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University of Phoenix Material

 

Legal Business Structure Matrix

 

Complete the following sections using the provided matrix template.

 

  • Develop a legal business structure matrix that describes the differences between each business structure.
  • Provide examples to support the approach new business owners should take when developing a start-up budget.
  • Explain why a start-up budget is different than an established business budget. Include a completed start-up budget template as further supporting information.
  • Write out your explanations in each section; each section should contain about 350 words.
  • Format your consistent with APA guidelines.

 

 

Structure

 

Definition/Characteristics

 

Liabilities

 

Taxes

 

Legal Prerequisites to Begin Operations

Sole Proprietorship A sole proprietorship is a business owned by a single person. An individual who owns the sole proprietorship is known as the entrepreneur. The owners usually pursue their dreams of running their own businesses.  The financing process is normally difficult for the sole proprietors. Capitalization of the business is limited to personal funds of the entrepreneur and the amount he or she can borrow. There is management flexibility ( Hopkins, 2011). The business owner can make management decisions without having to consult partners or the board members. A sole proprietor is terminated once the owner dies or decides to terminate his or her business.

 

 

 

The entrepreneur or the sole proprietor is he solely responsible for the losses of the business due to its unlimited liability status (Williams, Barton & Coltrain,2000). Businesses organized as sole proprietorships do not pay taxes as a separate company. The owner must declare the profits on his or her personal income tax return, and this makes taxes profits to be taxed only once. It is the simplest and least expensive form of business. Nor formal requirements are needed unless special license or unless the business is registered as business name other than the entrepreneur’s name.
“C” Corporation Under the federal income tax law, a C corporation is any business corporation which is taxed separately from its owners. A C corporation is normally viewed as a legal entity which is separate from its owners ( Ebert, Griffin, Starke & Dracopoulos,2014). The owners of a C corporation are called shareholders. Since the C corporation is a separate legal entity, it is a separate legal taxpayer. It is much easier to raise capital than for sole proprietorship and partnership due to the availability of stock to sell.

 

 

A C corporation offers a limited liability corporation, ad this prevents the shareholders from being personally liable and responsible for the debts and liabilities of the business.  A C corporation is separately taxable entities. The C corporations file corporate tax returns and pay taxes at the corporate level, and this makes them vulnerable to double taxation.  A C corporation must file formation documents with the state; the formation documents include the articles of incorporation. The articles of incorporation involve the name of the business, address, nature of business, and total number of shares, and other provisions. Each corporation has a right to draft its corporate by laws which shall be adhered to by all members.
Limited Liability Partnership A limited liability partnership is a form of partnership business where there are limits to personal exposure of partners regarding their obligations in the business. It however does not provide protection for the personal acts of the partners. The members of a limited liability company receive limited personal liability from the business activities. The shareholders enjoy a pass-through tax advantages (Kwall, 2011). Limited liability companies through complex legal formation process. The shareholders must submit the Articles of Organization, the Operating agreements, and annual report of its financial status and performance (Osterwalder, Pigneur & Tucci, 2005).
“S” Corporation  

An S corporation is a special type of corporation which is created through an IRS tax election.  This ensures that eligible domestic corporations can avoid being double taxed by requesting or electing to be treated as a special corporation. An S corporation has a subchapter S designation from the IRS. Just like the C corporation, the S corporation has a perpetual life.  The business does not cease to exist when the owners decide to sell the business.

 

An S corporation offers a limited liability status to its shareholders so that they cannot be held personally liable for the liabilities and debts of the business.  An S corporation is pass-through tax entities which file informational federal returns but no income tax is paid at the corporate level. The profits and losses of the business are passed through the business and reported on the personal tax returns of the owners (Keatinge, Ribstein, Hamill, Gravelle & Connaughton, 1992). Any due tax is paid by the individual shareholders. Most states in the united states do not tax An S corporation must file articles of incorporation which are state specific. The owners must also submit request for a S- corporation status to the IRS.to qualify as a S corporation, the corporation must be a domestic corporation, have allowable shareholders only,  have no more than 100 shareholders,  have only one class of stock,  and must be an ineligible corporation (Cooney, 2011).
Partnership A partnership is a business which is owned by two or more people usually called partners. The partners are the co-owners of the business and voluntarily agree to operate the business for profit. A partnership agreement must be signed by the partners and it states how the partnership will be organized.

