Business Organization Types: Sole Proprietorships, Partnerships, and Corporations

Sole Proprietorships

The simplest form of business organization, created and controlled by one owner.

Pros of Sole Proprietorships

Creation: least expensive business organization to create.

Taxation of Sole Proprietorships

Not taxed as an organization.

Managerial Control in Sole Proprietorships

Sole proprietor is in total control of the business's goals and operations.

Continuity of Sole Proprietorships

Proprietorship's continuity is tied directly to the will of the owner.

Liability in Sole Proprietorships

Owner has unlimited liability for the obligations of the business organization.

Partnership

Agreement between two or more persons (can be individuals or organizations) to share a common interest in a commercial endeavour and share in profit and losses.

General Partnerships

Creation can be automatic but may be modified by agreement.

Cost of Formation in General Partnerships

Cost of formation is not significant.

Taxation of General Partnerships

Taxed at the partner level only (entity isn't taxed).

Management in General Partnerships

Equal voice in management unless there is a contrary agreement.

Regulation of Partnerships

Partnerships are generally subject to less regulation and less government supervision than corporations.

Cons of General Partnerships

Only a limited number of people can be partners.

Dissolution of General Partnerships

Dissolved whenever a partner ceases to be a partner (withdrawal, death).

Liability in General Partnerships

Personal liability and joint and several liability for all debts and liabilities.

Taxation on Partnership Profits

Partners taxed on their share of partnership profits, whether those profits are distributed or not.

Operations in Limited Partnerships

Limited partners are not involved in the operations of the partnership.

Limited Partnership Certificate

Limited partnership certificate must be filed in the county of its principal place of business.

Updating Limited Partnership Certificate

Partners added or leaving require updating the certificate.

Interest Assignment in Limited Partnerships

Limited partners can assign interest without dissolving the partnership.

General Partners

Responsible for the organization's debts.

Limited Liability Partnership (LLP)

All partners have some liability protection.

Corporations

Artificial and intangible entity created under the authority of a state's law.

Domestic Corporation

A corporation in the state in which it was incorporated.

Foreign Corporation

Doing business in a state other than the one you were originally incorporated in.

Alien Corporation

Corporation created under a different (foreign) country.

Articles of Incorporation

Must be filed with the Georgia secretary of state.

Perpetual Existence

Corporation has perpetual existence.

Shareholder's Death or Sale of Stock

Does not affect the organizational structure.

Limited Personal Liability

Limited to their investment.

Large Number of Owners

Allows for a large number of owners.

Shareholders

Can be both owners and employees, entitled to benefits such as workers compensation.

Unequal Shares

Ownership can be divided into many unequal shares.

Charter

Created by a state issuing a charter upon the application of incorporators.

Costly to Form

More costly to form.

Licensed/Qualified

Corporation must be licensed/qualified to conduct business in foreign states.

Double Taxation

Taxes at the corporate and at the individual owners level.

Direct Control

Lack of direct control by the owners.

Government Regulation

Subject to more government regulation.

Corporate Managerial Control

3 people control: Shareholders (elect BOD), Board of Directors (set objectives), Officers (implement goals).

Publicly Held Corporations

Control by management is maintained with a small percentage of stock ownership.

Proxy

Agent appointed by a shareholder for the purpose of voting the shares.

Closely Held Corporations

One shareholder or small group may control a closely held corporation by owning the majority of shares.

Fiduciary Relationship

The directors & officers stand in a fiduciary relationship to the corporation and to minority shareholders.

Minority Stock

No ready market for minority stock should shareholder desire to sell it.

Buy and Sell Agreement

Should be used to protect against minority shareholders' decisions.

Subject to Decisions

Minority shareholders are subject to decisions of the majority.

Derivative lawsuit

A lawsuit brought by a shareholder on behalf of the corporation against the majority shareholder(s).

Corporate Liability

Owners are liable for debts only to the extent of shareholders' investment in the cost of the stock.

Piercing the corporate veil

When courts find that the corporate organization is being misused, the corporate entity can be disregarded.

Alter-ego theory

The corporate entity is disregarded by the officers, directors, and stockholders so that there is unity of ownership and interest.

