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					Chapter 27: Business Organizations:
An Introduction
      Megan Weber, Mike Walden, Ying Strow, Matt Brickey, & Sarah Busch



    Choosing a form of business can be an overwhelming task for many entrepreneurs.
After reading this chapter, it will be clear what the many advantages and disadvantages
certain business forms possess, and which type may be best suited for a new line of
business. Businesses have a plethora of options in choosing their type of organization, but
the most common types are the sole proprietorship, partnership, limited partnership
limited liability partnership, corporation, LLC, and Subchapter S Corporation. These
business types differ in the way they are formed, management, their transferability of
ownership, liability, as well as taxation. All of these factors should be considered when
deciding which organization type is best to form a new business, or possibly re-organize
an old one.
      The following should be considered when establishing a company: 1

      A. Legal Liability
       How much are you willing to assume? A lot of this may depend upon the industry in which the company is going
      to operate. Within certain types of formations (e.g. sole proprietorships, partnerships) the owner(s) will personally
      assume liability for their business. If you are not willing to risk your personal assets, setting up a company with
      unlimited liability will not be the wisest choice.
      B. Tax Implications
      Taxation can have large impacts on certain types of organizations. Corporations generally will have greater
      flexibility than partnerships or sole proprietors in regards to tax. While many corporations are subject to double
      taxation, this can be avoided with the implementation of the S corporation status. In the beginning years of a
      company‟s existence, the selection of a pass-through formation can be beneficial as losses can typically flow
      through to the individual‟s 1040 and lower their personal tax liability.
      C. Cost of formation and ongoing administration
      Many costs are ignored when businesses are formed in lieu of a more preferential tax treatment. When a business
      is incorporated, record-keeping and paperwork are continually required and usually come with a cost. A lot of
      these administrative costs eat an owner‟s time and thus „cost‟ the organization more than they would like. Unless
      there are significant tax advantages and you need to be shielded from liability, it would be wise to consider
      another type of business form.
      A. Flexibility
      In order to maximize the flexibility of your company, you must consider the unique risks the different owner(s)
      are willing to take. Each owner should consider how much financial liability they can afford before a business
      formation is decided upon. Every owner has a unique situation.


1
    Adapted from www.entrepreneur.com: “Choose your business structure”


Chapter 27 Business Organizations                                                                                  Page 1
   B. Future Needs
   The hard work and excitement invested in the initial formation may clout the reality of the future for many start-up
   businesses. Establishing a well-written agreement among participating parties to establish guidelines can make
   decisions down the road much easier (e.g. What if someone wants to sell their part of the organization). The issue
   of raising capital in the future is also essential to consider.




I. Sole Proprietorships
       A sole proprietorship is limited to one owner which in turn creates many
advantages and disadvantages. As the only owner of the organization, the individual will
be responsible for all of the managerial decisions. On the other side of the equation, the
owner will personally assume all of the liabilities, obligations and debts of the business.
Creditors can require the owner to pay debts with personal assets including his personal
bank account. There is little doubt that the sole proprietorship is a risky business even
though it has grown into the largest form of business in the United States.


Advantages and Disadvantages
        If an owner is willing to assume the risk, there are many advantages from
beginning a sole proprietorship. The organization is very easy to form and operate.
Essentially, a sole proprietor can begin doing business at will since neither federal or
state governments require formal filing or approval to start. However, if an owner decides
to do business under a name other than his (her) own, many states require that a fictitious
name statement be filed. If the organization generates profits, the owner is not required to
share any of the money. A sole proprietorship is not a legal entity and does not have to
pay taxes at an entity level, but rather at the individual level.
       Many businesses are turned off by the sole proprietorship because of its lack of
resources to raise capital. If the owner does not have a good credit history, attaining
adequate capital to provide leverage for the business may prove to be quite difficult.


Taxation of a Sole Proprietorship
        The taxation of a sole proprietorship is made simpler due to the fact that a sole
proprietorship can be distinguished separately from its owner. Therefore, any income
earned by the sole proprietorship is income earned by the owner and is not reported
separate. The owner of an organization with greater than $400 of income is required to
file a Schedule C Form along with their individual federal tax return, Form 1040,
detailing income (loss) of their business for the year. The losses generated from a
business can greatly reduce one‟s personal tax liability. Many wealthy taxpayers use a
sole proprietorship for their investments in the early years when losses are expected.
        Besides just having to report the income or losses from a sole proprietorship, the
Chapter 27 Business Organizations                                                                              Page 2
owner is also required to pay a self-employment tax. This tax is for social security and
Medicare and is very similar to the tax that is withheld from one‟s pay from an employer
if you were not in business for yourself. The calculation of the tax is completed on
Schedule SE, which also needs to be included with your individual tax return.