One major characteristic of partnership is that they are relatively easy to set up. The knowledge and skills needed to operate a partnership may come from the different partners (Ireland, 2010). The partners can also contribute more money to the business thereby making it easy to access capital. The partners have total control of their business. The partners are also responsible for the success or failure of their business. The partners have unlimited liability. The life of a partnership business also depends upon the willingness of the partners to continue doing their business together (Steele, 2007).

 

The full liability of the partnership business falls on the individual partners since every partner is considered as an agent of the business. The partners are usually held accountable for the debts incurred and any other obligation Partnerships, like the sole proprietress, ae not taxed as business and this make them subject to federal or state income taxes. The profits and losses of a partnership are reported on the personal income tax return of the partners based on pro rat share. The profits are taxed at an individual level, thereby preventing double taxation. No formal documentation is to be filed with the state agencies. It is recorded that partners should sign a partnership agreement which serves as the regulatory device for solving any dispute which may arise ( Brossard, Lavigne & Sakinc, 2013). The partnership agreement defines the purpose of the business, its duration, how to make management decisions, how profits and losses are shared, and how termination is handled.
Limited Liability Company A limited liability company is business which operates and pays its taxes as partnership but possesses a limited liability for the owners (Shaharuddin, Palil, Ramli & Maelah, 2012). The liability of owners is usually limited to their investments in the company. The profits of limited liability company are taxed only once.  The limited liability company has a perpetual life status (Easterbrook & Fischel,1985). They are more easily financed than the partnership and the sole proprietorship business organizations. The limited liability companies havea perpetual life in that even if new shareholders take the organization, the business will continue to exist and perform  its operations as stipulate din the articles of organization. The stakeholders may leave or enter the business at any time and this cannot affect  the existence of such a corporation. Its legal status as a business entity continues indefinitely.

 

The members of a limited liability company receive  limited personal liability from their business activities. The shareholders are not personally liable for the  debts and obligations of the business. Their liability risks are only limited to their shares and investments in the company. Limited liability companies are taxed as a corporation if it has more than two corporate characteristics which are determined by the limited liability and continuity of life. This is also determined by the free transferability of interests and the centralized management. There are several legal fining activities associated with limited liability companies. The limited liability company must submit the Articles of Organization which  specifies the name of the business, the period of its duration,  the purpose for which it is formed, the registered address of its office,  the right of the members to admit additional members, and any other provision which is consistent with  the law and which the members elect to incorporate in the article of organization (Arose, Ituraea & Masada, 2010).

 


References

Arose, B., Iturralde, T., & Maseda, A. (2010). Ownership structure and firm performance in non-listed firms: Evidence from Spain. Journal of Family Business Strategy1(2), 88-96.

Brossard, O., Lavigne, S., & Sakinc, M. E. (2013). Ownership structures and R&D in Europe: the good institutional investors, the bad and ugly impatient shareholders. Industrial and Corporate Change, dtt018.

Cooney, K. (2011). An exploratory study of social purpose business models in the United States. Nonprofit and Voluntary Sector Quarterly40(1), 185-196.

Easterbrook, F. H., & Fischel, D. R. (1985). Limited liability and the corporation. The University of Chicago Law Review52(1), 89-117.

Ebert, R. J., Griffin, R. W., Starke, F. A., & Dracopoulos, G. (2014). Business essentials. Pearson Education Canada.

Hopkins, B. R. (2011). The law of tax-exempt organizations (Vol. 5). John Wiley & Sons.

Ireland, P. (2010). Limited liability, shareholder rights and the problem of corporate irresponsibility. Cambridge Journal of Economics34(5), 837-856.

Keatinge, R. R., Ribstein, L. E., Hamill, S. P., Gravelle, M. L., & Connaughton, S. (1992). The Limited Liability Company: A Study of the Emerging Entity. The Business Lawyer, 375-460.

Kwall, J. L. (2011). Federal Income Taxation of Corporations, Partnerships, Limited Liability Companies and Their Owners.

Osterwalder, A., Pigneur, Y., & Tucci, C. L. (2005). Clarifying business models: Origins, present, and future of the concept. Communications of the association for Information Systems16(1), 1.

Shaharuddin, N. S., Palil, M. R., Ramli, R., & Maelah, R. (2012). Sole Proprietorship and Tax Compliance Intention in Self-Assessment System: A Theory of Planned Behavior Approach. International Journal of Business Economics and Law1, 34-42.

Steele, M. T. (2007). Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies. Del. J. Corp. L.32, 1.

Williams, C., Barton, D. & Coltrain, D. (2000). Selecting a business structure. Retrieved from <http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.552.9845&rep=rep1&type=pdf>.

 

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