What are the three types of businesses?

• Sole proprietorship
• Partnership
• Corporation

In a sole proprietorship, one person

Owns, operates, and supervises the business

Sole proprietors may be personally liable for what?

For all debts and obligations of the sole proprietorship

What are good practices for running a sole proprietor business?

Good record keeping, excellent work performance, and adequate insurance policies

In setting up a sole proprietorship and you wish to do business under a name other than your own, what do you do?

It should be registered and reserved at a local or state government office, which is called “doing business as” or DBA.

In setting up a sole proprietorship and wishing to operate it from the comfort of your own home you should do what?

  You should obtain special use permits if needed depending on the locality. A small fee is also required to mail letters notifying surrounding neighbors of the proprietor’s intent. As long as there are no neighbor objections and the contractor agrees to restrictions (such as not parking construction equipment on the front lawn), the permit will usually be granted.

A sole proprietor is taxed at what rate?

The individual income rate

For a business setup as a sole proprietor, how are profits reported?

Profits made during the year are reported as income to the sole proprietor.

For a business setup as a sole proprietor, what must they do for as an employer for every employee?

Pays out of profits Social Security benefits and Medicare tax for every employee.

What are the advantages of a Sole Proprietorship business organization?

• Fewer legal restrictions
• Simple ownership form
• Lower startup costs
• Sole owner of profits
• Autonomy in business-making decisions

What are the disadvantages of a Sole Proprietorship business organization?

• Exposed to complete personal liability
• More limited resources
• More challenging to obtain outside/long-term financing

What happens to the business when the business is setup as a sole proprietor and the owner dies?

The business ceases to exist

When one sells a sole proprietorship business, what is actually being sold?

The assets of the business.

When one sells a sole proprietorship business what must they do?

Close out their business license and the new owner will reestablish the business with a new license. This also applies when the proprietor dies and someone else in the family wishes to take over the business.

With a sole proprietorship, what is a Joint Entirety?

Joint Entirety (Spousal Co-Ownership of Property)

At times, it may be hard to separate business and personal expenses, especially if the business is being run out of the contractor’s home. The importance of keeping them separate cannot be overstated, because the IRS may need to examine your records. One way to protect personal property from lawsuits is by making it a “joint entirety”.

A joint entirety gives your spouse ownership in a portion of the property so that it cannot be considered a company asset. Of course, there are stipulations to this protection. Property that is solely used for the business (like construction equipment) cannot be made joint entirety property, but the family car, which can be used for both personal and professional activities, can be titled to both the proprietor and spouse.

What is a Partnership business organization?

  A partnership is a for-profit business operated by two or more people. Partners may be equal in investment and ownership, or they may be unequal, such as in a limited partnership. Each person contributes something to the business, whether it be money, property, labor, or skill, and they all share in the highs and lows of their business. Most people choose to enter into a partnership when they cannot operate a business alone.

What are the four types of business partnerships?

• General
• Limited
• Joint Ventures
• Limited Liability Companies (LLC)

In a general partnership, the partners:

• Contribute assets to the partnership and share the management, profits, and losses.
• All partners are personally liable for the obligations of the partnership.
• Partners may share equally in the business or they may invest different amounts, have different responsibilities, and share different percentages of the profits.

General partnerships are usually formed by:

a written agreement called the articles of partnership

The articles detail the name of the business, ownership proportions, partners’ duties, and distribution of profits.

True or false

A general partnership can also be created by an oral agreement

TRUE

Note: A written agreement is strongly preferred.

Property acquired by a general partnership is property of what?

Is property of the partnership and not of the partners individually.

In general partnerships, partners may:

• enter into contracts
• buy and sell property
• hire and fire employees
• sue to enforce contracts and agreements.

With a general partnership, there is a requirement to file what?

An informational tax report with the IRS. Individual partners must report, and pay, taxes on their share of the partnership income, even if the partnership income is reinvested in the business.

With a general partnership, all partners share what?

All partners share in personal and unlimited liability for any actions regarding the business, even in debts. Each of the owners is responsible for the others, which can become a little messy. If Partner A uses company money to fund a personal vacation, Partner B is still held responsible.

TRUE OR FALSE

General partnerships protect the partners from legal liability for all partnership obligations.

FALSE

General partnerships do not protect the partners from legal liability for all partnership obligations.

For example: If three partners each have a one-third interest in the partnership, and the partnership has acquired a $250,000 obligation, each partner, regardless of their investment or share of the business, is liable for the entire amount.

