Forms+of+organization+for+small+firms

**Sole proprietorships**
A sole proprietorship is the simplest and least expensive form of organizing for a new venture. To establish a sole proprietorship whose name is different from the one your parents gave you, you simply need to file a //fictitious name certificate// with your local and/or state government. This certificate is a form of legal notification that you are the business' true owner in the form of "Billy Gibbs, d.b.a Papa Wheelies." d.b.a stands for "doing business as."

While sole proprietorships are simple to establish, it is not a good idea to use this form is you plan on doing a substantial amount of business. Sole proprietorship owners have **unlimited personal liability** for their business' debts and activities. If someone sues your business, you may risk losing your own personal assets, such as your car, boat, or home. Sole proprietorships are not attractive forms of organizing to investors and are typically not as easy to sell as corporations. You and your business are essentially taxed as one person - it may be to your advantage from a taxes standpoint to pay corporate taxes instead of personal income tax. You still need to get appropriate business licenses, sales tax licenses, or permits based on the type of business you run.

**Sole Proprietorship - Points to Consider**
 * Easiest type of business organization to establish. There are no formal requirements for starting a sole proprietorship
 * Decision making is in direct hands of owner.
 * All profits and losses of the business are reported directly to the owner's income tax return.
 * The startup costs for a sole proprietorship are minimal.
 * Owner has unlimited liability. Both the business and personal assets of the sole proprietor are subject to the claims of creditors.
 * Because a sole proprietorship is not a separate legal entity, it usually terminates when the owner becomes disabled, retires, or dies. As a result, the sole proprietorship lacks continuity and does not have perpetual existence like other business organizations.
 * It is difficult for a sole proprietorship to raise capital. Financial resources are generally limited to the owner's funds and any loans outsiders are willing to provide.
 * Owner could spend unlimited amount of time responding to business needs.

**Sole Proprietorship - Key Attributes**
 * **Creation** (minimum requirements) - No Formalities for creating a sole proprietorship.
 * **Profits / Losses / Distributions** - Owner may use all profits and losses for business.
 * **Liability** - Owner faces unlimited personal liability.
 * **Capital / Financing** - All capital obtained from owner or through loans based on owner's creditworthiness.
 * **Duration** - Usually no continuity upon disability, retirement or death of owner.
 * **Transfer of Ownership** - Assets may be sold in entirety or in part.
 * **Management and Control** - Owner manages and controls the company.
 * **Taxation** - The business does not file or pay taxes.
 * **Reporting Requirements** - None.
 * **Fees** - None.

**General partnerships**
General partnerships are businesses that consist of two or more partners. General partnerships can be created as simply and inexpensively as sole proprietorships (register a fictitious name), but you also assume unlimited personal liability for your partnership's debts and the actions of your partner. Most entrepreneurs avoid using a general partnership because of the disastrous outcomes they have had for the individual founders; those that use the general partnership form usually have a well-written Partnership Agreement, an experienced lawyer, and a lot of insurance.

General partnerships have the following characteristics:
 * General partners have full unlimited personal liability for the actions and debts of their partnership.
 * Unless specified in the Partnership Agreement, each general partner has an equal right to share in the management and control of the partnership.
 * Any partner can take actions and sign contracts that bind the partnership (unless specified otherwise in the Partnership Agreement).
 * General partnerships can sometimes be more complicated to form than corporations because you need an experienced lawyer to help draw up an effective Partnership Agreement. At the same time, you typically don't need to make any state filings in order to form a general partnership.
 * General partners must honor the //fiduciary relationship// they have with each other. This means that they need to act consistently in ways that are based on undivided loyalty, good faith, fairness, and honesty in dealing with each other.
 * General partnerships can't live forever. They may be dissolved based on an ending date specified in Partnership Agreement or on the death of a partner.
 * Like sole proprietorships, general partnerships are hard to transfer and are not viewed as good investments by people like venture capitalists.
 * The individual partners are taxed on their partnership income on an individual basis. Like the sole proprietorship, this helps the owners avoid the "double taxation" that is part of corporate tax structure.

**General Partnership - Points to Consider**
 * There are few legal requirements to creating a partnership. As mentioned, a partnership agreement is not necessary, although it is advised. Also, no filings with the Secretary of State are required for formation.
 * Partners may pool their resources and talents. This allows all partners share control and participate equally in management of the partnership.
 * A general partnership has flow-through taxation meaning the partnership does not pay taxes. Instead, the individual partners are taxed on the income they receive from the partnership.
 * Profits and losses are divided among partners in any manner they choose.
 * There are no fees associated with creating a general partnership.
 * Under a general partnership, assets of any of the partners can be used to cover the business's liabilities, regardless of which partner incurred the liability.
 * Partners have unlimited liability in a partnership form of business.

**General Partnerships - Procedural Aspects**
 * **Formation**
 * It is recommended the partners create a written partnership agreement.
 * It is optional to file with Secretary of State's office a Statement of Partnership Authority.


 * **Dissolution** - Most states have statutes that identify several events which may cause the dissolution of a partnership.
 * **Merger** - A general partnership may file a statement of merger.
 * **Foreign General Partnership** - Some states do and other states do not have provisions associated with foreign general partnerships.
 * **Fees** - There is usually a state code Schedule of Fees associated with General Partnerships.