Commingling of corporate and personal assets

A consequence that can lead to piercing the corporate veil.

Alli v US (2008)

A case involving commingled personal and corporate funds.

Corporate Taxation

Corporations must pay income taxes on their earnings.

Double Tax

Profits are taxed at the corporate level and then dividends taxed at the individual level.

Legal methods to avoid double taxation

Include reasonable salaries, reasonable expense accounts, reasonable loans from shareholders, reasonable accumulation of earnings, and subchapter S election.

C-Corp

A type of corporation that is taxed separately from its owners.

S-Corp

Shareholders of s-corporations elect unanimously to have the corporation treated as a partnership for tax purposes.

Non-Profit Corp

Must be approved by the IRS (501 c (3)), created for a public purpose and not to personally benefit owners or members.

Tax exempt status

Non-profit corporations are exempt from paying federal income taxes.

Benefit Corp

Combines aspects of non-profit and profit organizations, pursuing explicit social-oriented goals.

Limited Liability Company (LLC)

Treated as non-taxable entities with more flexibility compared to s corporations.

Principal

The employer or business organization that can be held liable for the damages caused by its agent.

Agent

An individual who acts on behalf of the principal.

Duty of loyalty

An obligation of the agent to act in the best interest of the principal.

Actual Authority

Express authority given to an agent, which can be written, spoken, or derived from circumstances.

Implied Authority

Authority that is incidental to express authority, arising from the position held and the history of express authority.

Apparent Authority

Authority perceived by a third party when no actual authority exists.

Tort Liability

An agent who causes harm to a third party may create liability owed by the principal to the third party.

Frolic and detour

A defense used by employers in tort liability cases.

Criminal Liability

Organizations may face criminal liability for the criminal actions of its agents.

Intellectual Property

A category of property that includes intangible assets such as inventions, designs, and brand names.

Article 1, Section 8 of the Constitution

Gives Congress the power to promote the progress of science and useful arts by securing exclusive rights to authors and inventors for limited times.

Incentivize new inventions

The purpose of intellectual property laws to encourage innovation.

Granting exclusive rights

How intellectual property incentivizes new inventions.

Loss of competition

A potential cost of intellectual property laws that can lead to higher prices.

Intellectual Property and Research

Intellectual property is essential to maintain the growth of creative research and development (R&D).

Capturing Intellectual Property

The process of transforming knowledge into valuable intangible assets.

Deadlines

Strict timelines applicable for asserting rights of some intellectual property.

Public domain

The status of a product when intellectual property rules are not followed.

Trade Secrets

Any form of knowledge or information that has economic value from not being generally known to others.

Economic value

The worth derived from information not being generally known.

Common law

The legal system under which trade secrets are protected.

Uniform Trade Secrets Act

Most states have adopted this act to protect trade secrets.

Misappropriation

Occurs when one improperly acquires or discloses secret information.

Injunction

A civil remedy that orders a party to refrain from using a trade secret.

Economic Espionage Act

Criminal law that addresses the theft of trade secrets.

Inventive act

The creative process that leads to the granting of a patent.

U.S. Patent and Trademark Office (PTO)

The agency responsible for granting patents in the United States.

Limited period of time

The duration for which a patent is valid, as defined by statute.

Utility Patent

new useful process machines and composition of matter or improvements

Utility Patent Term

20 years from the filing date

Design Patent

new and ornamented design for an article of manufacture

Design Patent Term

15 years from issue date

Plant Patent

new variety of plant that can be reproduced asexually

Obtaining a Patent

Pay filing fee, Explain invention, Show difference from prior art, Describe patentable aspects, File application, Evaluation by the patent examiner (only humans can file)

America Invents Act

In 2011, Former President Obama signed into law the America Invents Act, the first substantial revision to the U.S. Patent Law since 1999.

Key Change in America Invents Act

switch from a first-to-invent-system to a first to file system

Patentable Subject Matter

Validity of a patent can be tested by scrutinizing its subject matter

Patentable Subject Matter Examples

Process, machine, article of manufacture, or Composition of Matter