Law and Business Associations I (Kubasek pp. 127-135)
-Different forms of business organizations:
-Sole Proprietorship: an unincorporated business owned and run by one individual with no distinction between the business and the owner (so the owner is entitled to all of the business’s profits and liable for all of its debts and losses). Profits are taxed as the owner’s income. The sole proprietor has unlimited liability.
Advantages
-only one individual is involved
-total control belongs to that individual and s/he may dissolve the business at any time
-Subject to less government regulation
Disadvantages
-Unlimited personal liability
-the individual pays all taxes on business profit
-ownership cannot be transferred
-General Partnership: a voluntary association of two or more people formed to carry on a business as co-owners for profit. Like a sole proprietorship, profits are taxed as the partners’ income. The partners are entitled to their shares of the partnership’s profits (equal shares, unless their partnership agreement specifies otherwise), and are liable for all of the partnership’s debts and losses. The partners in a general partnership have unlimited liability.
-Limited Partnership: aka Limited Liability Partnership, abbreviated LP or LLP. A business organization that has at least one general partner and at least one limited partner. The general partner operates like an owner of a general partnership – unlimited liability, but also entitled to unlimited profits from the business. The general partner (or partners) operate and manage the business and have control over it. The limited partner, on the other hand, has limited liability (meaning liability is limited to his/her capital investment), and is entitled to a return on that investment. The limited partner is an investor and cannot operate or manage the business on a day to day basis. If the limited partner becomes too involved, s/he could become a general partner against his/her will (for example, if the limited partnership got sued and the plaintiff – or a general partner – wanted to argue that the limited partner was involved in running the business and, therefore, should not be entitled to limited liability).
-Public Corporation: a corporation whose stock is publicly traded on a national securities exchange (or multiple national securities exchanges). There are typically numerous shareholders who are simply investors with little control over the operation of the corporation. Control over operation of the public corporation rests with the corporate officers and managers (who may own stock in the corporation but not a controlling amount), and broad policy decisions are set by the board of directors. Liability for shareholders is limited to the amount of their investment (so limited liability). Earnings are typically taxed twice: once as corporate profits, and then dividend payments to shareholders are taxed as those shareholders’ income.