**General Partnership - Key Attributes**
 * **Creation (minimum requirements)** - By agreement of two or more persons. Agreement may be verbal but written agreement is recommended. No filings required.
 * **Profits / Losses / Distributions** - By partnership agreement.
 * **Liability** - All partners are jointly and severally liable for all obligations.
 * **Capital / Financing** - By partnership agreement
 * **Duration** - By partnership agreement.
 * **Transfer of Ownership** - By partnership agreement
 * **Management and Control** - By agreement
 * **Taxation** - State and Federal taxes apply

Limited Partnerships
A limited partnership consists of one or more general partners and one or more limited partners. The general partners make all the operating decisions about the business, while the limited partners are passive investors. Limited partnerships are useful for owning real estate, restaurants, oil- and gas-related businesses, and venture capital funds. To form a limited partnership, you need to file an organizational form with the Secretary of State. You also need to prepare a Limited Partnership Agreement that establishes the rights and obligations of the general and limited partnerships.

Limited partnerships are characterized by the following attributes:
 * Limited partners have limited liability - they are not personally liable for the partnership's debt and other liabilities. They risk losing their investment in the limited partnership if the partnership goes bankrupt. The general partners have unlimited liability for the partnership's debts and other liabilities.
 * The general partner has all the control in how the partnership is managed, depending on how the Limited Partnership Agreement is written.
 * The general partner has a fiduciary trust to the limited partners.
 * A limited partnership interest (i.e., portion of his or her investment) is typically considered to be a security under federal and state securities laws, which have special compliance requirements.
 * There can be an unlimited number of owners.
 * Transfer of interests usually requires the general partner's approval.

**Limited Partnership - Points to Consider**


 * A limited partnership is an entity distinct from its partners.
 * Must contain both general partners and limited partners.
 * A person can serve as a general and limited partner.
 * The partnership agreement governs relations among the partners and between the partners and the partnership.
 * Achieves both limited liability and partnership principles.
 * A limited partnership has the power to sue, be sued, and defend in its own name and to maintain an action against a partner for harm caused to the limited partnership by a breach of the partnership agreement or violation of a duty to the partnership.

Limited liability partnerships
Limited liability partnerships (LLPs) are similar to general partnerships except that they provide the partners with a //liability shield// for the partners. The liability shield can protect the partners from tort claims (such as for negligence) or can even completely insulate the partners from all tort and contract obligations. In most situations, LLPs are restricted to use by professionals, such as lawyers, accountants, and management consultants. Note: This does not insulate these professionals from being sued due to malpractice!

**Limited Liability Partnership - Points to Consider**
 * All partners enjoy limited liability.
 * Partners can pool their resources and talents.
 * Management, distribution, etc., are governed by the partnership agreement.
 * Tax and liability treatment may not be uniform across state lines.
 * All partners have apparent authority to bind the partnership to agreements entered into.
 * Limited liability partnerships do not have as much continuity

Corporations
A corporation is a **separate legal entity** formed under a state's incorporation laws (it has its own taxation ID number and can live forever!). A corporation has shareholders, a board of directors who represent the interests of the shareholders, and officers who run the business. The main advantage of the corporate organizing structure is that is shields the shareholders from the corporation's debts and other liabilities. Shareholders risk the value of their investment in the corporation; their personal assets are protected.

There are two main types of corporations: C corporations and S corporations. They differ - importantly - on the way the business' earnings are taxed. A C corporation's income is taxed at the corporate level, and if any dividends are distributed to shareholders, the shareholders also pay an income tax on those distributions. This situation is called //double taxation//. An S corporation's business income is passed through to the shareholders who are then taxed on their own individual //pro rata// share of the corporation's income.


 * Characteristics of C Corporations:**
 * Shareholders, officers, and directors are generally not personally liable for the corporation's debts and other liabilities.
 * Corporations can generally last forever. Immortality!
 * The board of directors is responsible for the overall management of the corporation; directors are selected by the shareholders, who in turn elect the corporation's officers (CEO, CFO, etc.) who actually run the business.
 * Shareholders have rights. They get to elect directors, receive accurate and timely information about the corporation, view corporate records, vote on fundamental business operations (e.g., liquidations, mergers), and receive a share of the corporation's distributions.
 * The owners of the corporation are those who own stock in the corporation. Dividends are paid to shareholders on a pro rata basis that reflects their percent ownership of the total corporation.
 * Corporations can offer employee stock ownership to provide them with an equity interest in the business.
 * Corporations have sophisticated and diverse forms of capitalization, such as common stock, preferred stock, options, warrants, and convertible securities.


 * Characteristics of S Corporations**
 * The business income of S corporations is //passed through// to the individual shareholders, who are then taxed on their individual tax rates.
 * S corporations can have 75 shareholders at most.
 * Unlike C corporations, S corporations can only issue one class of stock, though the S corporation can create differences in voting rights among the shareholders.
 * Corporations, trusts, and nonresident aliens generally may not be shareholders of S corporations.