Us business law

If you have a client who wants to establish a business, what are the options ?

Need for a comparative analysis.

Different kind of businesses: sole proprietorship, partnership, C corporation, S corporation, limited liability company.

Various factors to take into consideration: control, limited liability, capital, double taxation, ease of management and alienability.

Sole Proprietorship

The business has the personality of the person who owns it.. No legal personality involved. The owner is not accountable to anyone but himself and does not have to provide the State with income or capital reporting documents. It is very simple, anybody could do it. If the business you have needs a licence, then you have to get it.

Basically, the owner is the business. If he makes a mistake, he will pay for it with everything that he has.

As far as capital is concerned, it’s hard to get any capital because there are no partners who have assets to pledge for a bank loan.

To compensate, the remedy is to get insurance to protect what he owns.

No double taxation. Owner is taxed only once.

Of course, there is ease of management since he’s alone.

If you decide to sell your business, not complicated. No need to get the signatures of all the partners. However, it is hard to see small businesses particularly service businesses.

Partnership

Most states have a law which is called the Uniform Partnership Act. It defines partnership as “an association of two or more persons for the purpose of sharing profit”. By using the term “persons “ and not “individuals”, it means that two partnerships, two corporations or legal personalities can form a partnership.

To form one, you need to fill out a certificate and file it. Then you can register and you get the authority to sue in the name of the partnership.

The amount of control that you have in a partnership depends on the size of the partnership business. Usually, the partners have a partnership agreement in which you may have a share of control equal to your partners and each of the partners has one vote. Sometimes, we have different classes of partners.

Liability is a problem. You get to be liable for the debts or actions of the partnership, but you are also liable for the debts and actions of the partners which incur in the course of the business ( more serious than marriage!). Of course, you can sue your partner afterwards. Breach of duty of loyalty could be a legal ground.

As a partner you have certain rights. Right to share profits. There is a duty to share the losses but which is not very bad provided the losses are not excessive, they can have very favourable tax consequences. A partner also has a right to inspect the books of the partnership. If he incurs expenses on behalf of the partnership, he has the right to be reimbursed in your expenses. This is called the right to indemnification. When the partnership is dissolved or terminated, you have the right to a share in the partnership property or capital.

Certain aspects of the partnership’s business requires a decision by all the partners. A decision to accept new partner has to be unanimous. Decisions to change the nature of the business or to assign an interest require the consent of all the partners. Under the Uniform Partnership Act and under common law, a partnership is dissolved if one of the partner dies, goes into bankruptcy, or loses his mental capabilities. Partnerships can avoid such an automatic dissolution by including as a part of the master agreement that in the event of bankruptcy or death of one of the partners, the partnership will automatically reconstitute without the bankrupt partner or the dying partner. However, a partner can petition a court to dissolve the partnership if he feels that the partnership is operating with a loss or that it’s engaged in unlawful activities. When the partnership dissolves, there is what we wall a liquidation. Liquidation involves paying off debts that the partnership has, and if there is anything left, then the partners who have lent the partnership money can be paid off, and finally, if anything left, the capital can be returned to partners.

In terms of raising capital, this form is very useful since the assets of all the partners can be used as a collateral for getting loans.

In terms of tax, partnerships are taxed as individuals as if the business is your own and you are the sole proprietor. You only pay taxes on your earnings.

Ease of management depends on the agreement and on the number of partners.

Alienability? Tough to sell a partnership business.

Partnership is still very popular form among small businesses. Tax aspect is simple and not much to report to the Government.