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.
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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.
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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.
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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.
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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.
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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.
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