Any partnership interest can be sold or otherwise transferred only with the consent of all partners. While a new person can purchase a partnership interest, the new person does not become a partner unless the partners elect to make the new person a partner. The new person has only purchased the right to receive the partner’s profits, but none of their power.

Upon death or withdrawal of one of the partners, the partnership is subject to what?

dissolution

If the partnership was licensed as a contractor, a new license will need to be obtained.

TRUE OR FALSE

For a general partnership - the issues of insurance, taxes, liability, and choosing a name are the same as for a sole proprietorship.

TRUE

What are the advantages for a General partnership type business?

• Easy to form
• Direct reaping of profits
• Larger management/decision-making base than sole proprietorship

What are the disadvantages for a General partnership type business?

• Partners exposed to full individual liability
• Multiple decision-makers
• Potential conflict in making changes to partnership agreement
• Business dissolves if a partner dies

What is a limited partnership business organization?

A limited partnership is formed by two or more persons having one or more general partners and one or more limited partners. (The associating “persons” may include individuals, partnerships, limited partnerships, trusts or corporations – but not limited liability companies).

In a limited partnership, what do the general partners do?

The general partners control the business and are liable for the debts and obligations of the partnership.

In a limited partnership, what do the limited partners do?

  The limited partners take no active role in the management of the business.

  A good example of this form of business organization is a large percentage of law firms; limited partners have a financial stake in the law firm but don’t actively manage it and their exposure to liability for any damages is limited.

  Limited partners are similar to shareholders in a corporation because their liability for debts and obligations of the limited partnership is limited to the amount of their contribution to the business. Limited partners have no personal liability for the business. Profits or losses are typically allocated to limited partners on the basis of their percentage of ownership.

In a limited partnership and a death or withdrawal of a limited partner happens, what happens to the partnership?

There is no effect on the partnership

The Limited Partnership carries the same advantages as the General Partnership, with the following exceptions:

• Additional resource potential
• Limited partners have limited liability
• Limited partners are similar to shareholders in that they can share in profits, but do not have a direct voice in day-to-day decision-making
• The death or withdrawal of a limited partner does not require dissolution or re-registering of partnership

The Limited Partnership carries the same disadvantages as the General Partnership, with the following exceptions:

• Limited partners have no say in daily operations
• General partners retain exposure to full personal liability
• The death of a general partner could mean the dissolution of the business

What is a Joint Venture partnership?

  A joint venture is a partnership that is formed solely for the purpose of a single business undertaking. Joint ventures are not required to register with the Virginia State Corporation Commission (SCC) unless they are formed as a limited liability company, general partnership, or limited partnership. Though the business itself may not need to register, each member of the joint venture must do so, and the entity must be established with a federal tax ID number. Each member must also be individually licensed to perform any work required in the joint venture. Once the joint venture is complete, the business is dissolved.

Joint ventures are not required to register with the Virginia State Corporation Commission (SCC) unless:

they are formed as a limited liability company, general partnership, or limited partnership.

Even though a joint venture business may not need to register with the SCC, each member must do what?

Each member of the joint venture must register with the SCC.

TRUE OR FALSE

A Joint venture partnership is not required to have a federal tax ID.

FALSE

A Joint venture partnership is required to have a federal tax ID when established.

In a Joint venture partnership, each entity must be what?

Each member must be individually licensed to perform any work required in the joint venture.

In a Joint venture partnership, what happens when the joint venture is complete?

Once the joint venture is complete, the business is dissolved.

What are the advantages in a Joint venture partnership?

• Not required to register with the SCC
• Easy to create and disband

What are the disadvantages in a Joint venture partnership?

Business is restricted to one finite goal

The State of Virginia classifies all LLCs as what?

Partnerships

LLC stands for what?

Limited Liability Company

The business structure of the LLC is the same as a partnership if:

The company is set up without a manager; otherwise it will be like a corporation with the partners (called members) acting as shareholders.  Managers can be members, but are not required to be.  The default structure puts the partners in charge of managing the business, unless the articles of organization stipulate that a manager will be employed.

The business structure of the LLC is the similar to a sole proprietorship in that:

it does not protect the partners from liability for personal actions, but it does protect from actions taken by other partners.

What is a tax advantage that a LLS has?

Pass-through taxation is a tax advantage that allows no assessment of taxes on the profits of the company, only on the amount of income distributed to the partners. Company profits can be taxed as individual earnings, like in a partnership, or they can be taxed at the corporate level and then again when distributed as income, as in a corporation. Some states treat an LLC as a partnership and then add on a special tax, but federal tax is always assessed as if the company were a partnership.

