Unit 9: Business Organizations
Corporations are legal entities that protect shareholders from certain legal liabilities. For example, if you start a sole proprietorship and take out a small business loan to get started, you are personally liable for that loan. If you do not repay the loan, the bank can pursue your personal assets. If you are a shareholder in a corporation that fails to pay its loans, however, the bank cannot pursue your personal assets.
Being a corporation has its own caveats. For example, corporations are subject to more regulations and fees. This unit will look into the various types of business entities in the United States and weigh the pros and cons of each. This unit emphasizes corporations because they are the most common kind of entity that most employees will work for.
Completing this unit should take you approximately 6 hours.
Upon successful completion of this unit, you will be able to:
- identify and describe the various forms of business organization; and
- discuss the advantages and disadvantages of each type of business organization.
9.1: Sole Proprietorship
Read the introductory materials for Chapter 11, which covers the various business entities found in the United States. Note the common characteristics of all businesses, as well as the great diversity found in the business world. To deal with the diverse needs of businesses, a multitude of business organization forms have been recognized. Note the importance of limited liability and tax consequences in choosing a business form. The law treats many business entities as if they are real persons in several important ways.
Watch this video, which describes the different types of businesses and how they are formed. Note the advantages and disadvantages of the various types of business.
Read this section. Sole proprietorships are the most common form of business organization, with good reason. There are no formal requirements to start a sole proprietorship. What other advantages and disadvantages are there to starting a business as a sole proprietorship? As this section notes, there are challenges of borrowing money as a sole proprietor. Be sure you understand the issue of liability in sole proprietorships, as this will provide a foundation for discussions of limited liability forms of organizations in the following subunits.
Read this section. For various reasons, individuals may decide that it is better to run a company with others than on their own. These individuals may decide to organize as a partnership in order to draw on the experience and expertise of others. There are several forms of business partnership, and these sections discuss some of them.
Read this section. Limited liability partnerships (LLPs) are discussed in the last paragraph of this section, and you should be aware of their function. LLPs are organizations that provide limited liability and tax advantages to professional partnerships, such as law firms and accounting firms. Limited liability limited partnerships (LLLPs) include both general and limited partners. Both the general and limited partners are allowed to manage the partnership. It is a unique type of business formation, in that both general and limited partners enjoy limited liability and are not held personally liable for the partnership’s debt. To form a limited liability limited partnership, articles of limited liability limited partnership must be filed with the secretary of state's office along with the required filing fee.
Read this section. The corporate structure is very attractive to businesses, particularly large and growing companies. Public corporations are listed on stock exchanges, offer their shares to the public, and are subject to the highest level of regulation. Private corporations are often owned by a small group of investors with a pre-existing relationship. These private corporations are also referred to as "closely held corporations". Because corporations get significant protections under the law, they must also be formed in strict accordance with the state statutes that govern corporate formation in the United States. Because corporate law is a function of state government, corporations have choices about where to incorporate, and what corporate formation requirements they wish to conform to. The state of Delaware, in particular, plays a very important role in the formation of corporations.
Read this section, which introduces the many aspects of mergers and acquisitions of corporations in the United States, including the purchase of assets, successor liability, purchase of stock, and state and federal laws governing mergers and acquisitions.
Read the Securities and Exchange Commission's material on corporate bankruptcy. When a corporation is unable to pay its debts, it is said to be insolvent. In the United States, bankruptcy laws help to protect creditors while allowing the debtor to start over. Corporations in the United States may reorganize and reach agreements with creditors as to how debts will be paid, if at all. Additionally, a corporation may just stop operating and liquidate all of its assets to satisfy a portion of its debts. Be aware of the distinctions between the two major types of bankruptcy.
9.4: Limited Liability Companies
Read this section. Limited liability companies (LLCs) are a relatively new form of business organization in the United States, but they have already been widely adopted, particularly by small businesses. With the many formalities and structural requirements required of corporations, LLCs offer a simpler alternative that is more suited to small businesses. Note, in particular, the similarities and differences of LLCs versus sole proprietorships and corporations. Why does the text refer to LLCs as a "hybrid form of business organization"? Be sure to familiarize yourself with the requirements needed to form and organize an LLC. It is important to note that the single member LLC business form is more preferable than a sole proprietorship because it offers the business owner limited liability coverage. Thus, the business owner may not be personally liable for business debt. The business owner also has the option to be taxed either as a corporation or a sole proprietorship. To form a single member LLC, the business owner must file articles of organization with the secretary of state and pay the required filing fee. Lastly, do the exercises at the end of the section.
Unit 9 Assessment
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