Chapter 5 Legal Forms of Businesses

1. Chapter 5Legal Forms of Businesses

2. Entrepreneur of the Day • KorviRakshand • Law school graduate – lives on the floor of a classroom • Has 10,000 volunteers, including folks from U.S. dignitary families • Jaago School – 1200 students, in slums of Dhaka and Chittagong • Focus on English, hygiene, healthy living • Children come from families with <$40/month income • National Children’s Day • Jaago Concept

3. Start It Off Right – With a Great Name! • The single-most visible attribute of your business! • Should portray the firm’s personality and image. • Also should: • Be short and memorable • Only conjure positive images • Avoid geographical or personal name reference • Great business names: Brownie Points, Pull-A-Part, Facebook, Edible Arrangements

4. What Next? • See if your name is taken at the Secretary of State’s web site. (No matches found is good) • See if your name is taken at the US Patent and Trademark Office. • Select a legal form of business: Sole proprietorship Partnership Limited Partnership C-Corporation S-Corporation LLC

5. Sole Proprietorships • Most common form of business (71%) • Very inexpensive - $22 at the Rutherford Co. Clerk’s office for a business license; additional business license for city • Can be started in a day • Tax flows to personal income • Only one owner, dies with that owner • No limitations on debt and lawsuit judgment liability – personal assets are considered business assets • Also must pay 15% self-employment tax on earnings • Hard to finance because you can’t attract investors

6. Partnerships • Allow for resources to be pooled from 2 or more owners • More likely to survive than sole proprietorship • Earnings are taxed as personal income. • Profits are divided between owners • No limitations on personal liability (joint and several) • Owners who accept limited partnerships do have limits on their liability, but agree to work no more than 500 hours per year in the business • Difficult to leave without dissolution of partnership and liquidation of the assets

7. Partnership Agreements • Help to avoid business-wrecking conflict • Include sections on: • Contributions made by each • Profit distribution • Agreement on salaries • Bringing on new partners • Leaving the partnership • Absence or disability of a partner

8. A Partnership Test (for any legal form) • Do you share mutual goals about what you’re in business to do? • Are you both, when not together, hard workers? • Are you both, when together, hard workers? • How do you feel about taking up each others’ slack in various situations? • How open are you with your communication, that is, how long does it take you to mention that something is bothering you about what the other is doing? • Discuss each others’ strengths and weaknesses. Does the expertise of one partner make up for weaknesses of the other? From Robert Kiyosaki, author of Rich Dad, Poor Dad

9. Corporations • Exist separately from owner • Owners are ONLY liable for their investment, unless they personally sign for debts, or unless a court finds otherwise! • Represent 64% of U.S. revenues and 45% of U.S. profits, but only 7% of the total companies. • Why do corporations make a disproportionate percent of profit and revenue? • Two types: S and C corporations • Different tax treatment and ownership allowances • Perpetual life – can be passed on or down to others

10. C-Corporations • Can attract capital by “going public” • Google did this and earned their company $1.67 B! • Can continue indefinitely by buying and selling shares • Double taxation • Earnings taxed first at corporate tax rate (35%) THEN • Divided for shareholders, who are taxed personal income tax on their shares (25-39%) • More red tape to start and maintain

11. S-Corporations • Limit personal liability • Allow for income to be counted on owners’ personal taxes • Owners must take a salary or pay payroll taxes as if they are. • Cannot have more than 100 owners • Cannot have foreign owners • Could result in owners paying taxes on income that wasn’t distributed (not unique to this form of company, though – LLC and C-Corporation are the samway )

12. Limited Liability Companies (LLCs) • Offer limited personal liability • Allow for profits to be taxed as personal income • Can be owned by foreigners or other companies • Can have any number of owners • Have flexible distribution of profit • Must have approval of other owners to sell out • May have limited life span (not in TN) • Owners must self-employment tax on profits because you don’t have to take a salary like in an S-corporation

13. Careful Consideration Should Be Taken to Pick the Right Form !! • Forms differ in terms of: • Liability concerns • Tax concerns • Future growth considerations • Cost to start up • Ability to split profit flexibly • Ease of exit from business • Register at the Tennessee One-Stop Business Resource

14. The Corporate Veil: A Myth? • Increasingly, owners and corporations are finding themselves personally named plaintiffs in business-to-business cases! • Must prove malice or injustice, or undercapitalization. OR • Must prove that corporation was formed illegally OR • Could be that the owner simply signed his or her name to a loan document, and did not include their position and the company’s name!! • Typically, in all corporate cases, the officers and directors will be named, and the plaintiff will go for piercing of the veil. • If the case doesn’t get you, the attorney’s fees might! • Basically, corporate formalities must always be upheld!