner’s responsibilities are spelled out in the partnership agreement.
• Limitation can be placed on whether who make decisions, how profits and expenses are allocated, how long the agreement is valid and what happens when the business is sold.

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Sole Proprietorship

Sole proprietorship:

• A sole proprietorship also known as a sole trader.
• It is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business.
• All profits and losses accrue to the owner (subject to taxation).
• The owner has unlimited liability, which means that all assets of the business are owned by the proprietor and all debts of the business are their debts and they must pay them from their personal resources.
• It is a “sole”  proprietorship in the sense that the owner has no partners.
  For example:
  Albert works as a carpenter. He opens a furniture company name “Albert’s Furniture”. Therefore, he is known as a sole trader because he owns the company alone.

Advantages:

• Easy to start up and also easy to discontinue. As it can be started fairly easily with minimal capital requirements.
• Are subject to fewer regulations relative to other types of businesses.
• The owner has full autonomy with regard to business decisions.
• One takes all the profits of the business. Therefore, this is the main reason that most businesses are of this type.
• A sole proprietorship is not a corporation, therefore, it does not pay corporate taxes, but the owner of the business pays self employment taxes on the profits made, making accounting much simpler.
• No double taxation like corporate entity.
• Has a quick decision process as a sole proprietor has total control of his business.
• A sole proprietor may do business with a trade name other than his or her legal name.
• This also allows the proprietor to open a business account with banking institutions.
• Absolute freedom in decision making.
• All profits will be the owner’s personal property.
• No reports of accounts are required.
• Only need to pay personal income tax and not business tax.

Disadvantages:

• Facing difficulty in raising capital since only a sole trader has to make up for all the business’s funds.
• Unlimited liability. As the owner of the business is responsible for the business’s debts because he has control over the business. This also means that the risks and failures in the business will involve the owner’s personal property.
• The owner will be responsible for the debts and risks of the business.
• Legally, there is no difference between the owner’s personal and business property.
• Operating as a sole trader, the owner’s will find it difficult to take days off for holidays and may have to work long hours.

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