Essay on Legal Forms of Business

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Legal Forms of Business
Denise Mack
LAW/531
May 27, 2013
Lilah R. Blackstone, Esq.

Legal Forms of Business
When starting a business, one must decide on a legal structure for it. When choosing they will choose a sole proprietorship, a partnership, a limited liability company (LLC), limited liability company (LLC), franchise, or a corporation. There is no right or wrong choice that fits everyone ("Inc.com", 2013).
Sole proprietorship is the simplest form of business organization. Sole proprietorship is well thought-out form of business in which the owner is the business; the business is not a separate legal entity (Cheeseman, 2010). For example, Sally’s Salon would be a sole proprietorship because Sally is the business owner and is also the business. Sally is responsible legally for any business ventures carried out at Sally’s Salon. The tax consideration for Sally’s Salon is very easy. The income earned by a sole proprietorship is income earned by the owner. A sole proprietorship has to file tax return and pay taxes to the federal and state government (Cheeseman, 2010). This income is reported by filing a Schedule C along with a Individual Income Tax Return 1040 form.
Partnership is a voluntary association of two or more persons carrying out business as co-owners for profit. During the formation of a partnership, it creates certain rights and duties among partners and with third parties (Cheeseman, 2010). An example of a partnership would be a Dental or Doctors office. They are considered a partnership because they share the workload, they each bring money to the table, bring new or specific skills to the business, and they share the responsibilities and profits from the business. Legally each partner is personally liable for the debts and obligations of each partner. Partners usually have to enter into an agreement known as a partnership agreement. This is a written agreement that partners sign. It is also known as articles of partnership. When considering the taxation of partnerships, they do not pay federal income tax. The income and losses of each partnership flow onto and have to be reported on the individual partners’ personal income tax return (Cheeseman, 2010). This is known as flow-through taxation.
Cheeseman (2010) stated “Limited liability partnership is a special form of partnership in which all partners are limited partners, and there are no general partners” (p. 623). When businesses are forming an LLP, there is no need to have a general partner who is personally liable for the debts and obligations of the partnership. In an LLP all partners are limited partners, they only are responsible for their capital contribution if the partnership or business fails. Legally none of the partners are personally liable for the debts and obligation of beyond their initial capital investment. An example of an LLP would be a law firm consisting of three or four partners. If one partner commits negligence against a client that partner can be sued personally and the other partners can be sued as an LLP, but it would only affect their capital contribution.
A Limited liability company is unincorporated business entity that combines the most favorable attributes of general partnerships, limited liability, and corporations (Cheeseman, 2010). An example limited liability company is a company such as a construction company. This is a company that combines some aspects of a corporation and a sole proprietorship. LLCs do not have shareholders and are not required to have meetings, unlike a corporation. An LLC is governed under the state laws in which it is organized. An LLC is also a separate entity. LLCs must file an article of organization, which is a formal document that must be filed at the secretary of state’s office in the state, which it was formed (Cheeseman, 2010). According to Cheeseman (2010), the taxation of LLCs is under the Internal Revenue Code and regulations, which is adopted by Internal Revenue Service
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