Buisness Structures Options:

Legal, Tax, and Risk Issues

Chapter Outline:
1. Business Structures: Overview of Legal and Tax Considerations
2. Corporations
3. Partnerships and Joint Ventures
4. Limited Liability Companies
5. Sole Proprietorships
6. Additional Considerations: Capital Acquisition, Buisness Domicile, and
Technology
7. Mitigating and Managing Risks
1. Business Structures: Overview of Legal
and Tax Considerations
Learning Objectives:

• Understand why a business’s purpose is an important role in the initial

business structure decision
• Identify major types of business structures (LLC, partnership, sole
proprietorship, joint venture)
• Distinguish between for profit and non for profit purposes ans
structures
 Sole
Proprietorship

Corporations Business Partnerships

(C,S or B Structures (GP,LP,LLP)
Corporation)

Hybrids
(LLC or Joint
Ventures)

Figure 13.2
Business Structure or entity selection – legal
organization of a business

Business purpose – 82is the reason44 the entrepreneur

73
forms the company and determines who benefits
from it, whether it is the entrepreneur, customers
or some other entity.
Establishing a Business Purpose

• Consider whether the entity created to produce a profit

for its owners or shareholders or whether it it will be
structured as a non-for-profit entity.
82 44 73
• The state of incorporation, as state of law defines each
business’s creation, with different states permitting
different types of entities and various legal protection
• How the structures facilitates bringing new investors,
allows the owners to transfer profits out of the business
and supports a potential subsequent scale entity.
• Taxation
Characteristics of For-Profit Businesses

• Designed to create profits that are distributed to the

owners
• Used multiple entity 82
structures 44 73
• Subject to a variety of local, state, and federal taxes and
filings.
• Commercial entities that generally earn revenue through
the sales of products or services
• Can be either privately owned or publicly owned(such as
an LLC)
Characteristics of For-Profit Businesses

• Most states require that the entrepreneurs create a

corporation that has a specific purpose of acting in the
public interest. 82 44 73
• Creation of a non-for-profit business organization for a
particular purpose.
Characteristics of Not-for-Profit Businesses

• Usually dedicated to serve the public interest, further a

particular a social cause, or advocate for a common
shared interest. 82 44 73
• Follow particular regulations regarding eligibility,
government lobbying, and tax-deductible contributions.
• Uses its surplus revenues to achieve its ultimate
objective, rather than distributing its income to the
organization’s shareholders, partners, or members.
• Usually tax-exempt as categorize IRS
2. Corporations

Learning Objectives:

• Distinguish between C corporations, S corporations, and B

corporations
• Distiguish between privately and publicly held corporations
• Explain how corporation are taxed
Corporations
- is a complex business structures created by filing
the appropriate documents with the state of
incorporations.
- operates as a separate legal entity apart from the
owners.
- the owners are called shareholders and can be
individuals, other domestic or foreign corporations,
LLCs, partnerships, and other legal entities.
- may be for-profit or not-for-profit.
82 44 73
Overview of Corporations
• Corporation are the only type entity that allows
to sell shares of stock
• Individuals or entities
82 that buy
44 stock become
73
shareholders and own the corporation.
• Corporations sell, or issue, stock to raise capital,
or money, to operate their business.
• Use of corporation allows the entrepreneur to
shield themselves, and the owners, from
personal liability for most legal and financial
obligations.
C Corporation, S Corporation, B Corporation
• An S Corporation is a “pass-through” entity, where the
report and claim the business’s profits as their own
and pay personal income taxes on it.
82 44 73
• C corporation levies taxes on the owner’s personal
income tax returns if corporate income distributed to
the shareholders as dividends.
• B Corporation is a business that meets very high
standard of social and environmental performance ,
public transparency and accountability to balance
profit with social purpose. B corporation can be C or
S corporation.
Unique Nature of B Corporation and/or
Benefit Corporation
• Becoming a B corporation is a formal process that
involves compliances82with various44standards and73 an
audit of this compliance.
• New B corporations is that “they recognize the
imperative to do no harm and create positive impact
throughout that value chain.
• B corporation certification somewhat like a seal of
approval for business voluntarily trying to be socially
responsible.
Unique Nature of B Corporation and/or
Benefit Corporation
• Benefit Corporation is a corporation recognized
82 agency under
by the governmental 44 73 but
state law
does not carry the certification of a B corporation.
• The objectives of benefit corporation is directed
toward maximization of benefits for all
stakeholders
Privately Held versus Publicly Held Corporations

 Public Corporation is a quasi-governmental entity, an entity

owned or sponsored by the government.
 Privately held Corporation is a company that does not allow
member investing public 82 to own stock. 44 73
 Publicly held corporation is an entity in which members of the
investing public own the stock.
 Closely held corporations is the same as a privately held
corporation for the purposes of securities laws. The
management structure is selected by small companies that
uses the less-formal management style of general partnership
yet retain the limited liability of a corporation.
Not-for-Profit Corporations

