Supplement
Chapter 11
© 2013 - Jeffrey Pittman
Business Organizations
 We begin our discussion of business organizations by
examining issues of business and owner responsibility
 Also, see my Business Enterprises Chart
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Comparison
The following slides review business enterprise law and provide
a comparison base for examining corporations
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Business Enterprises
 There are a variety of legal forms a business may take
 The “best” legal form for a given business depends on a
variety of factors
 Which form is best may change over time
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Sole Proprietorship
A sole proprietorship is a business owned by one person
 Generally, there is no state regulation of sole proprietorships
except:
 Licenses required for all business
 Fictitious name filings
 There are more sole proprietorships in the U. S. than any other
business organization
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Sole Proprietorship
 The sole proprietorship owner has unlimited liability for
business torts or contracts and s/he pays taxes on income
earned
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Partnerships
A partnership is an association of two or more persons to carry
on as co-owners a business for profit (UPA §6)
 Partners have individual and joint unlimited liability for
partnership torts and contracts
 Partnership income passes through to individual partners,
who are responsible for income taxes
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Limited Partnerships
A limited partnership is a specialized form of a partnership, with
general and limited partners
 The firm must have at least one limited partner and one
general partner
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Limited Partnerships
 Unlike regular (general) partnerships, limited partnerships can
exist only after successfully filing a certificate of limited
partnership with the appropriate state official
 Losses for limited partners are generally limited to the amount
of their capital contribution
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Limited Liability Companies
A limited liability company (LLC) is a hybrid legal entity
combining corporate and partnership characteristic
 LLCs provide the limited liability of a corporation and the
tax attributes of a partnership
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Limited Liability Companies
 Owners are called members, and LLCs are managed either by
members or outside managers
 Members liability is limited to the amount of their investment
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Corporations
Definition of a corporation from old England – “[A] collection of many individuals
united into one body, under a special denomination, having perpetual succession
under an artificial form, and vested, by policy of the law, with the capacity of acting,
in several respects, as an individual, particularly of taking and granting property, of
contracting obligations, and of suing and being sued, of enjoying privileges and
immunities in common, and of exercising a variety of political rights, more or less
extensive, according to the design of its institution, or the powers conferred upon
it, either at the time of its creation, or at any subsequent period of its existence.” - A
Treatise on the Law of Corporations, Stewart Kyd (1793-1794)
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Factors to Consider When Comparing Business
Enterprises
Selected comparison factors include the following:
 Difficulty of forming the organization
 Liability exposure
 Tax considerations
 Continuity of existence/ability to transfer ownership
 Management and control
 Financing
 Licenses
 Location
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Liability Principles
2.
1. A plaintiff sues the defendant
a) A business is liable
for employee torts under
respondeat superior;
b) A business is liable for contracts
under agency law principles
claiming a tort
or breach of contract
occurred
3. Business owners are potentially
liable for
business debts, depending on the
business form
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Simple Tax Illustration
We have a single taxpayer who owns a business but does not
work in the business; the business net income is $75,000 and
the taxpayer has outside employment income of $95,000.
 If a sole proprietorship is used as the business form, federal
taxation is at the personal level only
 For 2011, the federal personal income tax on $75,000 in
additional income (beyond the $95,000 salary) would be
assessed at a marginal rate of 28%, approximately $21,000,
leaving $54,000 in after-tax business income
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Simple Tax Illustration
Using the same taxpayer as in the previous slide,
 If a corporation form of business is used, the corporation will pay
federal tax of approximately $13,750 (see the following slide for
corporate tax information)
 If the remaining $61,250 is distributed as dividends to the shareholder,
an additional personal income tax of approximately $17,150 will be
assessed (28% * $61, 250; this is the essence of double taxation, as the
money was first taxed at the corporate level)
 The total federal tax bill with the corporation structure will be $30,900
($13,750+$17,150), leaving $44,100 after tax income ($75,000-$30,900)
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Selected Corporate Tax Rates - 2011
Taxable income
over
$
0
Not over
Tax rate
$ 50,000
15%
50,000
75,000
25%
75,000
100,000
34%
100,000
335,000
39%
335,000
10,000,000
34%
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Reducing the Effects of Double
Taxation
The prior slides provided an illustration where the corporate
form could result in additional taxes of $9,900
 There are a variety of strategies to reduce this additional tax
bill
 One tax strategy is selection of the S Corporation status, if
possible
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