Business organizationsSole proprietorship
- Unlimited liability
- lasts as long as the owner desires/lives
- In Texas, a married couple can count as a single proprietor
- There is a sole proprietorship tax that counts above personal income taxes
Partnership
- Can be unlimited liability or limited liability for individual partners, depending on contract. Usually at least one partner is unlimited liability. (General partner)
- Requires two or more persons — some states allow corporations to be partners.
- Uniform Partnership Act
- Death of a partner dissolves a partnership under law, unless remaining partners buy out deceased member’s stake.
- Divorce can result in additional partners, since a 50/50 split will give each side of divorce half interest.
Corporation
- Must file Articles of Incorporation to become a separate legal entity. These give name and location for corp., tell how many shares corporation is authorized to issue, and at what par price.
- After articles have been filed, state will issue a charter for the corporation. After charter is issued, documents can be filed to go into business
- Corporations can only be chartered in one state. They can, and many do, have permits to do business in many states
- Limited liability. Personal assets of shareholders are not exposed, so liability is limited to investment.
- Shareholders must annually have a meeting to elect board of directors, decide on bylaws.
- Board of directors will oversee business day-to-day, or choose officers to do so.
- Corporations can be double taxed, to a certain way of thinking. The corporation pays income taxes, and then shareholders pay taxes on dividends received. This can be avoided by filing the corporation as a sub-chapter S corporation. Dividends issued as sub-s distributions are exempt from payroll taxes, but not from personal income taxes.
- Corporations created by the government are generally referred to as public corporations. Many are non-profit corporations. The Post Office is a public corporation.
- Corporations created/owned by private citizens are private corporations. Some private corporations are publicly traded, meaning they have stock traded on the stock market. Publicly traded corporations must have their publicly available stock registered, and must follow various securities acts to legally sell stock. Getting this wrong will result in large fines and/or jail sentences.
- Closed corporations only allow the shareholders to sell stock back to the corporation, or between officers of the corporation.
See page 817 of textbook.
A Limited Liability Company, or LLC, is becoming popular now. LLCs can be treated as partnerships or corporations in various situations. They are formed just like a corporation. When taxes are filed for the first time, you have to check a box to have the company treated as a partnership rather than a corporation. LLCs also used to have a tax benefit, by not being subject to the state franchise tax. This has now been changed under the law.
Articles of Incorporation should normally include the Pre-Emptive Rights clause, where major stockholders have the right to maintain their share of the total available stock.
Mergers happen when one corporation purchases another, through cash exchange or exchange of stock. The SEC can veto merger attempts.