Company:
Any formal business entity for profit,
which may be a corporation, a partnership, association
or individual proprietorship. Often people think the
term "company" means the business is incorporated, but
that is not true. In fact, a corporation usually must
use some term in its name such as "corporation," "incorporated,"
"corp." or "inc." to show it is a corporation.
[Back to top]
Corporation:
An organization formed with state
governmental approval to act as an artificial person
to carry on business (or other activities), which can
sue or be sued, and (unless it is non-profit) can issue
shares of stock to raise funds with which to start a
business or increase its capital. One benefit is that
a corporation's liability for damages or debts is limited
to its assets, so the shareholders and officers are
protected from personal claims, unless they commit fraud.
For private business corporations the articles of incorporation
filed with the Secretary of State of the incorporating
state must include certain information, including the
name of the responsible party or parties (incorporators
and agent for acceptance of service), the amount of
stock it will be authorized to issue, and its purpose.
In some states the purpose may be a general statement
of any purpose allowed By law, while others require
greater specificity. Corporation shareholders elect
a board of directors, which in turn adopts Bylaws, chooses
the officers and hires top management (which in smaller
corporations are often the directors and/or shareholders).
Annual meetings are required of both the shareholders
and the board, and major policy decisions must be made
By resolution of the board (which often delegates much
authority to officers and committees). Issuance of stock
of less than $300,000, with no public solicitation and
relatively few shareholders, is either automatically
approved By the state commissioner of corporations or
requires a petition outlining the financing. Some states
are considered lax in supervision, have low filing fees
and corporate taxes and are popular incorporation states,
but corporations must register with Secretaries of State
of other states where they do substantial business as
a "foreign" corporation. Larger stock offerings and/or
those offered to the general public require approval
By the Securities and Exchange Commission after close
scrutiny and approval of a public "prospectus" which
details the entire operation of the corporation. There
are also non-profit (or not for profit) corporations
organized for religious, educational, charitable or
public service purposes. Public corporations are those
formed By a municipal, state or federal government for
public purposes such as operating a dam and utility
project. A close corporation is made up of a handful
of shareholders with a working or familial connection
which is permitted to operate informally without resolutions
and regular board meetings. A de jure corporation is
one that is formally operated under the law, while a
de facto corporation is one which operates as if it
were legal, but without the articles of incorporation
being valid. Corporations can range from the Corner
Mini-Mart to General Electric.
[Back to top]
Limited Liability:
The maximum amount a person participating
in a business can lose or be charged in case of claims
against the company or its bankruptcy. A stockholder
in a corporation can only lose his/her investment, and
a limited partner can only lose his/her investment,
but a general partner can be responsible for all the
debts of the partnership. Parties to a contract can
limit the amount each might owe the other, but cannot
contract away the rights of a third party to make a
claim.
[Back to top]
Limited
Liability Company:
A business structure that is a hybrid
of a partnership and a corporation. Its owners are shielded
from personal liability and all profits and losses pass
directly to the owners without taxation of the entity
itself.
[Back to top]
Limited Partnership:
A special type of partnership which
is very common when people need funding for a business,
or when they are putting together an investment in a
real estate development. A limited partnership requires
a written agreement between the business management,
who is (are) general partner or partners, and all of
the limited partners. Each limited partner makes an
investment of funds into the partnership and is supposed
to receive a pre-stated share of the profit, which is
ordinarily greater than that of each of the general
partners up to a point (such as return of the investment),
and, thereafter, the limited partners will receive a
lesser share than the general partner(s). The limited
partners also will receive the tax benefit of a "passed
through" loss (a personal income tax deduction for part
of the loss) during the development stages of the partnership
when the expenses exceed any receipts. Quite often there
is also a provision for eventual buy-out of the limited
partners By the general partner(s). The limited partners
may not participate in the management decisions of the
partnership or they will lose their limited partnership
status. They do have the power to vote to remove the
general partner(s), although usually the partnership
agreement is structured so that such removal is virtually
impossible unless the general partner in question has
committed fraud. Since the limited investors have no
control of the conduct over the partnership, they should
make sure they have considerable knowledge about the
reputation and record of the general partner(s) and
the type of business. In fact, state laws require that
there be some pre-existing acquaintanceship between
the general and the limited partners or a detailed prospectus
provided By the general partner(s) meeting very stringent
and specific federal requirements of disclosure. The
maximum number of limited partners is set By state law
to prevent using interests in the limited partnership
as if they were shares of stock in a corporation. In
addition to priority in profit, tax deductions, and
potential share in the success of the enterprise, the
limited partner is "limited" in potential loss, since
all he/she can lose is his/her investment, and the general
partners alone are subject to claims, debts in bankruptcy
and lawsuits against the partnership. Limited partnerships
must file their name and names and addresses of general
partners with the Secretary of State or other designated
officer in the state in which the partnership is created
so the public can find out who the responsible parties
are. Like a corporation, a limited partnership may not
have a name which is too similar to another limited
partnership or corporation.
[Back to top]
Partnership:
A business enterprise entered into
for profit which is owned By more than one person, each
of whom is a "partner." A partnership may be created
By a formal written agreement, but may be based on an
oral agreement or just a handshake. Each partner invests
a certain amount (money, assets and/or effort) which
establishes an agreed-upon percentage of ownership,
is responsible for all the debts and contracts of the
partnership even though another partner created the
debt or entered into the contract, has a share in management
decisions, and shares in profits and losses according
to the percentage of the total investment. Often a partnership
agreement may provide for certain division of management,
shares of investment, profit and/or rights to buy out
a partner upon leaving the partnership or death. Each
partner owes the other partners a duty of full disclosure
of information which affects the business and cannot
commandeer for himself/herself business opportunities
which rightfully belong to the partnership. A partnership
which does business under a trade name must file with
the county or state a certificate of "doing business
under a fictitious name," which gives notice to the
public of the names of partners and the business address.
A "limited partnership" limits the responsibility for
debts beyond the investment to the managing "general
partners." The investing "limited partners" cannot participate
in management and are limited to specific percentages
of profit. A partnership differs from a "joint venture,"
which involves more than one investor for only a specific
short-term project and prompt division of profits. Partnerships
are traditionally the most fragile of business arrangements
and are often dissolved and subject to disputes. But
several million exist in the United States and, ironically,
they are the favorite business entity for law firms.
Sole Proprietorship:
A business owned By one person, as
distinguished from a partnership or corporation.
|
