Embed Size (px)
Citation preview
Four Business types
Assignment
Course:
Business and Labor Laws
Topic:
Four Business types
Business:
A commercial activity engaged in as a means of livelihood or profit, or an entity which engages in such activities.
Or
Any particular occupation or employment engaged in for livelihood or gain, as agriculture, trade, art, or a profession.
Business Laws:
Commercial law (sometimes known as business law) is the body of law that governs business and commercial transactions. It is often considered to be a branch of civil law and deals with issues of both private law and public law.
Or
Business laws refer to the laws that apply to business entities such as partnerships or LLCs.
Business types:
Following are the four general business types:
1. Sole proprietorship2. Partnership3. Corporations4. Limited Liability Company (LLC)
1. Sole proprietorship:
Definition:
Business and Labor Laws Page 1
Four Business types
A sole proprietorship also known as a sole trader or simply proprietorship 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.
Or
A business that is wholly owned by a single person, who has unlimited liability.
The owner of a sole proprietorship is called a sole proprietor.
It is most common form of business. It is the simplest and cheapest business form for single owner to start and run (maintain). Sole proprietorships are not a separate legal entity meaning that they are inseparable from their owner and from legal point of view, the business and its owner are one in the same. Being not a separate legal entity, owner is considered fully responsible for debts, losses, obligations and court judgments for business itself. No form of limited liability exists in Sole proprietorship business. Owner is always on the hook for the liabilities. While setting your business up as Sole proprietorships, you are required to be the only owner (except your spouse can be the co-owner in business). Operating your business as Sole proprietorship gives you choice to either run it under your own name or generate a fictitious name for it. You can also start your business as Sole proprietorship and then change it to a more complex form later, if you feel a need for this.
Advantages:
It is cheap and easy to start and somewhat cheap and easy to run. Because there are not a lot of laws and formalities that you have to worry about act in accordance with. And you do not generally need to hold any formal meetings, make any filings with the state (unless you are using a fictitious name) or pay the state any ongoing fees.
It can also make owner’s life easier because he can mix his business and personal assets without worrying about running afoul of any legal requirements (although this is not necessarily a good practice from a practical standpoint).
Business taxes are relatively easy to prepare and file as the profits and losses are simply reported on personal tax returns.
It is also very easy to transform business form to a more complex one like partnership or LLC.
Disadvantages:
The large disadvantage is that, because the business is not a separate legal entity from the owner, he or she is personally liable for the business and any debts, losses, court judgments, etc.
As the business is not separate from the owner, it does not generally live on when the owner dies.
The business taxes are part of the owner’s taxes which means that the owner cannot take advantage of certain business-related tax laws.
If owner wants to raise additional capital for company, he cannot sell an interest in the business, as anyone can with corporations and LLCs.
2. Partnership:
Business and Labor Laws Page 2
Four Business types
Definition:
A contract between two or more persons who agree to pool talent and money and share profits or losses
Or
A partnership is an arrangement where entities and/or individuals agree to cooperate to advance their interests. In the most frequent instance, a partnership is formed between one or more businesses in which partners (owners) co-labor to achieve and share profits or losses.
The owners of a partnership are called partners. When the partnership is a general partnership, they are all simply called partners or general partners. However, when the partnership is a limited partnership, the owners will be split between general partners (those who manage and run the partnership) and limited partners (those who are simply silent investors).
A partnership is the default business organization for two or more people- in other words, if two or more people start a business together and do not specifically set it up as a formal corporation or LLC, it is automatically a partnership. partnerships are significantly cheaper and easier to set up than a corporation or LLC, and they are also generally cheaper and easier to control and operate. As with a sole proprietorship, the owners of a partnership are not generally afforded any liability protection, meaning they are personally liable for any losses, debts or judgments of the partnership itself. Most partnerships are general partnerships, where all partners have the ability to control and manage the partnership, which means that all of the owner-partners have personal liability risks. Some partnerships instead opt to be run as a limited partnership, which means that some of the partners are only investors (e.g., silent partners) with no control over the partnership - this lack of control affords these limited partners some of the same limited liability protections offered to the owners of corporations and LLCs.