II. Partnerships

         If the business being started will be owned and/or operated by more than one
individual, there are many business organization possibilities. One of the most common
types is the partnership. A Partnership in its basic sense consists of two or more people
called partners. In different types of partnerships, partners have different legal
responsibilities and duties. In a basic partnership, there are general partners who share in
the management of business and have unlimited liability to the creditors. Many creditors
will require that one or more of the general partners pay debts when the assets of the
partnership are insufficient. In short, any of the general partners could potentially be held
liable for any of the partnership debt. Although partnerships offer great advantages, the
liability assumed by the partners can be quite the risk.


Formation a Partnership
         The formation of a partnership does not require any formalities, but an agreement
typically is drawn between the different owners. Merely sharing gross revenues does not
imply that a partnership has been formed. Rather, many issues should be decided upon
including how to share the profits and losses of the company (See Figure on Next Page).
An agreement specifying the details are referred to as the articles of partnership. The
failure to comply with the agreement could result in a fine or termination from the entity.
Oftentimes poorly drawn partnership agreements can lead to litigation courts where
things can turn bad and prove to be very expensive. While a partnership is formed when
two or more people begin doing business together without selecting a business form, the
costs of not completing a formal partnership agreement can prove to be costly. Additional
partners can be added upon unanimous consent of the current partners.




Chapter 27 Business Organizations                                                      Page 3
                 What should be defined in a partnership agreement?
                               1. Who are the partners?
                         2. What is the nature of the business?
                                       3. Duration?
                                    4. Place of business?
                      5. Amount of capital contributed by each?
              6. Will property be contributed? Can it be used personally?
                7. Duties of each? Will certain partners earn a salary?
                     8. How and when will money be withdrawn?
                        9. How will profits be divided? Losses?
       10. How many votes will each partner have? How will disputes be settled?
    11. What happens if a partner leaves or dies? How will that partner’s share of
                              the business be valued?
                        12. Should life insurance be taken out?




Taxation of a Partnership
        Like a sole proprietorship, partnership income and losses flow through to the
individual partner‟s tax returns. Double taxation occurs when taxes get paid twice on
income that is coming from the same source. For example, corporations get taxed on any
income that it earns, and then its shareholders will get taxed on any cash distributions,
and dividends, that they receive from the corporation therefore creating double taxation.
(This is expanded on in Section V, which discusses Corporations.) Unlike corporations,
partnerships are not subject to double taxation since the income flows to the partners.
Although the company will not pay any taxes on an entity level, they are required to fill
out informational Form 1065 which is then passed down to each partner through a
Schedule K-1. The Schedule K-1 will detail each of the partner‟s shares of partnership
income, deductions and tax credits.
        Many times partnerships will have losses in their initial years as they get
themselves off the ground. The opportunity for a partner to take the partnership losses on
their personal taxes serves as a „tax shelter‟ in reducing taxes. The Internal Revenue
Service has guidelines on when certain partnership losses are deductible, but this
opportunity makes the formation of a partnership very appealing to newly formed
organizations.
Dissolution of a Partnership
       The Revised Uniform Partnership Act (RUPA) is a set of partnership rules that
has been adopted by many of the states. Within the Act, the rules for the termination of a
partnership are outlined. Dissolution of a partnership can occur by a prior agreement,
present agreement of partners, or a decree of court. In general, a partnership will
automatically dissolve when a partner leaves or dies. However, if the partnership
agreement specifies that the partnership will continue and what must be done, the

Chapter 27 Business Organizations                                                    Page 4
partnership can continue. If a partnership continues, the partner who left or died has a
right to receive their share of assets and profits they are due.


III. Limited Liability Partnerships
        An alternative to a partnership is the limited liability partnership (LLP). An LLP
offers essentially the same structure as the partnership, but an LLP partner has no
obligation for the acts of the other LLP partner's within the organization. (e.g. medical
malpractice). However, in some states the partner may be personally liable for the
contracts of the business. Another advantage to forming an LLP is that the partners have
the option of being taxed as a partnership or a corporation. Only in rare situations would
the LLP choose the corporate form of taxation, but it could be a valuable option if the
partners are high worth individuals. In the case of being taxed as a corporation, the
partners pay federal income tax only on the compensation paid and the partnership
distributed profits of the partnership.


