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LAW OFFICES |
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This website is provided as an educational service not as legal advice (see important legal notice). Except as otherwise indicated, all contents copyright ©2000 and thereafter by Alexander L. Ullenberg. All rights reserved worldwide. |
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ULLENBERG |
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Law Office |
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101 Camelot Dr., Ste. 2b Fond du Lac, WI 54935
Phone: (920) 924-9878 (877) 924-9878 Fax: (920) 924-9895 E-Mail: info@UllenbergLaw.com |
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General Information
Business Services:
Buying a Business Selling a Business Custom Contracts Annual Records / Reporting
Litigation (i.e. Lawsuits):
Being Sued / Suing
Other Issues of Interest:
Wills, Trusts, P.O.A.s
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ULLENBERG |
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Types of Business Entities.
Sole Proprietorship:
A sole proprietorship is a business form in which one person operates the business in his/her own name and owns all the assets and owes all the liabilities of the business. It is the easiest business form to organize, but also the riskiest form as the owner is fully liable for all debts of the business. It is usually designated as “John Smith doing business as Smith’s Home Builders”.
Partnership:
A partnership is a business form in which two or more persons operate a business sharing the business’ profits and losses proportionately. A partnership can take several forms.
In a general partnership, the partners participate jointly in the business operations and share the business profits and losses. The general partners are also personally responsible for all the partnership’s debts and liabilities. As a result, even if the partner shares only 50% of the partnership profits, that partner can still be held responsible for 100% of the partnerships’ debts.
In a limited partnership, there are one or more general partners and one or more limited partners. The general partners manage the daily operations of the business, share in the profits and losses, and are 100% responsible for the partnership debts and liabilities. The limited partners receive a share of the profits but do not participate in the management of the business and are not liable for any amount greater than their original investment.
In a limited liability partnership, the partners participate jointly in the business operations and share the business profits and losses. The partners are also fully liable for the contractual obligations of the partnership, but are not liable for the negligent acts committed by another partner or employee not under that partners’ supervision.
Corporation:
A corporation is a business entity that acts as a separate “individual” under the law from its owners (called shareholders) and managers and agents (i.e. employees). A corporation operates through a board of directors and employees or agents. The liability of the corporation’s owners and shareholders is limited to the amount of their original investment in the corporation; and only in very limited circumstances can the corporation’s owners be held personally responsible for a debt or liability of the corporation.
A corporation, however, does require more formal decision making and record keeping than a sole proprietorship or partnership. A corporation acts through a board of directors, and therefore all major decisions of the corporation must be made by the board of directors (either through unanimous consent or through a meeting by vote of majority). The corporation must maintain minutes of all shareholder and board of director meetings, records of all actions taken by the shareholders and board of directors (or any committee’s thereof), and records of all shareholder ownership. Wis. Stats. §180.1601. Many small businesses that organize as corporations later forget or neglect to act correctly in this manner, and thereby jeopardize the limited liability protection of the corporation form.
There are several types of corporations: a stock corporation, a non-stock corporation, a statutory close corporation, a service corporation, and for tax purposes, a “C-Corporation” or “S-Corporation”.
The most common corporation form is a stock corporation. Shareholders purchase stock from the corporation and thereby become owners of the corporation. Wis. Stats. Ch. 180. The corporation acts through a board of directors that is elected by the shareholders and employees or agents that are hired by the board of directors. Most businesses that are organized as corporations, are organized as stock corporations.
For tax purposes a corporation can be treated as a “C-Corporation” or “S-Corporation”. A C-Corporation is a corporation whose income is taxed to it and not to its shareholders. A S-Corporation is a corporation whose income and loss “passes through” to its shareholders and is taxed or deducted on the shareholders’ individual income tax returns. (Some taxpayers may be limited in the amount of corporate losses that can be deducted from their individual returns.)
To become an S-Corporation, a corporation must file IRS Form 2553, and meet certain qualifications:
1. The corporation must be a U.S. corporation (i.e. organized in the United States); 2. The corporation must have no more than 100 shareholders; 3. The corporation’s shareholders must be either U.S. resident individuals, estate, or certain types of trust or tax-exempt organizations; and 4. The corporation must have only one class of stock.
An S-Corp. election can be revoked for federal tax purposes. But some states, including Wisconsin, prohibit revocation in the first four years after the election.
A non-stock corporation is a corporation without shareholders. Instead of shareholders, the non-stock corporation’s articles of incorporation set forth who is or may become a member of the non-stock corporation. Members do not have to buy their membership, and they can be changed as future needs dictate. A non-stock corporation is generally used to organize a not-for-profit business such as charities, private foundations, and condominium homeowners associations. Wis. Stats. Ch. 181.
A service corporation is a corporation organized by licensed professionals to provide their professional services. Wis. Stats. §180.1901, et. seq. Examples of service corporations are those organized by doctors, lawyers, or accountants. They are usually designated with the suffix “S.C.” after their corporate name.
A statutory close corporation is a corporation with a small number of shareholders who agree to restrict the sale of their stock outside the shareholder group. Only a corporation with 50 or fewer shareholders can be a statutory close corporation. A statutory close corporation operates with less formality than a regular corporation: i.e. it does not need a board of directors, and it does not have to hold annual meetings. Wis. Stats. §180.1821, §180.1829, §180.1835.
Limited Liability Company (LLC):
A limited liability company (also known as a “LLC”) is a business form in which one or more owners own a business or asset. The business is operated by the owners and in the manner specified in an agreement between the owners. Profits are also shared as specified in that agreement. The liability of the company’s owners is limited to the amount of their original investment in the corporation, unless the operating agreement provides otherwise. Like corporations, only in very limited circumstances can the company’s owners be held personally responsible for a debt or liability of the LLC.
Businesses organized as LLCs that transact business in states other than Wisconsin, may be governed by different rules and regulations in those other states. It is important to check the laws of all other states in which a Wisconsin LLC will be doing business.
Business Trust:
A business trust is a business held by a trust and managed by a trustee for the benefit of certain owners (called beneficiaries). The beneficiary owners liability is generally limited to their original investment. Business trusts are usually used for ownership of real estate and stock (such as a mutual fund). |