 Created in one a state but may operate or solicit donations in

other states
 Organized in a similar fashion to a for-profit with a board of
directors and officers, but they have no shareholders, stock,
or owners
 Stakeholders of a non-for-profit corporation play an important
role, monitoring overhead and allocation of funds.
 Public watchdogs monitor the financial statements of federally
tax-exempt organizations.
Overview of Corporate Taxation

 All for-profit corporations is subject to tax at the federal level,

and usually at the state level as well.
 Tax planning is a major issue for most corporations and may
explain some key decisions such as where they are located.

Taxation of C Corporation
• C corporation pay corporate income taxes on profits made.
Individuals are subject to personal income taxes on any
dividends they receive.
Overview of Corporate Taxation
Taxation of S Corporation
• S Corporation is a corporate entity in which the firm’s profit is
passed through its stockholders (shareholders), usually in
proportion to their investment – this is known as pass-through
taxation.
• The IRS taxes the corporate profits at the personal income tax
rates of the individual shareholders.
3. Partnerships and Joint Ventures

Learning Objectives:

• Describe the ownership structure of a partnership

• Describe the ownership structure of a joint venture
• Summarize the advantages and disadvantages of partnership and joint
venture structures
Partnership
- is a business entity formed by two or more
individuals, or partners, each of whom contributes
something such as capital, equipment or skills. The
partners then share profits and losses. A partnership
can contract its own name, take title to asstes and
sue or be sued.
Joint venture
- is a temporary partnership that two business from to
gainmutual benefits, such as sharing of expenses
and to work toward shared goals and the associated
potential revenue. Joint ventures share costs, risks,
and rewards. Joint venture can help speed up
expansion of your business by gaining access to
additional equity, new markets, or new technology.
Overview of Partnerships
• State law governs the formation and operation
of all partnerships.
• General partnership is created when two or
more individuals 82 44 to work 73
or entities agree
together to operate a business for profit.
• Partnership generally operates under the terms
of a written partnership agreement, but there is
no requirement that the agreement be in writing.
Overview of Partnerships
• Partnership agreement addresses many
important topics, including the monetary
investment of each partner, their management
82
duties and other obligations, 44 profits or 73
how
losses are to be shared, and all the other rights
and duties of the partners.
• Partnership can take many forms, including
general partnership GPs, limited partnership
(LPs), limited liabilities partnership (LLPs) and
limited liability limited partnership (LLLPs).
Overview of Partnerships
• Limited partnership requires at least one general
partner and one or more limited partners. LPs are
commonly used in businesses that require investment
capital but do not82require management
44 73
participation
by LP investors.
• Limited liability partnership, partners are licensed
professionals, with limited liability for financial
obligations related to contracts or torts, but full
liability for their own personal malpractice.
Overview of Partnerships
• Limited liability limited partnership (LLLP) allows the
general partner in an LP to limit their liability.
82 44 73
Advantages and Disadvantages of
General Patnership
• GP is very common business structure, easy and inexpensive to
form
82 to have a 44
• GP not technically required 73 or to file
written agreement,
or register with the state government, however should have their
business structures described in writing.
• One partner is liable for the other partner’s debts made on behalf
of the partnership, and each partner has unlimited liability for the
partnership debt.
• Partners are liable for the taxes on the partnership
Taxation of Partnerships
• Partnerships are considered pass through entity,
whether they are GPs, LPs, LLPs.
• Partnership profits82are not taxed
44at the entity73level but
the profits passed through to the partners who claim the
income tax returns.
Joint Ventures: Business Entities Doing
Business Together
• Two or more individuals or business agree to operate a for-profit
business venture for specific purpose.
• It is similar with legal partnership but differs in terms of purpose and
44 73
duration. Usually used for a single purpose and limited period.
• Typically two business entities operate a business together on a joint
project.
• Joint venture is not recognize as taxable entity by IRS
• Joint venture can be a good way to test business venture with less risk
• Joint venture can involved parties that are large and small, or from
private or public sectors or they can involve a combination of types of
entities and most often formed a corporation or LLC.
82 44 73
4. Limited Liability Companies

Learning Objectives:

• Describe the ownership structure of a limited liability company

• Explain how limited liability companies are taxed
• Summarizes the advantsges and disadvantages of the limited liability
company structure
Limited Liability Company