Formation of a Limited Liability Partnership
        Unlike an ordinary partnership, the formation of a limited liability partnership in
many states requires the filing of a form with the Secretary of State. By simply going to
the Secretary of State‟s website in the state where the partners live, they can find the
application. To see a sample form for the state of Missouri, go to
http://www.sos.mo.gov/forms/corp/llp6.pdf


IV. Limited Partnerships
        As mentioned in the subsequent partnership section, some partnerships have
partners with different amounts of liability. Within a limited partnership (LP), there are
general partners who have similar rights to partners in general partnerships in the fact that
they assume the managerial duties and personal liability of the company. However, in
addition to the general partners, the LP has limited partners who generally do not have
any personal liability, but have contributed capital to the LP.


Forming a Limited Partnership
        Formation of the LP can be created by complying with state statues regarding
limited partnerships. Since the life of a LP is not tied to an individual and is seen as a
separate legal entity, it is very important to outline the rules about the transferability and
acceptance of new partners at the beginning.
      Many businesses choose the LP because it has an opportunity to attract large
amounts of capital with smaller amounts of personal liability.


Chapter 27 Business Organizations                                                        Page 5
       Instructions and forms to start a limited partnership in Missouri can be found by
going to: http://www.sos.mo.gov/forms/corp/lp41.pdf


Taxation of a Limited Partnership
        The LP has the option of being taxed as a partnership or a corporation. If taxed as
a corporate organization, partners will only pay federal income tax on compensation paid
to them and distributed profits. However, it is important to understand that under the
election of the „pass-through‟ partnership tax, general and limited partners are subject to
different tax treatment. Many times, LP‟s will choose the partnership tax option to avoid
the double taxation corporations are subject to. While general partners can deduct any of
the losses the organization may suffer, limited partners can only deduct losses to the
extent of their investment in the business. This type of limited investment is considered to
be a passive investment and is subject to a separate set of taxation rules.


V. Corporations
         The corporation is the main form of organization for large businesses in the
United States. The main characteristic differentiating it from partnerships and sole
proprietorships is that a corporation is considered a separate legal entity with rights and
liabilities separate from those of its shareholders or owners. A corporation can enter into
contracts, be sued, sue other businesses under its name, and acquire, hold, and transmit
both real and personal property. A corporation receives the same rights as an individual
person under the U.S. Constitution including equal protection, due process, freedom from
unreasonable searches and seizures, and freedom of speech. However, some forms of
speech are given less protection to corporations than individual people such as freedom
of advertising and political contributions.
        Corporations are owned by various shareholders who elect a board of directors to
manage their business for them, which includes taking care of daily activities. Since the
board of directors is separate from the shareholders, the ownership and management of a
corporation are likely to be separate as well. Although a shareholder owns part of the
corporation, no one shareholder has the right to manage the business, and no officer or
director has to be a shareholder.


Forming A Corporation
        In order to form a corporation, one must first obtain a state charter by filing
Articles of Incorporation with the state. There are several decisions to make before
applying to form a corporation. First, the state in which a business wants to incorporate
should be chosen. This will usually be the state where the company headquarters is


Chapter 27 Business Organizations                                                     Page 6
located, or where it conducts most of its business. Some people prefer to incorporate in
states that impose few regulations or no corporate income tax, such as Delaware, Nevada,
and Wyoming.
        In addition, other information should also be specified such as (1) proposed name
of the corporation, (2) the corporation‟s purpose and powers, (3) name of the
corporation‟s registered agent, and (4) name and address of each incorporator.
        During the first shareholders‟ meeting, stock certificates are issued to
shareholders and prior temporary directors resign and new directors are elected. At the
same meeting, or later meetings, directors elect officers, adopt or reject any contracts
made prior to formation, start new business of the corporation, and adopt the
corporation‟s initial bylaws. The newly adopted bylaws outline specific rules set out by
management. These adopted bylaws do not need to be filed with a government agency.
Lastly, the Articles of Incorporation may be amended upon approval of any affected
shareholders. Usually a majority vote of two-thirds is required for any amendments to be
accepted.
       Instructions and forms to start a for-profit corporation in Missouri can be found
by going to: http://www.sos.mo.gov/forms/corp/corp41.pdf


