Overview of Business Organizations

Summary

This script explores various business entity types, focusing on their formation, tax implications, management, liability, and continuity. It covers sole proprietorships, partnerships (general, limited, limited liability, and limited liability limited), LLCs, and corporations (including S corporations). Each entity's advantages and disadvantages are discussed, such as ease of formation, management control, personal liability, and tax treatment, providing a comprehensive guide for choosing the right business structure.

Takeaways

• 🏢 **Sole Proprietorship**: A single-owner business with no legal distinction from the owner, offering ease of formation and management but unlimited personal liability.
• 🤝 **Partnerships**: Include General, Limited, Limited Liability, and Limited Liability Limited Partnerships, each with varying degrees of liability and management rights.
• 📜 **General Partnership**: Formed by default with shared management and unlimited liability, offering continuity despite partner changes.
• 📋 **Limited Partnership**: Requires state filing, with at least one general partner bearing unlimited liability and limited partners having limited liability.
• 🔐 **LLP (Limited Liability Partnership)**: Offers liability protection similar to an LP but is used by professionals like lawyers and accountants due to specific state laws.
• 🔄 **LLLP (Limited Liability Limited Partnership)**: A limited partnership variant that allows even general partners to limit their liability.
• 🌐 **LLC (Limited Liability Company)**: Combines partnership and corporate benefits, with limited liability for all members and the option for members to participate in management.
• 🏛️ **Corporation**: A separate legal entity from its owners, offering limited liability, centralized management, and perpetual existence but subject to double taxation unless structured as an S corporation.
• 🔄 **S Corporation**: A corporation that files IRS Form 2553 to avoid double taxation, passing profits and losses directly to shareholders, with specific requirements including a 100-shareholder limit and only one class of stock.
• 💡 **Entity Selection**: The choice of business entity depends on factors like liability, taxation, management control, and the desire for continuity, with each form having distinct advantages and disadvantages.

Q & A

What is a sole proprietorship and what are its main advantages and disadvantages?

A sole proprietorship is an unincorporated business owned by a single person. It usually does not require governmental filing or documentation other than sometimes a business name statement. The main advantages include the owner's absolute control in management and avoidance of double taxation. The main disadvantage is the owner's unlimited personal liability for business losses.

How does the transferability of ownership work in a sole proprietorship?

In a sole proprietorship, the owner can freely transfer interests in the business. However, the death of the sole proprietor will dissolve the proprietorship.

What are the key characteristics of a general partnership?

A general partnership is an unincorporated business association formed by two or more people co-owning a business. Key characteristics include unlimited liability for each partner, equal rights to management and control, individual partner taxation, and freedom to transfer financial interests with all partners' consent.

How does a limited partnership differ from a general partnership?

A limited partnership requires filing a certificate with the state and has at least one general partner and one limited partner. General partners have unlimited liability, while limited partners have limited liability. Limited partners do not have management and control rights.

What is the purpose of a limited liability partnership (LLP) and in which type of businesses is it commonly used?

An LLP is an unincorporated business association that allows partners to limit their liability for the misconduct of other partners. It is commonly used by professional partnerships such as law firms or accounting firms.

How does a limited liability limited partnership (LLLP) differ from a limited partnership?

An LLLP is a limited partnership that allows even the general partners to limit their liability, similar to an LLP. In all other ways, they are very similar to limited partnerships.

What are the main benefits of an LLC (Limited Liability Company)?

An LLC combines the benefits of partnership laws with corporation laws. All members have limited liability, can participate in management, and the LLC can elect not to be a separate taxable entity, avoiding double taxation.

What are the key features of a corporation?

A corporation is a separate legal entity from its owners/managers, can independently sue or be sued, has centralized management, and shareholders generally have limited liability. It has perpetual existence, and ownership of shares is easily transferable.

What is double taxation, and how can a corporation avoid it?

Double taxation refers to the taxation of corporate income at the corporate level and again at the shareholder level when profits are distributed as dividends. A corporation can avoid double taxation by electing to be treated as an S corporation under subchapter S of the Internal Revenue Code.

What are the requirements for a corporation to qualify as an S corporation?

To qualify as an S corporation, a corporation must be domestic, have only allowable shareholders (individuals, certain trusts, and estates), not exceed more than 100 shareholders, have only one class of stock, and not fall into ineligible categories such as certain financial institutions or insurance companies.

How does the continuity of a business differ between sole proprietorships, partnerships, and corporations?

In a sole proprietorship, the death of the owner dissolves the business. In general partnerships, the death or withdrawal of a partner does not dissolve the partnership. In corporations, the death or withdrawal of a shareholder or manager does not terminate the corporation's existence due to its perpetual nature.