Sole Proprietorship

A sole proprietorship is a business owned and operated by one person for profit.

Characteristics
Ownership Liability

Tax Liability
Risk

Formation of Sole Proprietorship

No formal process. Obtain all necessary federal, state, and local licenses and permits. Register Assumed Name Certificate (if necessary). Obtain Employer Identification Number (if necessary).

The Partnership
Voluntary association of two or more people to carry on as co-owners of a business for profit

Characteristics
Each person involved participates in management decisions Assets are jointly owned Profits/losses are shared The parties operate under the firms name The parties have a joint bank account for their business The parties keep a single set of business records

Types of Partnerships
General Partnerships

Limited Partnership

Single Member Limited Liability Companies

General Partnership
A partnership is any two or more individuals who contribute money, labor, and skill to a business, and who share in its profits, losses, and management.

Formation of General Partnership

No formal process required. Obtain Employer Identification Number. Obtain all necessary federal, state, and local licenses and permits. Register Assumed Name Certificate, if necessary. Partnership Agreement (optional, but highly recommended).

Limited Partnership
A limited partnership has one or more partners who have limited liability and no rights of management.

Formation of Limited Partnership

File Certificate of Limited Partnership with Secretary of State or other appropriate agency. Name must contain the words Limited Partnership. A written partnership agreement is required. Maintain certain records as required by state law.

Limited Liability Company

A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
The "owners" of an LLC are referred to as "members." Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs.

Characteristics
Profits are taxed once Limited legal liability Business may or may not terminate upon death or withdrawal of member, depending upon operating agreement Moderately easy to liquidate Moderately easy to set up and operate. Some formalities are required

Formation of LLC
Acquire all the necessary licenses and permits. File articles of organization with the Secretary of State. Pay filing fees. Prepare and adopt operating agreement. File all necessary reports with the Secretary of State.

Single Member Liability Company

A single-member limited liability company (LLC) is an LLC with one member. The SMLLC is formed under state laws and regulations and it pays taxes as a sole proprietorship.

Formation
Forming a single-member LLC is relatively simple. You will need to get information from your state department of state (business division) to learn the state requirements for LLC formation. You will need to obtain a format for the Articles of organization and send in the required payment. Then you need to construct an operating agreement .

Corporation
Formed under state or federal law. Legally treated as an artificial person, distinct from the individuals who own it.

 Advantages:
Limited liability Transfer of ownership Perpetual life External sources of funds Expansion potential

Disadvantages:

Double taxation Forming a corporation Disclosure of information Employee-owner separation

18

Organization of Corporation

Shareholders own the corporation through stock ownership. Shareholders elect the Board of Directors
Board sets corporate policy. Board elects corporate officers who run the dayto-day operation.

Characteristics
The most complex form of business to set up and operate Profits may be subject to double taxation Limited liability Business continues after death of owner(s) Difficult and expensive to liquidate

Formation of Corporation

File Articles of Incorporation with the Secretary of State. Pay filing and license fees. Prepare and adopt bylaws. Obtain corporate minute book, corporate seal, stock certificates, and other desired supplies. Follow corporate formalities.

Private corporation
A corporation owned by just one or a few people who are closely involved in managing the business. Characteristics

Does not offer shares for sale to the general public Might have just a few shareholders

Shareholders often operate and manage the business.

Usually not required to make its financial activities public For tax reasons, must prepare reports for the state in which it operates
Subject to dual taxation: Taxed on profits made by the company itself Shareholders taxed on dividends

Public Corporation
A corporation whose stock anyone may buy, sell, or trade. Characteristics Can sell millions of shares of stock to the general public and have thousands of owners Subject to more government regulation and taxation than other forms of ownership Must provide financial information to the public (annual report) Subject to dual taxation

Non-profit corporation
Focuses on providing a service rather than earning a profit but are not owned by a government entity Characteristics Operates to accomplish a specific missionother than to make a profit Usually helps societycharitable, educational, religious, scientific, etc. Income used to fund programs and cover operational expenses Generally not taxed by the federal government Many rely on donations and grants.

Articles of Incorporation

The articles of incorporation are an associations agreement with the state granting its incorporated status, establishing the basis for that associations separate legal existence.

Items to include in the Articles of Incorporation

Full name Specific purpose, taxexempt purpose Duration of existence Addresses of operation Legal agent Initial board of directors Membership status

Bylaws status Provisions for internal affairs Dues requirements Dissolution procedures Distribution of assets State approval

Other Important Aspects of the

Articles of Incorporation:

Submission process Amending the Articles of Incorporation

Bylaws are rules adopted and maintained by an association to define and direct its internal structure and management.

Bylaws

Legal Characteristics of Bylaws

Serve as subordinate (yet complementary) guidelines to the Articles of Incorporation Describe relationships, rights and obligations of all participants Honored and enforced in a court of law Assist in attaining tax-exempt status

Formation and Revision of Bylaws

Authority Periodic review General guidance Available to all members

Content of Association Bylaws

Detailed purposes Membership qualifications Officers qualifications Filling of vacancies Voting procedures Meeting procedures Property procedures Indemnification Committee structure Delegation of authority Organizational relationships Association logo Financial procedures Office locations Amendment procedures Dissolution procedures Legal compliance

Incorporation process
The process of incorporation generally involves two steps:
Promotional Activities; and The Legal Process of Incorporation.

32