                                         GET CONNECTED!
Visit this recommended website for more detailed information on the steps involved in forming a
corporation:         http://www.medlawplus.com/library/legal/incorporation.htm
Here‟s another recommended website if you are thinking about actually starting your own corporation:
                http://www.legalzoom.com/business-formations/business-formations.html


Advantages and Disadvantages
       There are several advantages of being classified as a corporation. These
advantages include:
 Limited liability of shareholders/owners
 Separation of ownership and management
 Free transferability of shares of stock that can be freely bought, sold, or assigned
     (unless agreed upon restrictions exist)
 Continuous life of the entity
 Ease of obtaining capital
 Receipt of the same rights as a person under the U.S. Constitution
        Unlike partnerships, a corporation is not terminated upon the death of any
shareholders. Financing is also easier for corporations. Corporations have the ability to
raise large amounts of capital compared to other business organizations since they have

Chapter 27 Business Organizations                                                                  Page 7
the advantage of issuing stocks and securities, such as bonds. In addition, the corporation
has flexibility in the different kinds of stocks and bonds issued, which can be done
according to the needs of the business and demands in the marketplace.
       In addition to these numerous advantages, corporations also come with some
disadvantages:
  Less individual control of the business
  Double taxation (both the corporation and shareholders pay taxes on dividends)
  Large formation and operation cost requirements
  Transfer of unrestricted shares to unknown parties (only pertains to certain kinds of
   corporations)
  Minority shareholders unable to liquidate interest or influence the operations of the
   business (again, only applies to certain kinds of corporations)
  Being subject to state and federal regulation of securities transactions with both
   reporting and registration requirements


Liability for Owners
        Shareholders of a corporation have limited liability to the business, even if a
shareholder is considered an officer or director. In general, a shareholder in a corporation
only risks his or her personal investment in the business. When signing under a
corporation‟s name, neither directors nor officers are liable for contracts signed by them
or other employees. Managers are only liable for their own actions and have no liability
for issues dealing with other managers or employees of the corporation. Officers,
managers and large shareholders have a fiduciary and ethical duty to look after the
welfare of other shareholders and not participate in side deals without other stakeholders
knowing.


Taxation of a Corporation
        Corporations are considered tax-paying entities and are required to pay federal
income taxes on profits earned by the business. Shareholders have an advantage since
they do not report their individual shares of the corporation‟s profits on their individual
income tax returns. However, shareholders are required to report any profits distributed
to them in the form of dividends. Also on individual tax returns, shareholders must
report any sales of investments producing a profit. Shareholders are not allowed to
deduct corporate losses on their individual tax returns, but may deduct any personal
investment losses after the sale of their shares.
        A disadvantage of being taxed as a corporation is the possibility of double
taxation since profits are taxed at both the corporation level as well as the shareholder

Chapter 27 Business Organizations                                                       Page 8
level whenever dividends are paid. An exception to these corporate tax rules is made by
electing to become an S Corporation where the corporation and its shareholders are taxed
like a partnership under Subchapter S of the Internal Revenue Code. Subchapter S
Corporations are discussed in more detail later in this chapter in Section VII.


VI. Limited Liability Companies (LLC)

        A limited liability company is a hybrid business organization that combines the
numerous non-tax advantages of corporations with the favorable tax treatment of
partnerships, thus getting the best of both worlds. This is a relatively new form of
business where its laws have been developing in many states and have started to become
fairly uniform.


Forming an LLC
         LLCs are easier to create than corporations, and must be formed in accordance
with the limited liability company statute of the state in which the LLC is to be formed.
Sole proprietorships are allowed in certain states to be formed into a limited liability
company to reap its advantages. Some general partnerships or limited partnerships also
can decide to switch to an LLC status. In this case, partners retain any liabilities they had
in their prior partnerships, but obtain the benefits associated with being new members of
an LLC for transactions taking place after the conversion date. If the LLC does business
in other states, it is considered a foreign LLC and laws of the formation state usually
prevail over foreign states.
       To form an LLC, members must adopt an operating agreement, which is
considered a contract outlining the rights and duties of its members, and should be filed
with the Secretary of State. Usually state law requires the entire operating agreement to
be in writing. The agreement can be amended by filing articles of amendment, also with
the Secretary of State.
     In summary, below are the steps involved in forming an organization as an LLC:
 (1) Choose an available business name that complies with that state's LLC rules
 (2) File formal paperwork, usually called articles of organization, and pay the filing fee
     which ranges from about $100 to $800 depending on state rules (For Missouri, the
     filing fee is $105).
 (3) Create an LLC operating agreement that establishes the rights and responsibilities of
     members
 (4) Publish a notice of intent to form an LLC (required in only a few states)
 (5) Obtain any required licenses and permits
Chapter 27 Business Organizations                                                      Page 9
        Instructions and forms to start an LLC in Missouri are found at:
http://www.sos.mo.gov/forms/corp/llc1.pdf. Below is a copy of the form that is needed
for the formation of a LLC in Missouri, which can be found at the link. The link also
includes rules for the formation that are applied in Missouri.


