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.

Outlines

00:00

🔑 Business Entity Forms: Sole Proprietorship and Partnerships

This paragraph discusses the considerations for choosing a business entity, such as formation ease, tax laws, management rights, liability, and continuity. It introduces the sole proprietorship, an unincorporated business owned by one person, which offers absolute control and avoids double taxation but comes with unlimited personal liability. The paragraph also covers various types of partnerships, including general, limited, limited liability, and limited liability limited partnerships. Each partnership type has unique characteristics regarding liability, management rights, tax treatment, and continuity. For instance, general partnerships are easy to form but carry unlimited liability, while limited partnerships offer some liability protection. The discussion highlights the legal requirements and advantages of each form, such as the ability to limit liability in LLPs and the flexibility of LLCs in management and taxation.

05:02

🏢 Business Entity Forms: LLCs and Corporations

The second paragraph delves into the LLC and corporation business structures. An LLC is an unincorporated association that offers a combination of partnership and corporate benefits, including limited liability for all members and flexibility in management and taxation. LLCs can be structured to avoid double taxation and allow for easy transfer of ownership interests, with the continuity of the business often being determined by operating agreements. The paragraph then explains corporations as separate legal entities with distinct characteristics: they require state filings, offer limited liability to shareholders, have centralized management, and can have perpetual existence. It discusses the concept of double taxation for corporations and how S corporations can avoid this by being taxed similar to partnerships. The paragraph concludes with the requirements for a corporation to qualify as an S corporation, including domestic status, allowable shareholders, a limit on the number of shareholders, and restrictions on stock classes and ineligible categories.

Keywords

💡Sole Proprietorship

A sole proprietorship is an unincorporated business owned by a single individual, which does not require extensive governmental filings beyond possibly a business name statement. In the video, it is highlighted as a business form that offers the owner absolute control and avoidance of double taxation, as the business income and expenses are reported on the owner's personal tax return. However, it comes with the disadvantage of unlimited personal liability for business losses.

💡General Partnership

A general partnership is an unincorporated business association formed by two or more people who co-own a business. It is characterized by equal management rights, unlimited liability for all partners regarding the partnership's debts, and taxation of partnership income by the individual partners. The video script explains that a general partnership can be created by default without formal filings, emphasizing the ease of formation but also the risk due to unlimited liability.

💡Limited Partnership

A limited partnership is an unincorporated business structure that requires state filing and consists of at least one general partner with unlimited liability and at least one limited partner with limited liability. The video points out that while general partners retain management control, limited partners have no control but are protected from personal liability beyond their investment, making it a popular choice for investors seeking limited exposure to risk.

💡LLP (Limited Liability Partnership)

An LLP is a form of partnership that offers liability protection to all partners for the misconduct of the partnership or other partners, while still maintaining the pass-through taxation of a partnership. The video script notes that LLPs are often used by professional service providers like law firms or accountants, as they provide a structure that limits personal liability while allowing for the professional to operate within a partnership model.

💡LLC (Limited Liability Company)

An LLC is a hybrid business entity that combines the benefits of both partnerships and corporations, requiring state filing. Members of an LLC enjoy limited liability and can participate in management, making it a flexible structure. The video script explains that LLCs can elect to be taxed similarly to a partnership, avoiding double taxation, and that they offer the advantage of continuity as the death or withdrawal of a member does not necessarily dissolve the LLC.

💡Corporation

A corporation is a separate legal entity from its owners and managers, formed by complying with state incorporation statutes. The video script describes corporations as having centralized management, limited liability for shareholders, perpetual existence, and ease of transferability of ownership. Corporations are subject to double taxation unless they elect to be treated as S corporations, which is a key consideration for businesses looking to minimize tax burdens.

💡S Corporation

An S corporation is a type of corporation that elects to be taxed like a partnership, avoiding double taxation by allowing profits and losses to pass through to shareholders. The video script details that to qualify as an S corporation, certain requirements must be met, such as having only allowable shareholders, no more than 100 shareholders, and only one class of stock. This election is beneficial for small businesses looking to retain the corporate structure while enjoying tax advantages similar to partnerships.

💡Double Taxation

Double taxation refers to the taxation of corporate income at both the corporate level and again at the individual level when distributed as dividends to shareholders. The video script explains that corporations are subject to this unless they elect to be treated as S corporations, which allows them to be taxed only once, similar to how partnerships are taxed, thus avoiding the additional layer of tax.

💡Continuity

Continuity in the context of business entities refers to the ability of a business to continue operating despite changes in ownership or management. The video script discusses how different business forms handle continuity; for instance, the death or withdrawal of a partner does not dissolve a general partnership, whereas an LLC's continuity can often be stipulated in its operating agreement, providing flexibility in the business's ongoing operations.

