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.
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Sole Proprietorship:
A business owned By one person, as distinguished
from a partnership or corporation.
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