legal structure for a buisness

what to consider in selcting legal structure

• purpose to exist- for profit, for service to members?

• decion making and control

• legal and tax- asset ownership, income tax rates

• legal liablity - resposnbility for upaid debts?

• complexity- how complex is start up and ongoing operations

• financing - how easy is it to get funding, and are there differnt opteions to getting funding

sole proprietorship - defintion

unincoprated buisness owned and operated by ONE INDIVUDAL with no distrinction btwn business and owner for tax and legal

• simplest and most comon strucutre

sole proprietorship - legal and tax

• tax

  • net income from buisness go to owner and considered as personal income, only files one tax report

  • high taxes paid bc personal income tax rates are progressive - (rate increases with income)

• legal

  • asset ownership - buisnes cannt own assets, all assets are viewed as property of owner

sole proprietorship - decsion mking and legal liablity

• decsion making

  • belong soley to owner

• legal liability UNLIMITED

  • onwer reasoonbile for all buisness debts, loss and libailites

sole proprietorship - finacning options and complexity

• financing

  • friends/family, and bank loans

• complexity

  • most simple

partnership - defintion

two or more poeple share onwership

• each partner contributes to buisness, either throuhg money, poperty, labor or skill and each partner shares in the profits and losses of the buisness

partnership - legal and tax

• tax

  • net income flows to partners and partners pay tax on net income at PERSONAL TAX RATE

  • personal tax rate progressive

• legal

  • asset ownership - buisness CAN LEGALLY OWN ASSETS IF REGISTERD AS PARTNERSHIP

partnership - legal libailty and decsion making control

• legal liability

  • unlimited, partenrs are resonsible for all debts losses and liablities

  • also bound by the actions of other parterns

  • exceptions = limited parternship- partners limited liability

• decsion making control

  • share control, Each partner is bound by the actions of any member of the

    partnership, if these are within the usual scope of the operations

  • excetions= limited partnerhip

general partnership vs limited partnerships

• general

  • profits, liablity, decison making is devided among partners

• limited

  • select partners limited liablity and limted input to decsion making

  • attractive to investors of short term projects

    • ex. law firms

complexity of partnerhsips

moderate

• requires partenrhsip agreement

coporation - defintion

independent legal entity that has the right to enter into contracts

• produce products to sell to the public, make profit and maximize shareholder wealth

coporation - tax and legal

• tax - seperate tax return

  • pay tax based upon how much net income buisness earns

  • pays coporate tax rate, flat or staged - NOT PROGRESSIVE - usually lower

• legal - seperate legal entity

  • asset ownership= coporation CAN LEGALY OWN ASSETS

coporation - liability and financing

• liability

  • limited- shareholders have limtied liabilty and are responsible only up to the value of the shares in the compnay

  • may only apply in a limited way to smaller, closely held corporations due to banks and creditors requirement of personal guarantees from the major shareholders. As a result, the owners will still find themselves personally liable for the corporation’s debts.

• financing

  • debt- loans/bonds obtained from creditiors

  • investment - buisness issues ownership shares then sells shares to investors

complexity of coporation

very complex

• costs money to incorporate

•  more reporting and ONGOING- separate legal entity = separate tax return = more complicated, decision making - multiple share holders, need to go hrouhg diecsison through them and reach a consensus

other types of buisness onwership_ not legal structures

• b corp

• cooperatives

• joint venture

• not for profit coporation

• social enterprise

b corp

certifiation issed to for-profit compnaies

• comapnei smust meet standards of soical and enviormatal perfomance and inegrate commmitemetns to stakeholders into company governing documents

cooperative

type of incorporated buisness thats owned by its members

• members have common needs and or common goal

• each member has one vote

• ex. credit unions

joint venture

• buisness model where two or more companies pool resorues to achive common goal

• sharing risk and prfoit - ex. sony and honda

• generally temporary and more informal than a parternship

• profits flow thr the coventures and then taxes according to its buisness strucutre

non profit

Organized and operated exclusively for a purpose other than profit

• Purpose: Social welfare, civic improvement, pleasure or recreation or for any other purpose except profit.

• must not have any part of its income paid for the personal beenfit of any properite, emmer or shareholder

• rewareded by tax exemptions- dont have to pay income tax

social enterprise

revenue generating, can be oeprated by non profit or for profit org, and has goals of

• acheicing cultural, soical, community ecnomic and or envioemntal outcomes

• earning revuenue

mission is at the centre of business, with income generation playing an important supporting role