The State of Virginia classifies all LLCs as partnerships, and is known for its business friendly tax code.

What the advantages of an LLC?

Advantages of an LLC:

• Flexible taxation (pass-through taxation)
• Limited liability Limited documentation
• Ability to delegate responsibilities to a manager

What the disadvantages of an LLC?

Disadvantages of an LLC:

• No protection from personal actions
• Usually requires a specific contribution to become a member
• Requires more administrative work
• Can be expensive to organize

What does LLP stand for?

Limited Liability Partnerships

What is a Limited Liability Partnership?

A limited liability partnership is an association of two or more licensed, professional individuals (including licensed contractors) doing business as a partnership.

What is the exception between a General Partnership and a Limited Liability Partnership?

Only in a LLP - partners in a registered LLP are directly liable for their own negligent or wrongful acts (or those committed by persons under their direct supervision and control), but not vicariously liable for other partnership obligations.

TRUE OR FALSE

A qualifying general partnership may not convert to an LLP without making a conversion from one form (partnership) to another (corporation) and thus avoid a potentially taxable conversion.

False

A qualifying general partnership may convert to an LLP without making a conversion from one form (partnership) to another (corporation) and thus avoid a potentially taxable conversion. Although requiring an existing partnership in place to convert to an LLP, the formation process can be subsumed into a single transaction.

Workers’ comp is required if the LLP is a _________

contractor

Commercial

(Otherwise, it is not required unless the LLP has employees or if there are more than two partners that are not all members of the same family.)

TRUE OR FALSE

The name of the limited liability partnership must contain the words “Limited Liability Partnership” or the abbreviation “L.L.P.” or “LLP” as the last words or letters of its name.

TRUE

The name of the limited liability partnership must contain the words “Limited Liability Partnership” or the abbreviation “L.L.P.” or “LLP” as the last words or letters of its name. The name must be registered with the state. If the limited liability partnership will be using a name other than its registered name to conduct business, it must also register that name as an assumed business name.

What is the advantage of a Limited Partnership verses a General Partnership?

Liability to general partners is limited to their own negligent or wrongful actions and those of the personnel for whom they are responsible, and are not vicariously liable for the negligence or wrongful acts of the other partners

What are the disadvantages of a Limited Partnership verses a General Partnership?

• LLPs have the same State registering requirements as LPs
• Not all states recognize LLPs, so actions in another jurisdiction may treat liability as a GP exposing all partners to full personal liability - check the laws of any “foreign” (outside Virginia) jurisdictions before committing to a project
• Workers’ comp is required if the LP is a commercial contractor.

A corporation is a legal entity that is what?

A corporation is a legal entity separate from its owners, who are called shareholders. A corporation is created when a business files articles of incorporation with the Virginia Corporation Commission. This kind of organization acts as a single entity. It exists separately from its owners (shareholders) and continues to exist even though the shareholders may change.

TRUE OR FALSE

A Corporation does not have limited liability

FALSE

Corporations have limited liability—meaning that while the corporation is fully liable for all of its business obligations, individual shareholders are liable only to the extent of their investment. Shareholders greatly benefit from this, and will brave highly regulated corporations for limited liability.

TRUE OR FALSE

A corporation has a board of directors and officers and observes certain legal formalities such as annual shareholder meetings and the creation of meeting minutes.

TRUE

Corporation contracts, properties, legal responsibilities, and finances are not attached to what?

Shareholders’ personal assets

TRUE OR FALSE

A corporation may not own property, but can sue, and be sued.

FALSE

A corporation may own property, sue, and be sued.

Which choice is not an advantage of a C Corporation?

• Tax advantages
• Pays taxes on profits
• Unlimited owners
• Owners are not automatically taxed on business earnings

Pays taxes on profits

Which choice is not an advantage of a C Corporation?

• Credibility
• Lower audit risk
• Ability to raise money
• Stockholders pay taxes on dividends

Stockholders pay taxes on dividends

Which choice is not an advantage of a C Corporation?

• Limited life
• Easy transfer of ownership
• Retain earnings inside the business
• Tax deductible expenses

Limited life

C Corporations have unlimited life

Which choice is not an advantage of a C Corporation?

• Perpetual existance
• No Self-employment tax savings
• Limited liability
• Ability to raise money

Self-employment tax savings

TRUE OR FALSE