Types of partnership: There are two general types of partnership:
a) General partnershipb) Limited partnership
General partnership: A business partnership featuring two or more partners in which each partner is liable for any debts taken on by the business. Because the partners do not enjoy limited liability, all the partners' assets can be involved in an insolvency case against the company.
Or
An arrangement by which partners conducting a business jointly have unlimited liability, which means their personal assets are liable to the partnership's obligations. Since all partners have unlimited liability, even innocent partners can be held responsible when another partner commits inappropriate or illegal actions. This fact alone demonstrates how an investor should heed caution when deciding on whether to become a general partner.
Business and Labor Laws Page 3
Four Business types
Limited partnership: A business organization with one or more general partners, who manage the business and assume legal debts and obligations, and one or more limited partners, who are liable only to the extent of their investments
Limited partners also enjoy rights to the partnership's cash flow, but are not liable for company obligations.
Or
Business structure that combines features of a limited company with that of a partnership for use as a tax shelter, but does not create a legal entity separate and distinct from its owners.
It is usually formed by at least one general partner (or full partner) and at least one limited partner (or nominal partner). The limited partners (1) cannot, in any way, control or participate in the management of the partnership (otherwise they will lose their limited liability protection), (2) are liable only up to the sums invested by them, and (3) cannot withdraw their investments without the consent of the general partners. Both types of partners benefit from the firm's profits, capital gains, accelerated depreciation, and investment credits, but the general partners are paid management fees as well. Limited partnerships can be formed for any type of business but they are most popular in equipment-leasing, movie making, oil and gas exploration, and real estate development industries.
Advantages:
It is the easiest and cheapest business type to set up for multiple owners. There are very few formalities that the business must follow which means that they
are also cheaper and easier to run and maintain. Partnerships also allow taxes to be kept fairly simple - as with a sole proprietorship,
the partnership’s profits and losses are generally reported on the owners’ own personal tax returns, allowing you to avoid the double taxation that comes along with forming a corporation.
Disadvantages:
Most partnerships are set up as a general partnership meaning that the owning partners are not entitled to any limited liability. Thus, they are personally responsible for any debts, losses or judgments which the partnership itself is responsible for (means that creditors or successful plaintiffs can go after the partners’ personal assets in trying to fulfill the partnership’s outstanding debt). There is an obvious risk here, and this risk is even greater than the same liability risk associated with a sole proprietorship because partners may be financially responsible for actions taken by other partners. This is because the actions of any one partner, as related to the partnership, legally bind the other partners, even if they did not know or approve of that partner’s actions.
Business and Labor Laws Page 4
Four Business types
To avoid these risks, some partnerships are set up as a limited partnership, instead of as a general partnership. This form of partnership affords some limited liability protection to those partners who merely invest in the partnership without offering any management and control (so-called limited partners). However, the partners who are actively involved in running the partnership (the general partners) have the same liability risks as partners running a general partnership.
Corporations:
Definition:
It is a separate being created by law.
Or
Firm that meets certain legal requirements to be recognized as having a legal existence, as an entity separate and distinct from its owners.
Corporate owners are known as shareholders who share in profits and losses generated through the firm's operations.
Corporations have three distinct characteristics:
1. Legal existence: A firm can (like a person) buy, sell, own, enter into a contract, and sue other persons and firms, and be sued by them. It can do good and be rewarded, and can commit offence and be punished.
2. Limited liability: A firm and its owners are limited in their liability to the creditors and other obligors only up to the resources of the firm, unless the owners give personal-guaranties.
3. Continuity of existence: A firm can live beyond the life spans and capacity of its owners, because its ownership can be transferred through a sale or gift of shares.