                                    Articles of Organization
                                   (Submit with filing fee of $105.00)
1. The name of the limited liability company is
(Must include “Limited Liability Company,” “Limited Company,” “LC,” “L.C.,” “L.L.C.,” or “LLC”)

2. The purpose(s) for which the limited liability company is organized:

3. The name and address of the limited liability company‟s registered agent in Missouri is:

4. The management of the limited liability company is vested in: _ managers _ members

5. The events, if any, on which the limited liability company is to dissolve or the number of years
the limited liability company is to continue, which may be any number or perpetual:
(The answer to this question could cause possible tax consequences, you may wish to consult with
your attorney or accountant)

6. The name(s) and street address(es) of each organizer (PO box may only be used in addition to a
physical street address):
(Organizer(s) are not required to be member(s), manager(s) or owner(s)

7. The effective date of this document is the date it is filed by the Secretary of State of Missouri
unless a future date is otherwise indicated:
(Date may not be more than 90 days after the filing date in this office)

In Affirmation thereof, the facts stated above are true and correct:
(The undersigned understands that false statements made in this filing are subject to the penalties
provided under Section 575.040, RSMo)
All organizers must sign:


Advantages and Disadvantages
         A major advantage of an LLC is the limited liability of its owners. If the LLC is
managed by managers, the LLC receives the management advantage of a corporation.
Also, there is much less paperwork involved with an LLC than a corporation. The LLC
and any members can choose to receive federal tax treatment similar to that of an S
Corporation and its shareholders. However, the LLC has no limit on the number or type
of its owners as in an S Corporation. Many states permit an LLC to have only one owner,
referred to as a “single member” LLC. Depending on state law and the terms of the
agreement, circumstances such as death, retirement, or bankruptcy of members might not
result in the dissolution or liquidation of the LLC. It is most likely in these circumstances

Chapter 27 Business Organizations                                                             Page 10
that the agreement will call for the business to be bought out like a partnership.
        A disadvantage of an LLC is that the owners‟ interest is not freely transferable
like a corporation, unless it has been agreed upon. Transferability of a member‟s interest
only allows the transferee to receive the member‟s distributions from the LLC, unless
there is an agreement by members or the LLC to permit the transferee to become a
member. However, some states allow LLCs to adopt certain characteristics of a
corporation including centralized management, continuous life of the entity, as well as
free transferability of interests. Another disadvantage is that compared to partnerships
and sole proprietorships, the LLC is more expensive to create, and investors may be more
reluctant to give financial capital to an LLC instead of a well-known, trusted corporation.


Liability for Owners (“Members”)
         An LLC is owned by its members who can manage the LLC themselves or choose
to elect other people as managers to operate the business. Like its name implies, the
members of a limited liability company, which are often called members, have limited
liability to the business‟s obligations and have no personal liability. The liability of
owners is limited to their capital contributions plus any equity in the LLC. Compared to
limited partnerships, LLC is still more desirable since only limited partners have limited
liability in a LLP.
         Unlike corporations, if members of the LLC fail to follow the formal rules
involved with conducting business, they are not exposed to personal liability for any
debts. An example is members of an LLC failing to keep minutes at a meeting. With an
LLC, members still do not have personal liability for the debts of the LLC. However, if
minutes were not taken at a meeting of a corporation, shareholders may have personal
liability for the corporation‟s debts.


