PRIN ENTREPRENEURSHIP ENT 3003
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This 11 page Class Notes was uploaded by Cordelia Pacocha on Friday September 18, 2015. The Class Notes belongs to ENT 3003 at University of Florida taught by William Rossi in Fall. Since its upload, it has received 31 views. For similar materials see /class/206884/ent-3003-university-of-florida in Finance at University of Florida.
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Date Created: 09/18/15
ENT3003 4152011 74600 PM Choosing a legal structure for your business It depends on many factors 0 O O O O 0 Complexity Ownership 0 0 Profit 0 The easy and cost formation The capital requirements of the business The flexibility of management decisions Government restrictions The extent of personal liability Tax considerations It is the simplest form of legal structure it is a form of business owned by one individual The owner is the business and there are no different legal entity then the owner The sole propeitorrecives all the profits of the business Creation 0 0 There are no formalities There are not required any approval from the federal and state government Anyway sometimes local governments require some licences that business should obtain to do business at the local level city Life of legal structure 0 It terminates when the owner dies Voting 0 It is not necessary to regulate that point considering that the owner often is the only employer and in any case he has the right to manage all the decisions concerning the business So he can take all the decisions about the business such as transferring and sold it without the approval of anyone He can also decide to involve hiring and firing employees Registering 0 If the owner wants it is always possible to register the business Obviously the process with varies from state to state 0 However we can talk about some common points Choose a name for your business Fill out a registration form DBA doing business as operating under a trade name to file a fictious business name statement Check if the name you choose is not already being used in the jurisdiction in which the business will operate Payment of the required fees Notary form if requested o Taxation Partnership 0 Individual Advantages Disadvantages It is easy to create It can be difficult to raise money by oneself to start of expand a business He works a lot because he is alone and he doesn t share the responsibilities Does not require much formalitiles for registration Registration is not expensive comparing to other form All profits are taxed personally There are not many regulations applicable to this form Sole proprietor can mane quick decision without others He receives all the profits Type Partnership Complexity Ownership creation profits voting registering Taxation Individual Liability Unlimited o Owner 0 It consists in a voluntary associations of two or more people who will be the owners 0 The aim is carrying the business together Make decisions together Share profits Losses Assets Liabilities c We can distinguish 2 types of partnership 0 General partnership Each partner can be held responsible for paying debts orjudgments even those incurred by other partners without the knowledge or agreements Jointly n It is not necessary any formalities a To form a partnership we may have any form 0 Oral o Written o Implied from the conduct of the parties a In the absence of a written agreements the rule is all the partners have equal rights in the management but if signed the agreements creates a legal link among the owners it establishes certain rights and duties a Not only by agreement by also by laws rights and duties are established o In 1914 has been promulgated the UPA that codifies a uniform partnership law throughout the united states who would have adopted it The number of states who adopted it is 48 o The UPA asserts the entity theory of partnership the partnership is legal entity separated from owners 0 Limited liability partnership Under UPA partners have jointly and several liability for torts and breaches of the trust even if a partner did not participate in the commission of the act So a third part can sue one or more of the partners separately and the judgment can be collected only against partners sued But the partnership and the partner who are made to pay tort liability may seek indemnification from the partners who committed the wrongful act and can recover contribution from other partners for their share ofjudgment a As in sole partnership partner face unlimited liability in any lawsuits o Example 0 Even if in the partnership agreement was established A size of capital contribution and A size of contact liability a Any partner can pay more than hisher proportionate share It is a special form of partnership that is formed only if certain formalities are followed An LLP is a separate legal entity legal person distinct from its members and is treated as an artificial person that can sue or be sued and can be found civilly and criminally liable for violations of law It must have two types of partners a General partners and limited partners It is necessary to have a least one general partner and one limited partner then there are not any restrictions on the number of general or limited partner Sole General limitedproprietor I C Cor I S Cor I VE VE Tax Liability VERY VERY BAD BAD General partner who invest capital manage the business and are personally liable for partnership debts They manage the company and assume legal liability for all partnership debts Limited partners who invest capital but do not participate in management and are not personally liable for partnership debts beyond their capital contribution They don t have official say in daily operation of the business and have as a result limited liability to the amount of their investments o In general partnership an agreement may specify how profits and losses from the limited partnership are to be located and sets the rights and the duties among general and limited partner reguarding operation termination dissolution and voting rights can be established which transactions must be approved by which partners or the partnership Complexity o Corporation is a legal entity composed of stockholders under a common name o It is a separate legal entity from their shareholders o Generally it is a corporation under the law of the state in which the entity is organized o So it is a domestic corporation in the state in which I is incorporated o It is a foreign corporation in the state other than the one in which it is incorporated o It is an alien corporation in the united states if