- is a hybrid of a corporation and a partnership that

limits the owner’s liability
- The advantage of LLCs have over GPs is in the
protection of owners from personal liability.
- Its advantage compared to corporations to
entrepreneurs is that they are easier to form and less
cumbersome to operate because there are fewer
regulation and laws governing its operations.
Overview of LLCs
- owners of LLC are called members
- daily operations of the LLc can be delegated to a
professional manager
- LLC provides the corporate shield of limited liability
to the investors
- Ownership of LLC represented by percentages or units
- Term shares is not use in operating agreements because
they cannot sell shares of stock like corporation can
Taxation of LLCs

- Government can tax the business as corporation or as

an individual
- LLC can select its method of taxation either a C
corporation, S corporation or partnership
5. Sole Proprietorship
Learning Objectives:

• Describe the ownership structure of a sole proprietorship

• Explain the advantages and disadvantages of operating as a
sole proprietor
Sole Proprietorship

- is a business entity that is owned and

managed by one individual and has very
little formal structure and no mandatory
filing/registration with the state.
- Owner is called sole proprietor
Overview of Sole Proprietorship
- Most common business structure, even
though the business is not legally separate
from its owner.
- Quick, easy and cheap to form and operate
- The rapid growth of gig economy is another
decision to be a sole proprietor
Overview of Sole Proprietorship
- Simplest method to operate a business – often
under the owners name and the owner is
typicall taxed directly by the IRS
Advantages and Disadvantages of Sole Proprietorship
- Sole proprietor is personally liable for everything
- Sole proprietor is the investor, owner and manager of the business
- Sole proprietorship is the easiest business to start but has almost no
differentiation from the individual starting the business.

Taxation of Sole Proprietorship

- A sole proprietorship is not taxed as an entity. All profits pass through
to the owner who pays individual income taxes .
6.Additional Considerations: Capital Acquisition,
Business Domicile and Technology
Learning Objectives:

• Describe the capital acquisition opportunities available to different

types of business structures
• Explain how the advantages and disadvantages of where a business is
registered should inform the decision of where to create a business
domicile
• Understand the role technology considerations may play in selecting
a business structure
Capital Acquisition
Capital Acquisition

• Management is left to the owners when borrowing fund, but when

companies receives investment funds, investor also receives an equity
share in the business and may be involved in management.
• The business structure will drive the tax circumstances of the
investment, business and owners
• The business structure change when the company is growing
• Using SBA to guarantee a loan through a participating bank
• The typical entities to which the banks lend money and investors
invest money are partnership, LLCs or corporations
Capital Acquisition

• Equity Crowdfunding – involves a starup raising capital through

online sale securities to the general public.
• Jumpstart Our Buisness Startups (JOBS) Act in 2012 enables to use a
variation on a technique known as crowdfunding .
Business Domicile: State and Local Considerations

• Choice of state when incorporating or registering your business

- business seeking the protection of limited liability must be
registered with a state (LLCs, LPs and Corporation)
- forming a business in the state where the entrepreneur is located is
generally the easiest way to create the entity through which the
entrepreneur will conduct business.
• Multistate Taxation – most business have a website and sell their
products to any buye, regardless of where the buyer is located. Online
business may have to collect and remit sales tax to as many as forty-
five states
Technology Considerations

• It is significant challenges for companies with relatively small

budgets to protect data. Technology security adds large costs and
requires skilled personnel for any business, large or small.
7. Mitigating and Managing Risks
Learning Objectives:

• Explain Enterprise Risk Management and how a company

uses it
• Describe litigation and financial risks
• Describe common insurance needs
Enterprise Risk Management
- An integrated, cross disciplinary to monitoring risk
- multistage process of risk identification, risk assessment
and risk abatement
- sample of risks that businesses face includes, naural
resources causes, economic causes and human causes
Legal Risk and Protection
- Stems primarily from breach contract and/or commission
of tort.
- Example : Product liability lawsuits. Borrowing money
from bank,

Financial Risk and Protection

- Starting a new business with insuffiecient funds to sustain
perations over an extended period of time.
Insurance Protection
- Directors and officers liability insurance
- Errors and ommisions insurance
- Automobile insurance, health insurance, property insurance
cyber/data breach insurance
Information Technology/Cybersecurity
Small Business Administrtation Recommendaton for Cybersecurity

Step 1 Protect against viruses, spyware, and other malicious code

Step 2 Secure your networks
Step 3 Establish security pratices and policies to protect sensitive information
 Information Technology/Cybersecurity
Small Business Administrtation Recommendaton for Cybersecurity

Step 4 Educate employees about cyber threats and hold them accountable
Step 5 Require employee to use strong passwords and change them often
Step 6 Employ best practices on payment card
Step 7 Make backup copies of important business data and information
Step 8 Control physical access to computers and network components
References:
Laverty, M., Little, C. et al. (2020). Entrepreneurship, 1st ed. Rice
University. © 2020 OpenStax. Creative Commons Attribution
4.0International License (CC BY 4.0)
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