Business Organizations

Business Organizations

In this lesson, you’re expected to learn about:
– a Limited Liability Company (LLC)
– corporations
– the difference between a partnership, corporation, and LLC

Limited Liability Company (LLC) is a hybrid business organization that combines certain characteristics of both a partnership and a corporation.

The “operating agreement” is the agreement between the LLC owners (called “members”) to govern its business. Although state statutes typically provide “default” rules for how an LLC will be governed, the LLC members have tremendous freedom to elaborate the operating agreement, according to their specific needs.

Usually, internal affairs among the LLC members are governed by partnership law.

Similarity to Corporations

Some of the characteristics of an LLC that are similar to corporations are:

• Limited liability of its members
• Centralized management
• Transferable interests
• Continuity of life

Formation of an LLC

Unlike a general partnership, which may be created informally, an LLC must be registered with a state and requires completion and filing of a statutory form.

Management and Liability

The management of an LLC can be:

 Member-managed: all members may operate the business and are both principals and agents – more like a partnership.

 Manager-managed: business is operated by elected officers (designated members, outsiders or a combination of both) who are agents of the members – more like a corporation.

Regardless of whether LLC members exercise control over the company, they always enjoy limited liability, which means that they cannot be held personally liable for the company’s debts or liabilities.

Taxation

Since 1997, the American Internal Revenue Service (IRS) treats an LLC either as a corporation, a partnership or a sole proprietorship, depending on elections made by the LLC and the number of members:

• As Partnerships: the LLC income will “pass through” the business to the LLC members, who will report the information on their personal tax returns. The LLC is not a separate tax entity.

• As Corporations (for a multiple-member LLC):  a separate legal entity is created and there will be double taxation. Income will be taxed at both the corporate and the personal levels.

[Optional] What is a Limited Liability Company or LLC?
Watch this 2-minute video to learn more: https://www.youtube.com/watch?v=oLcHSBjt1L4
Corporation
Corporation is an artificial legal entity created by operation of law with an existence distinct and totally independent from its investors (here called “shareholders”), directors, officers, and employees.

This separation gives a corporation a life of its own, and the responsibility and accountability to laws that are attributable to a natural person. Consequently, a corporation may own property, make contracts, be punished for its crimes, sued for its torts, and held accountable for its contracts.

Attributes of a Corporation

The basic attributes of the corporate form are:

 Legal personality: it is an independent legal entity separated from its shareholders.

• Limited liability of shareholders: except for special cases, as a rule, shareholder’s liability is limited to their investment.

• Indefinite life: it takes a majority of shareholders to dissolve a corporation and reduces the likelihood of opportunistic dissolution. Modern corporations are usually granted perpetual existence, although corporate existence may also be for a limited period of time.

• Free transferability of share interests: there is no restriction on a shareholder’s ability to sell his/her stake in a company without permission from others.

• Management appointed by shareholders.

• Centralized management: decision-making is governed by a board of directors.

Limited liability makes the free transferability of shares more valuable to investors because it reduces the costs associated with the transfer of interests as the shares remain independent of the shareholders’ assets.

Thus, limited liability encourages otherwise risk-averse investors to invest in risky ventures and permits perpetuity in conducting business.

Types of Corporations

Corporations may be:

1) Public Corporation: formed to meet a governmental or public purpose.

2) Private Corporation: formed to meet private purpose, meaning its owners’ interests.

• The so-called “hybrids” are corporations that have features of both public and private corporations – i.e., corporations with “public utilities,” which are privately owned businesses created for public purposes.

3) Publicly-Held Corporation

A corporation that is publicly traded within the open market with shares being purchased by a variety of investors on one or more stock exchange or in the over-the-counter market.

Some public companies were originally closely-held companies that went public by issuing securities through an initial public offering (IPO).

Advantages: it has the ability to sell future equity stakes and increased access to the debt markets. Once a company goes public, additional revenue can be generated through additional offerings, which involve the creation and sale of new shares within the marketplace.

Disadvantages: increased regulatory scrutiny and less control for majority owners and company founders. Publicly-held companies must meet mandatory reporting standards as regulated through government entities.

4) Closely-Held Corporation

Its shares are held by relatively few people, frequently members of a family. Its stock is not publicly traded on the stock exchange or over-the-counter market on a regular basis, and the law may permit restriction on stock transfer by agreement between the shareholders or by charter provision.
5) S-Corporation

This type of corporation has elected a special tax status with the IRS. It is organized to minimize the effects of federal income taxes on small business, principally by doing away with corporate “double taxation” (taxation applied to the corporation’s and to the individual shareholder’s income in the form of earnings and dividends).

This type of corporation does not pay a corporate income tax on earnings; the entire income is taxed with shareholders, whether distributed or not.

6) C-Corporation

The C-Corporation is the standard corporation. It is a separately taxable entity that files a corporate tax return and pay taxes at the corporate level.
7) Professional Corporation

Usually created by lawyers, accountants, doctors, engineers or other professionals in order to gain corporate tax advantages.
Capital Structure

Corporations may:  

• borrow money through the issuance of debt instruments; and/or

• sell ownership in the corporate entity by issuing equity securities.

[Optional] The Basics of Corporate Structure
Watch this 3-minute video about corporations:
https://www.youtube.com/watch?v=wtMORWO5h9Y
Comparison between a Partnership, Corporation, and LLC
Enlarged version: http://bit.ly/2rlVz5o
Comparison between a Partnership, Corporation, and LLC
Enlarged version: http://bit.ly/2rlVz5o
[Optional] What is an LLC?
Watch this 4-minute video to see the difference between an LLC and Corporation:
https://www.youtube.com/watch?v=b_wAHBNDmI4
Jim Rohn