💡Transferability of Ownership

The transferability of ownership pertains to how easily an owner's interest in a business can be sold or transferred. The video script notes that in a sole proprietorship, the owner can freely transfer interests, but the death of the proprietor dissolves the business. In contrast, corporations have easily transferable shares, and LLCs typically allow for the assignment of financial interests with member consent, showcasing the varying degrees of flexibility in transferring business ownership.

💡Liability

Liability in a business context refers to the legal responsibility for the debts and obligations of the business. The video script outlines how different business entities distribute liability among owners, from the unlimited personal liability in a sole proprietorship and general partnership to the limited liability offered in LLCs and corporations, which protect personal assets from business debts, a critical consideration for risk management in business structuring.

Highlights

Ease of formation, federal and state income tax laws, management rights and control, liability for losses, transferability of ownership shares, and continuity are key factors to consider when choosing a business entity.

Sole proprietorships are unincorporated businesses owned by a single person and usually do not require governmental filing.

A business name statement, sometimes known as a DBA, may be needed for sole proprietorships.

Sole proprietorships offer the owner absolute control and avoid double taxation as they are not separate legal entities.

The main disadvantage of a sole proprietorship is the owner's unlimited personal liability for business losses.

Partnerships can be general, limited, limited liability, or limited liability limited, each with distinct characteristics.

General partnerships are unincorporated and can be created by default without state filings.

In a general partnership, each partner has unlimited liability and equal management rights.

Limited partnerships require a state filing and consist of at least one general partner with unlimited liability and one limited partner with limited liability.

Limited liability partnerships (LLPs) allow partners to limit their liability for the misconduct of other partners.

LLPs are often used by professional partnerships such as law firms due to state law restrictions on regular limited partnerships.

Limited liability limited partnerships (LLLPs) enable general partners to limit their liability, similar to LLPs.

LLCs combine the benefits of partnership and corporation laws, offering limited liability and the ability for members to participate in management.

LLCs can elect not to be a separate taxable entity, avoiding double taxation, and are attractive for their flexibility.

Corporations are separate legal entities from their owners and require state filings for formation.

Corporations offer limited liability for shareholders, centralized management, and perpetual existence.

Corporate shares are easily transferable, and corporations can be considered persons or citizens for legal purposes.

Corporations are subject to double taxation unless they elect to be treated as S corporations under subchapter S of the Internal Revenue Code.

S corporations allow for the avoidance of double taxation by passing income, losses, deductions, and credits directly to shareholders.

To qualify as an S corporation, a business must meet specific requirements including domestic status, allowable shareholders, and not exceeding 100 shareholders.