Taxation of an LLC
        LLCs have a major tax advantage in that they can be treated as partnerships for
tax purposes by having pass-through taxation, and thus avoid the problem of double
taxation associated with regular corporations. If treated like a partnership, LLCs can use
the IRS Form 1065 and Schedule SE for self-employment tax. As a partnership, the
business‟s income and deductions associated with each member are reported on that
member‟s individual tax return. Also, health insurance and pensions are deductible by
members of an LLC if the business has been chosen to be taxed as a partnership. In some
cases, the members may elect the LLC to be taxed as a corporation where the business‟s
income before dividends and member distributions are taxed, as well as being taxed at the
individual level for dividends and distributions received as income by its members.


Chapter 27 Business Organizations                                                    Page 11
Dissolution of an LLC
       The LLC may be required by state to dissolve when one of the following occur:
        All members agree in writing
        Time period passes or event occurs as specified in operating agreement
        Member withdraws, is voted to leave, dies, goes into bankruptcy, or becomes
          incompetent (however, most states allow the remaining members to continue
          the LLC if agreed upon)
        Court orders the dissolution




VII. Subchapter S Corporations
        A subchapter S Corporation is a corporation that is elected to be taxed under
Subchapter S of Chapter 1 of the Internal Revenue Code for federal income tax purposes.
This allows an S Corporation to be taxed as a partnership while still receiving the various
benefits of a corporation. However, there are several requirements that must be met in
order to be elected as an S Corporation, making many corporations not eligible.


Forming an S Corporation
        The shareholders of a corporation must agree to be elected as an S corporation
shortly after it is incorporated. To form a subchapter S Corporation, a corporation must
first qualify by meeting several requirements. A corporation electing S Corporation
status is not allowed to have more than 100 shareholders, must have only one class of
stock, and can only be owned by individuals and estates. In addition, profits and losses
must be allocated to shareholders in proportion to their interest in the business. Each of
the requirements to be elected is shown on the Internal Revenue Service‟s website at this
address: http://www.irs.gov/instructions/i2553/ch01.html#d0e53.
       If the corporation qualifies, the next step is to elect to be taxed under Subchapter
S. The corporation must elect to be filed with the IRS on or before the 15th day of the
third month of the taxable year. For example, a corporation formed on June 1, 2007
would have to file the election by August 15.



Advantages and Disadvantages
        A main advantage of being elected as a subchapter S Corporation is the
substantial benefit of being taxed as a partnership. In addition, the death of shareholders,
directors, or officers has no effect on the existence of the corporation, and it must be
Chapter 27 Business Organizations                                                    Page 12
legally dissolved to terminate. A Subchapter S Corporation‟s assets or ownership is
easily transferred through the sale of assets or stock.
       Another advantage is that S Corporations are treated as corporations under state
law, which means they are recognized as separate legal entities. This provides
shareholders with the same limited liability protection from creditors as corporations
receive. However, the S Corporation has an additional advantage in that losses of the
business are deductible on individual federal income tax returns.
        A disadvantage of being elected as a subchapter S Corporation is the constantly
changing rules involving the criteria needed to be taxed as an S Corporation. Certain
rules to be aware of include the number of shareholders a Subchapter S Corporation is
allowed to have, the types of entities that cannot be shareholders, the citizenship of
shareholders, and the amount of the corporation‟s income allowed to come from passive
income.
         Another disadvantage is that many corporations are ineligible since there are
several specific requirements that must be met in order to qualify as an S Corporation.
One of the requirements is that the corporation is limited to no more than 100
shareholders. This stipulation severely limits the ability to raise capital. In addition, S
Corporation shareholders may not be able to find investors to buy their shares or may be
restricted from selling them because of an agreement among shareholders. The other
requirements are discussed in more detail later on.


Liability for Owners
        Like a corporation, shareholders of an S Corporation have limited liability to the
business and only risk personal investments. Managers are only liable for their own
actions and have no liability for issues dealing with other managers or employees of the
corporation.


Taxation of an S Corporation
        In general, an S Corporation does not pay any income taxes, but instead passes its
income and losses onto its shareholders. Thus, income is taxed only at the shareholder
level, and not at the corporate level. A Subchapter S Corporation status can be elected to
avoid double taxation by not paying taxes on a corporate level by instead having the
corporation‟s income flow through to the individual tax returns of shareholders. The
elected S Corporation status is mainly like a partnership in that shareholders report the
income or loss on their individual tax returns, even when income was not distributed to
them personally.