A corporation is a separate legal entity from its owners, and it can live beyond the life of any of the individual owners. Many times a corporation is not run or controlled by its shareholders. Instead, the corporate directors manage the corporation and the officers operate it on a day- to-day basis (of course, the role of shareholders, directors and officers can often be mixed, and for small corporations, there may just be one or more shareholders who also run and control the company). Many state laws do not allow certain organized professionals to run their business as a corporation (or, for that matter, as an LLC). For example, in many states, lawyers or doctors can not join together in a corporation because the state has decided that these professionals should not be entitled to the strict limited liability afforded to corporate owners. In such states, these professionals will often form a limited liability partnership instead, as this is the most protection they can obtain when not permitted to form a corporation or LLC.
Advantages:
The greatest advantage of running a business as a corporation is of limited liability- the owners are protected from being personally liable for any losses, debts or
Business and Labor Laws Page 5
Four Business types
obligations of the business itself. So, for example, if your corporation were sued and lost the case, the successful plaintiff would not be able to go after your personal belongings - the most you could lose is whatever you had actually invested in the company.
As a corporation is an entirely separate legal entity from its owners, it generally has an unlimited life beyond the life of its owners, lasting for decades or even centuries.
Another major advantage of a corporation is its ability to sell stocks, allowing investors to become partial owners of the company. It is therefore easier to raise capital with a corporation than with other types of business forms.
The corporate tax scheme also gives companies more flexibility in dealing with the overall impact of taxes instead of the fact that the corporations are subjected to double taxation.
Disadvantages:
Corporations are more expensive and complicated both to initially setup and to maintain. This is because state corporate laws have many rules and formalities which corporations must follow, including requirements that corporations makes various filings and fee payments.
The corporate form also provides you with less flexibility in how you can distribute your company’s profits and losses (as opposed to LLCs, which generally allow you to distribute however you would like).
Another costly disadvantage to corporations (which LLCs share as well) is that many states require your business to get a license, even if the corporation is actually located in another state, if you are going to do business in that state.
Limited Liability Company (LLC):
A limited liability company (LLC), also known as a company with limited liability (WLL), is a flexible form of enterprise that blends elements of partnership and corporate structures.
It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions. LLCs do not need to be organized for profit.
Often incorrectly called a "limited liability corporation" (instead of company), it is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC, although a business entity, is a type of unincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation and it is well-suited for companies with a single owner.
Business and Labor Laws Page 6
Four Business types
It is important to understand that limited liability does not imply that owners are always fully protected from personal liabilities. Courts can and sometimes will pierce the corporate veil of corporations (or LLCs) when some type of fraud or misrepresentation is involved.
Advantages:
Check-the-box taxation. An LLC can elect to be taxed as a sole proprietor, partnership, or corporation (as long as they would otherwise qualify for such tax treatment), providing for a great deal of flexibility.
Limited liability, meaning that the owners of the LLC, called "members," are protected from some or all liability for acts and debts of the LLC depending on state shield laws.
Much less administrative paperwork and record keeping than a corporation. Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a
corporation. Using default tax classification, profits are taxed personally at the member level, not at
the LLC level. LLCs in most states are treated as entities separate from their members, whereas in other
jurisdictions LLCs are not considered to have separate legal standing from their members. LLCs in some states can be set up with just one natural person involved. Less risky to be "stolen" by fire-sale acquisitions. (More protection against hungry
investors)
Disadvantages:
The members of an LLC can only establish governance and protective provisions pursuant to the contract, in the form of an operating agreement.
It may be more difficult to raise financial capital for an LLC as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO. One possible solution may be to form a new corporation and merge into it, dissolving the LLC and converting into a corporation.
The management structure of an LLC may be unfamiliar to many. Unlike corporations, they are not required to have a board of directors or officers. (This could also be seen as an advantage to some.)
The principals of LLCs use many different titles—e.g., member, manager, managing member, managing director, chief executive officer, president, and partner. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf.
Note: In Pakistan LLCs are known as private companies that end with Pvt. Ltd.. They should have at least Rs. 100,000 as their minimum paid up capital, and should not have more than 50 employees.
Source: (Lectures and Internet)
Business and Labor Laws Page 7