Transcripts

when choosing an appropriate business

entity it's important to consider

numerous factors such as ease of

formation federal and state income tax

laws management rights and control

liability for losses transferability of

ownership shares and continuity first

we'll discuss a sole proprietorship the

sole proprietorship is an unincorporated

business owned by a single person this

business entity form usually does not

require governmental filing or any other

documentation other then sometimes a

business name statement which provides

the owner's name and address and the

name under which the owner will conduct

the business this is sometimes known as

a DBA for doing business as the main

advantages of this business entity form

include the owners absolute control in

terms of management rights and avoidance

of double taxation as sole

proprietorships are not separate legal

entities the sole proprietor reports the

business's expenses and income on his or

her own personal income tax return the

main disadvantage of a sole

proprietorship is the owners unlimited

personal liability for losses of the

business the sole proprietor can freely

transfer interests in the business but

the death of a sole proprietor will

dissolve the proprietorship notably sole

proprietorships can also be a default

entity because if a single person

conducts a business without filing with

the state to form such other entity like

an LLC or a corporation the business

will by default be considered a sole

proprietorship next we'll turn to

partnerships there are various kinds of

business partnerships including general

partnerships limited partnerships

limited liability partnerships and

limited liability limited partnerships

partnership law originated in the common

law however it is now codified in the

Uniform Partnership Act and the revised

Uniform Partnership Act these uniformed

acts are written by experts in the area

and are only binding where they are

adopted by States in the case of the

Uniform Partnership Act and many similar

acts these essentially are binding

across the country let's first discuss

the general partnership a general

partnership is an unincorporated

business association that does not

require any filings with the state a

general partnership is formed whenever

two or more people co-owned a business

for

as such general partnership can be

created by default even if there are no

filings or even any intentions to form a

business organization among the partners

the main characteristics of general

partnerships are first each partner has

unlimited liability with respect to the

partnership and the partnership debts

second each partner has equal rights to

management and control third the

individual partners are taxed for the

partnership income the partnership by

default is not a separate taxable entity

though in some cases tax filings can be

made to elect otherwise fourth the

financial interest of each partner is

freely transferable but all partners

need to agree in order to transfer

membership in the partnership and lastly

general partnerships have advantages in

terms of continuity since death

bankruptcy or withdrawal of a partner

usually does not dissolve a general

partnership under the revised Uniform

Partnership Act next let's look at the

limited partnership a limited

partnership is an unincorporated

business Association that requires

filing of a certificate of limited

partnership with the state each limited

partnership must have at least one

general partner and at least one limited

partner the main characteristics of the

limited partnership are general partners

have unlimited liability for partnership

debts while limited partners have

limited liability general partners have

equal management and control rights

while limited partners have no

management and control rights a limited

partnership may also elect to not be

treated as a separate taxable entity in

order to avoid double taxation except

for publicly traded limited partnerships

which are subject to corporate income

tax Asian partners may assign their

financial interests in the partnership

but the assignation only become a

limited partner if all partners consent

and lastly only death bankruptcy or

withdrawal of a general partner will

dissolve a limited partnership the LLP

or limited liability partnership is also

an unincorporated business association

that requires filing with the state

limited liability partnerships are

similar to general partnerships except

that they enable partners to limit their

liability for the misconduct of other

partners

but each partner has unlimited liability

for his or her own misconduct the LLP is

typically used by professional

partnerships such as law firms or

accounting firms because state law is

very often restrict professional

partnerships from organizing as regular

limited partnerships so instead they

form LLP s apart from specific filing

requirements and the ability to limit

liability limited liability partnerships

are very similar to general partnerships

next we have a similar form of business

called the lllp or limited liability

limited partnership and lllp

is also an unincorporated business

association that requires filing with

the state a limited liability limited

partnership is essentially a limited

partnership that enables even the

general partners to limit their

liability just like an LLP in all other

ways they're very similar to limited

partnerships next we have the LLC or

limited liability company an LLC is also

an unincorporated business association

that requires a filing with the state an

LLC combines the benefit of partnership

laws with the benefit of corporation

laws and an LLC all of its members have

limited liability but each member can

participate in management decisions

which makes LLC's very attractive on top

of that a properly structured LLC has

taxation benefits generally speaking

only the members are taxed as the LLC

can elect not to be considered a

separate taxable entity if the LLC has

only one member it can be taxed as a

sole proprietorship unless that member

elects to have the LLC text as a

corporation which is rare but can

sometimes be useful

typically members can assign their

financial interests in an LLC but the a

signifi other members consent or if the

LLC's operating agreements provide

otherwise it varies from state to state

whether deaths bankruptcy or withdrawal

of a member necessarily dissolves the

OLC and state default rules can often be

modified by an LLC operating agreement

next we'll move to corporation

a corporation is a business entity whose

existence is distinct from those that

own it and/or manage it

the main characteristics of a

corporation are one it can be formed

only by filing with the state and

filings must substantially comply with

state incorporation statutes 2 it is a

separate legal entity from its owners

and/or managers and as such it can

independently sue be sued contract and

hold title to corporate property 3 its

management is heavily centralized and

those in management don't even

necessarily have to be shareholders of

the corporation for shareholders

generally have limited liability for the

corporation's debts and legal

obligations 5 unless otherwise specified

in the Articles of Incorporation a

corporation has perpetual existence so

death or withdrawal of a shareholder or

a manager will not terminate the

existence of the corporation 6 ownership

of corporate shares is easily

transferable 7 a corporation can be

considered a person or citizen such

classification is important for

corporations because personhood entitles

corporations to many important

protections provided in the Constitution

of the United States while citizenship

is important for jurisdictional issues

in litigation and 8 since a corporation

is a separate legal entity it is subject

to double taxation unless it elects to

be treated as an S corporation which is

so cold because it's taxed under

subchapter S of the Internal Revenue

Code under the double taxation principle

based on subchapter C of the Internal

Revenue Code for AC corporation the

income of the corporation itself is

directly taxed and corporate profits are

taxed separately a second time when they

go to the hands of the corporation's

owners or shareholders once they're

distributed generally speaking they are

distributed as dividends next let's move

to the S corporation in order to become

an S corporation a corporation must

submit specific forms to the Internal

Revenue Service signed by the

shareholders this form is called a form

2553 election by a small business

corporation

becoming an s-corporation allows

corporations to avoid double taxation on

the corporate income bypassing corporate

income to their shareholders for federal

tax purposes it also enables a

corporation to pass losses deductions

and credits to their shareholders in

essence becoming an S corporation

enables the corporation to be taxed as a

partnership the corporation must meet

the following requirements in order to

qualify for S corporation status one it

must be a domestic corporation - it must

have only allowable shareholders who may

be individuals certain trusts and

estates but may not be partnerships

other corporations or non-resident alien

shareholders 3 it cannot have more than

a hundred shareholders for it must have

only one class of stock and 5 it must

not fall into an ineligible corporation

category such as certain financial

institutions insurance companies and

domestic international sales

corporations