STARTING A BUSINESS: LLCS AND OTHER OPTIONS

CHAPTER 21

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QUOTES OF THE DAY

“Business underlies everything in our national life, including our spiritual life. Witness the fact that in the Lord’s Prayer, the first petition is for daily bread. No one can worship God or love his neighbor on an empty stomach.”

Woodrow Wilson,

United States president

SOLE PROPRIETORSHIPS

A sole proprietorship is an unincorporated business owned by one person.
Advantages
Ease of Formation
Taxes
Disadvantages
Liability
Limited Capital

CORPORATIONS- ADVANTAGES

Advantages
Corporations offer limited liability – usually the managers’ and investors’ personal property is not at risk.
Partnership interests are not transferable without the permission of the other partners.
When a sole proprietor dies, legally so does the business. But corporations have perpetual existence.

CORPORATIONS – DISADVANTAGES

Logistics – corporations require substantial expense and effort to create and operate.
Taxes – a corporation is a taxable entity, which means it must pay income taxes on its profits and also file a tax return. Shareholders must then pay tax on any dividends from the corporation.

“S” CORPORATIONS

Shareholders of S corps have the best of all worlds: the limited liability of a corporation and the tax status of a partnership.
The disadvantages of an S corp are:
There can only be one class of stocks.
There can be no more than 75 shareholders.
Shareholders cannot be partnerships or other corporations.
Shareholders must be U.S. citizens or residents.

CLOSE CORPORATIONS

“Close corporation” and “closely held corporation” refer to a corporation whose stock is not publicly traded on a stock exchange.

Common provisions of close corporations:

Protection of Minority Shareholders

Transfer Restrictions

Flexibility

Dispute Resolution

LIMITED LIABILITY PARTNERSHIPS (LLPS)

An LLC offers the limited liability of a corporation and the tax status of a partnership, without the disadvantages of an S corporation.
The LLC is popular because it has:
Limited Liability, Flexibility, Transferability of Interests, Duration, Management
The biggest disadvantage with LLC is the legal uncertainty involved since it is a fairly new type of business. State laws vary, and case precedents are few.

PIERCING THE COMPANY VEIL

If members abuse their rights, a court may remove their limited liability, a process called piercing the veil.
A court may pierce an LLC’s veil if members:
Fail to observe formalities.
Commingle assets.
Fail to provide adequate capital.
Commit fraud.

SOCIAL ENTERPRISES

Almost half the states now offer charters to some type of socially conscious organization, collectively referred to as “social enterprises.”
Social enterprises pledge to behave in a socially responsible manner, even as they pursue profits.

GENERAL PARTNERSHIP

A partnership is an unincorporated association of two or more co-owners who carry on a business for profit.
Each co-owner is a general partner.
Unless otherwise agreed, partners share profits, losses and management equally.
Partnerships are easy to form (sometimes it happens unintentionally!)
Partners can be held personally liable for the partnership actions and debts.

DISSOCIATION

Dissociation occurs if a partner quits.
When one or more partners dissociate, the partnership can either buy out the departing partner(s) and continue in business or wind up the business and terminate the partnership.
A partner always has the power to leave a partnership but may not have the right.

PARTNERSHIP PROS & CONS

Advantages:
They don’t pay taxes
They are easy to form.
Partners help with the work and financing.
Disadvantages:
Each partner is liable personally.
Funding may be difficult (can’t sell shares).
Management may be difficult.
Transferability is limited.

LIMITED LIABILITY PARTNERSHIPS (LLPS)

An LLP offers the limited liability of a corporation and the tax status of a flow-through organization.
To form an LLP, the partners must file a statement of qualification with state officials. LLPs must also file annual reports.

PROFESSIONAL CORPORATIONS

Most states let professional incorporate.
In many states, PCs provide more liability protection than a partnership.
The corporation may be liable for an individual member’s mistakes, but the innocent professionals are not at risk.

FRANCHISES

Are not actually a separate form of business – they can take almost any one of the ones discussed already.
Advantages
Owning a business, support
Drawbacks
Control, cost, legal requirements

Wise entrepreneurs know that careful attention to legal issues is an essential component of success. The form of organization affects everything from taxes to liability to management control. The idea for the business may come first, but legal considerations occupy a close second place.

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