Topic outline

  • PCS 125 - Business Structures

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  • Sole Proprietorship

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      A sole proprietorship is the most basic type of business to establish. You alone own the company and are responsible for its assets and liabilities. You don't have to file special forms or pay fees to start your business.

      Main advantages:

      • Simple and inexpensive to create and operate
      • Owner reports profit or loss on his or her personal tax return

      Main drawbacks:

      • Owner personally liable for business debts
      • Owner cannot give/share equity (limits funding opportunities and potential partners)

  • Limited Liability Company (LLC)

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      A Limited Liability Company (LLC) is a hybrid between a corporation and a partnership. Business owners in an LLC are not responsible for the debt of the company. In other words, they have limited liability. However, unlike a corporation, the business does not file separate taxes. Instead, each partner (called members) includes their profits on their personal tax return. When creating an LLC, develop an LLC Operating Agreement to set out the financial and working relations among business owners ("members") and between members and managers.

      Main advantages:

      • Owners have limited personal liability for business debts even if they participate in management
      • Profit and loss can be allocated differently than ownership interests
      • IRS rules now allow LLCs to choose between being taxed as partnership or corporation

      Main drawbacks:

      • More expensive to create than partnership or sole proprietorship
      • State laws for creating LLCs may not reflect latest federal tax changes
      • Inability to obtain VC funding
      • Inability to provide employees with stock options


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      What is an operating agreement?

      An operating agreement outlines and defines internal operating procedures and relationship agreements among the members (owners) of a limited liability company (LLC). An operating agreement’s general goal is to establish guidelines for how the business owners professionally relate to one another in terms of management and operations. 

      Bylaws are similar to operating agreements, except they’re used in corporations (S corporations and C corporations) instead of LLCs, and they often have statutory requirements for the information they include.

      What should an operating agreement include?

      The information you include in your operating agreement or bylaws depends on your business’s and state’s specific requirements. However, an operating agreement generally includes ownership, operations, management and financing details.

      Depending on your business type (LLC, S corporation, C corporation) and state, you may be legally

      What are articles of incorporation?

      Articles of incorporation, also known as a certificate of incorporation or corporate charter (certificate of formation for LLCs), is a legal document that formally establishes a corporation in the eyes of the state.

      required to file an operating agreement. For example, any LLC conducting business in California, Delaware, Maine, Missouri or New York must file an LLC operating agreement. Although LLCs in the other 45 states aren’t legally required to have an operating agreement, it is highly recommended.

      What should articles of incorporation include?

      The information you include in your articles of incorporation or certificate of formation will depend on your business’s and state’s specific requirements.

      Whether you are legally required to file articles of incorporation will depend on the type of business you own. For example, LLCs aren’t legally required to file articles of incorporation, but it is highly recommended for LLCs to have a certificate of formation. On the other hand, every corporation is legally obligated to file articles of incorporation with the state.


  • General Partnership

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      In a general partnership, two or more people share ownership of a single business. The partners manage the business and are responsible for all debts and obligations of the business. The details of this partnership agreement should be written out formally to define the roles of each partner, including what would happen if the business fails. You don't have to file special forms or pay fees to start your business. When forming a partnership, you should create a Partnership Agreement documenting the profit/loss sharing arrangement to avoid difficulties down the road.

      Main advantages:

      • Simple and inexpensive to create and operate
      • Owners (partners) reports profit or loss on his or her personal tax return

      Main drawbacks:

      • Owners (partners) personally liable for business debts
      • Owner is personally liable for partners' or employees' actions

  • Corporation

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      A C Corporation is more complex than other business types. It is a separate entity from those who own it, meaning it can be taxed (or sued) independently from its owners. A C Corporation is the right choice if you want venture capital funding, to give equity to employees, and/or to limit personal liability. C Corps are required by the state to create bylaws to define the corporation's purpose, how it will operate, and the duties and responsibilities of the people who own and manage it.

      Main advantages:

      • Owners have limited liability for business debts
      • Fringe benefits can be deducted as business expense
      • Owners can split corporate profit among owners and corporation

      Main drawbacks:

      • More expensive to create than partnership or sole proprietorship
      • Paperwork can seem burdensome to some owners
      • Separate taxable entity

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      • Filing articles of incorporation is legally required to structure a new or established company as a professional corporation, nonprofit corporation, or other classification.
      • Each state has various paperwork requirements and other rules for filing articles of incorporation. 
      • State officials review applications for articles of incorporation; if the filer follows the regulations and pays the appropriate fees, officials will notify the company of its corporation status. 
      • This article is for small business owners looking to register their company as a corporation.

      What are articles of incorporation?

      Articles of incorporation, sometimes called a certification of formation or a charter, are a set of documents filed with a government body to legally document a corporation’s creation. These legal documents contain general information about the corporation, including the business name and business location.

      Articles of incorporation are easy to confuse with bylaws, which lay out the rules and regulations governing a corporation and help establish the roles and duties of the company’s directors and officers. Bylaws work in conjunction with the articles of incorporation to form the business’s legal backbone. 

      Why are articles of incorporation important?

      Articles of incorporation are crucial because they establish a company within its home state, informing the state of essential aspects of the business. When filing, the business owner lets the state know the following:

      • The corporation’s purpose
      • Name and address of the registered agent
      • Number of authorized shares and amounts of common stock
      • Names of any incorporators

      What is in the articles of incorporation?

      Articles of incorporation include the following information, with some variations by state:

      • The name of your business or corporation
      • The name and address of your corporation’s registered agent (the person or company to whom the state government will direct all vital legal and state documents and communications)
      • The type of corporate legal structure (which may include a designation of your business as a nonprofit corporation, non-stock corporation or other category)
      • The names and addresses of all members of your company’s board of directors
      • The type and amount of authorized shares available to your company (“authorized shares” means the maximum number of shares that your corporation may issue and may include common stock and preferred stock)
      • The duration of the business (if it’s not permanent)
      • Your name, signature and address; if you are not the business’s incorporator, you will provide this information for the incorporator instead

  • Corporation (and optional S Corp tax designation)

  • Limited Liability Partnership (LLP)

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      A limited liability partnership (LLP) is formed by two or more individuals going into business together.

      Advantages:

      • The personal liability in an LLP is limited to your capital contribution in the LLP. This means that your personal assets are not at risk because of the company's losses or debts.
      • An LLP is not required to maintain corporate formalities, such as annual meetings or corporate filings. All partners can conduct business for the LLP and participate in management duties.
      • LLPs are pass-through entities. This means that the LLP doesn’t pay taxes for the business entity, and all profits are “passed” to the partners and taxed as personal income.

      Disadvantages:

      • Any partner in the LLP that is actively involved in the management of the business can lose their limited liability status. They will be responsible for their liability as well as the liabilities of any of the limited partners

  • Limited Partnership (LP)

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      A limited partnership (LP) is formed by two or more individuals and at least one of them must be a general partner. The general partner may be a corporation instead of an individual.

      Advantages:

      • No mandatory corporate formalities, such as annual meetings or corporate filings.
      • Personal liability of limited partners is limited to capital contributions.
      • Limited partners don’t have to pay self-employment tax as general partners do. This is because they receive dividends for their share of investment in the business and are not considered self employed as long as they stay passive in the business operation.

      Disadvantages:

      • General partners don’t have limited liability. They will be responsible for their liability as well as the liabilities of any of the limited partners in the LP.
      • Limited Partners are silent partners and cannot participate in the management of the LP. Only the general partners have the right to manage the LP.
      • Limited Partners can lose their status and be held personally responsible for business liabilities if they’re found to be actively involved in the management of the business.