Chapter 27 Business Organizations                                                    Page 13
                            AN INTERVIEW WITH AN S-CORPORATION OWNER


       Nature of Business: Real Estate
       Owner Name: James Meyer

       1. Describe your business.
                 My business consists of real estate investments and property management services. The
       management service maintains and repairs properties for investors, condominium owners, and
       landlords.
       2. What type of business organization is your business (sole proprietorship,
           partnership, corporation, S corporation, etc.)?
              S Corporation
       3. Who manages the business from day to day?
             I manage the daily business.
       4. What is the formation process involved in being this type of business organization?

               I must Register the corporation with the state of Missouri and update the state annually.
       5. Why did you choose to be this type of organization?

               I have limited personal liability for the corporation but the tax advantages of individuals.
       6. What kind of liability is involved with this type?
                I’m limited personally for the corporation’s liability but generally I ‘m requested to give
       personal guarantees for large debt. (Mortgages, loans etc.)
       7. What are some of the advantages of being this type? Disadvantages?
             Advantages are limited liability (corporate protection), sale of stock, perpetual organization.
       Disadvantages are separate tax reporting and filings.
       8. How is this business organization taxed?
              The corporation is not taxed. All tax liability is transfer to the individual owners
              (stockholders).
       9. Would you be able to transfer ownership of your business to another person?
             Yes, I believe as a whole or through the sale of stock.




For a good comparison table, see: http://www.bizfilings.com/products/pdf/EntityComparisonTable.pdf


      A table comparing business forms:



      Chapter 27 Business Organizations                                                                  Page 14
Figure 1 Basic Characteristics of Business Forms

              Sole              Partnership        LLP                 Limited          Corporation       LLC          Subchapter S-
              Proprietorship                                           Partner ship                                    Corporation




Feature       Has one owner     Has two or         Has two or          Has general      Has               Has          Has
                                more owners        more members        partners and     shareholders      members      shareholders as
                                                                       limited          as owners         as owners    owners
                                                                       partners

Formation     A person goes     Multiple           Multiple            Multiple         Shareholders      Members      Shareholders
              to business by    partners go to     partners go to      partners         found and         go to        found and
              himself.          business           business by         comply with      incorporate       business     incorporate the
                                without            filing and          limited          the business      by filing    business
                                incorporation      complying with      partnership                        and
                                                   LLP statue          statue                             complying
                                                                                                          LLC
                                                                                                          statue

Legal         The owner is      The partners       The partners        The general      Shareholders      Members      Shareholders
Liability     personally        have               have no             partners have    have limited      have         have limited
              liable and the    unlimited          liability for the   unlimited        liability. The    limited      liability. The
              business is not   liability for      business except     liability and    business has      liability    business has its
              a legal entity.   the business.      the one at fault.   the limited      its own           for the      own liabilities.
                                                                       partners have    liabilities.      business.
                                                                       limited
                                                                       liability

Tax           The business      The business       The business        The business     The business      The          Business profits
Implication   does not file     does not file      may elect to be     may elect to     is taxed on its   business     are reported on
              tax. Business     tax. Business      taxed as a          be taxed as      income. This      may elect    shareholder
              profits are       income are         corporation or a    corporation      is double         to be        individual tax
              reported in       passes through     partnership.        or               taxation as the   taxed as     returns as with
              owner‟s tax       to the partners    Usually             partnership.     shareholders      an S-        a partnership.
              return                               partnership is      Usually          report            Corporati
                                                   elected.            partnership is   dividends and     on.
                                                                       elected.         capital gains     Usually
                                                                                                          partnershi
                                                                                                          p is
                                                                                                          elected.

Manage-       The owner         The partners       The partners        The partners     The               The          The shareholder
ment          makes all         make all the       manage the          manage the       shareholder       members      elect a board of
              manage            managerial         business.           business.        elect a board     may self     directors as
              decisions         decisions                                               of directors as   Manage       mgmt of
                                                                                        management        or hire      business
                                                                                        of business       managem
                                                                                                          ent

Transfer      Cannot be         Cannot be          Cannot be           Cannot be        Can be feely      Transfera    Can be feely
ability of    transferred to    freely             freely              freely           transferred       bility is    transferred
ownership     another person    transferred        transferred         transferred      unless there is   limited      unless there is a
                                unless agreed      unless agreed       unless agreed    a contrary        unless       contrary
                                upon all           upon all            upon all         agreement         agreed       agreement
                                partners           partners            partners                           upon




Chapter 27 Business Organizations                                                                                        Page 15

				
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