ENTITY TYPE KEY FEATURES

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Corporations (For-Profit)

• It is the most complex form of business organizations; its formation and internal operations are governed my state law.  It is organized for profit under the laws of one state.

• Four key advantages to doing business as a corporation:

  • Investors are not liable for the corporation’s obligations

  • The corporation has perpetual existence

  • Capital can be raised by selling stocks and securities

  • The corporation has centralized management so investors do not get involved in day to day operations.

• Three key disadvantages to this form of organization:

  • Most expensive to form

  • Most complex to operate

  • Subject to “double taxation”; double taxation is when the corporation pays a tax on its income when earned and its shareholders pay a tax on the income when it has been distributed in the form of dividends.

• Corporate powers:

  • Sue and be sued in its corporate name

  • Have a corporate seal

  • Make and amend bylaws

  • Buy, sell, own lease, mortgage and use real and personal property

  • Acquire interests in other corporations or entities

  • Make contracts and guarantees, borrow money, and issue notes, bonds and other obligations.

  • Lend money and invest funds

  • Act as a partner, member or associate of another business entity

  • Conduct is business, have offices and exercise its powers inside or outside the state

  • Establish pension, profit sharing and other benefit plans

  • Make charitable donations

• The Bylaws are the regulations of the corporation; they contain basic rules for the conduct of the corporation’s business and affairs.  Bylaws include the location of offices, the formalities concerning the holding of shareholders’ and directors’ meetings, the voting entitlement of shares, the powers, duties, and qualifications of directors and officers, provisions for appointing directors’ committees, etc.

  • The initial bylaws are adopted at the organizational meeting held after the articles have been filed.  The bylaws may be amended by the shareholders and in some cases the board of directors thereafter.

• Corporations raise capital by either equity financing (where the corporation sells its stock) or by debt financing (where the corporation borrows money).        

  • A corporation issues securities to those who give it money, property or capital resources.  For equity financing, it issues shares of stock or equity securities and in debt financing, it issues debt securities.

  • Shareholders are owners of the corporation, however their ownership is not entitled to control the corporation’s business affairs or own the corporation’s property.  They are not liable for the corporation’s acts or debts.

    • Shareholders have a right to vote which is limited to the corporation’s directors and to voting for changes in the entity’s structure.

• A corporation is managed by directors and officers; the directors are known as the board of directors, and is the corporation’s governing body.  It manages the entity’s affairs and has the authority to exercise all of the corporation’s powers.  Corporations also have officers appointed by and receive their powers from the board.

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Limited Liability Company

• It is neither a partnership nor a corporation. Considered a “hybrid” entity with some characteristics of each.

• Exists as an entity separate and apart from its owners.  The LLC may sue or be sued in its own name, buy, own and use its own real or personal property, make its own contracts, lend money, invest funds, and have its own rights, responsibilities and liabilities.

• Flexible Management structure- Owners of an LLC are called members; owners are not liable for the company’s debts based upon their status as owners.  Members can also elect one or more managers to run the LLC if they do not want to run it themselves.  This advantage provides an appropriate vehicle for ventures with few owners, which may have operated as a partnership before the creation of the LLC entity, or a venture with many owners spread across the county which may have been operated as corporation previously.

• It has the advantage of flow-through taxation; the LLC will not have to pay an entity level income tax.  Instead the profits, losses and other tax items flow through to its members, unless it chooses otherwise.

• The key feature of an LLC is that its owners have limited liability; the individual assets of LLC members may not be used to satisfy the entity’s debts and obligations.  The risk of loss is limited to the amount of capital invested in the business by its member(s).

• Perpetual existence

• Free transferability of financial interests

• The Operating Agreement is its governing document

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General Partnerships

• If two or more persons agree to do business, a partnership is formed.

• All partners have equal rights to manage the partnership; they also share the profits, losses and distribution of income equally unless there is a partnership agreement that states otherwise.

• Each partner is considered an agent for the partnership and may bind the other partners in connection with the business partnership.

• A general partnership does not have to pay an entity level income tax; its profits and losses flow through to the partners.

• A general partnership has unlimited personal liability for the business’ debts similar to aspects of a sole proprietorship.

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Limited Liability Partnership

• Is a special kind of general partnership; the main difference between a GP and LLP is the partners’ exposure to liability.

• In most states, partners in this type of entity are protected from liability for any of the partnership’s debts and obligations.  In some states, the partners are not liable for debts as a result of negligence or wrongful acts of the partners but will remain liable for other debts and liabilities.

• A GP can become an LLP by filing a registration document with the Secretary of State.

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Limited Partnership

• Consists two kinds of partners- the general partners and the limited partners.

• General partners have the same rights, powers and liabilities as partners in an ordinary general partnership.  Limited partners are partners whose liabilities are limited to their investment in the business partnership.   Generally limited partners do not participate in the business management of the partnership.

• This entity is subject to flow-through taxation

• A Limited Partnership cannot be formed by simply doing business, they must be formed complying with state statutory requirements by filing the appropriate certificate in the state of organization.

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