it is incorporated in another country c It has the rights and responsibilities under the law and it can buy and sell property be part of contracts and be persecuted o The shareholders elect a board of directors that is responsible for representing their interest in the management of the company Complexity advantage o Limited personal legal liability for shareholder o Funds can be raised through the insurance of stock o Ownership can be transferred easily o The legal entity survives beyond the life span or participation of individuals Complexity disadvantage o Corporation are often more heavily taxed than sole proprietorship o Their profits are taxed twice 0 First as the income and corporation except S corporation 0 And again as personal income when dividends are distributed to shareholders double taxation o The founder of a corporation may loose control if he or she no longer owns more then half the stock 0 Example Steve jobs o It is more expensive to start a corporation than a sole proprietorship o Corporation are subjected to many government regulations There are two types of corporations o C corporation o S corporation Complexity o C corporation sell ownership as shares of stock o Stockholder have the right to vote on important company decisions as the annual meeting or to vote by proxy c To raise capital the corporation can sell more stock issue bonds or secure other types of loans o C corporation is doubled taxed after few slides o A C corporation does not have any limit on the number of shareholders and they can be foreign or domestic people Liability o The owners have limited personal liability and they are protected from having their personal assets taken to pay business lawsuit settlements or debts o It s easy to imagine most lenders will not loan money to a small closely held corporation For that reason the owners can decide to personally guarantee the debt in which case the owners will become personally liable and can have their personal property confiscated to pay Taxation o A corporate income is taxed twice o A corporation it is a legal entity so it must pay corporate income taxes to federal and state government o Then if the corporation distributes its profits to shareholders in the form of the dividends shareholder must include those dividends as personal income on heir tax returns double taxation o Example 0 A corporation with taxable income of 100000 that distributed 10000 in dividends would have a tax bill of 34000 34percent corporate tax rate and its shareholders would owe 2800 28percent personal tax rate more for a total tax of 36000 The total tax on 100000 for a sole proprietor could be 28000 28percent personal tax rate reflecting no dividedfor an 8800 difference S corporation o Under s corporation there are many benefits of partnership taxation and the owners have limited liability protection from creditors o Profits and losses must be allocated to shareholders proportionately to each one s interest in the business Complexity Must not have more than 100 shareholders Shareholders must be US citizens or residents and must be natural persons so corporate shareholders and partnerships are generally excluded Spouses are automatically treated as a single shareholder Families defined as individuals descended from common ancestor plus spouses and former spouses of either the common ancestor or anyone lineally descended from that person are considered a single shareholder as long as any family member elects such treatment Liability c As C corporation S corporation has limited liability protection afforded to the shareholder o Only the assets of the corporation can be used to pay corporate debts Taxation o S corporation do not pay any federal taxes o Instead the corporation s income or losses are divided among and passed through to it s shareholder o The shareholders must then report the income or loss on their own individual income tax returns This concept is called single taxation corporate income is only taxed once as the personal income of the owners whether or not the profits are distributed payments to S shareholders by the corporation are distributed taxfree They will after pay at their personal level Nonprofit corporation o A nonprofit is not set up for the purpose to gain but rather with the specific mission to improve society Nonprofits are tax exempt c There are no individual shareholder c Any net profits that are earned must go toward the advancement of the missions so there are no dividends issued and income taxes are not paid Limited liability company o Complexity 0 An LLC combines the most favorable attributes of general partnership and corporations The primary characteristics that an LLC shares with a corporation is limited liability and the primary characteristic it shares with a partnership is the availability of passthrough income taxation And it is wellsuited for companies with a single owner LLC does not need to be organized for profit LLcs are creature of state law not federal law LLC can only be created pursuant to the laws of the state in which the ILC is being organized o The limited liability company codes is a state statues that regulate the formation operation and dissolution of LLC Liability 0 O Taxation 0 o The members are not personally liable to third parties for debts obligations and liabilities of the LLC beyond their capital contribution The debts obligations and liabilities of the LLC whether arising from contracts torts etc are solely those of the LLC Example A and B from an LLC and each contributes 25000 in capital The LLC operates for a period of time during which it barrows money from banks and purchases goods on credit from suppliers After some time The LLC experiences financial difficulty and goes out of business If the LLC fails with 500000 in debts each of the members will lose hisher capital contribution of 25000 but will not be personally liable for the rest of the unpaid debts of LLC It is important to understand that limited liability does not imply that owners are always fully protected from person liabilities Courts can and sometimes will pierce the corporate veil of corporations or LLCs when some type of fraud for misrepresentation is involved 0 For US Federal income tax purposes If there is only one member in the company it is treated as a disregarded entity for tax purposes and the owner reports the LLC s income on his or her own tax return on schedule Cgt For LLC with multiple members the LLC is treated as a partnership the members of the LLC would be treated as partners and each would report the share of the LLC s income or loss 4152011 74600 PM 4152011 74600 PM