General Information

Sole Proprietorship

This is the simplest and the most widely used structure for business. It is the least regulated type of the various business structures. For tax and legal purposes, the business is the owner. The unlimited liability factor is probably the greatest disadvantage. The liabilities of the business are personal to the owner, and the business ceases to exist when the owner dies.

Advantages

The sole owner has total control over the operations of this business.
A least regulated form of business.
Other than records for tax purposes, there are no legal requirements as to how the business must be operated.
Usually, one only needs to obtain a license or pay a fee to a local registry authority.

Disadvantages

All of the personal and business assets of the sole owner are at risk in the sole proprietorship.
A judgment against the sole proprietorship could reach into the personal assets of the sole owner.
Liability insurance premiums are very high. Perhaps too costly for the resources of the sole owner.
Due to the structure, it may be difficult to obtain a loan. If there is insufficient collateral, a sole proprietor may have to mortgage a loan or place another piece of personal property as collateral.
When the sole owner dies, the business often ceases to exist due to the lack of structure in this business form.

The Limited Partnership

The limited partnership is a hybrid type of business structure. It contains elements of both a traditional partnership and a corporation. The limited partnership form of business structure may be used when some interested parties want to invest in a partnership but want only limited liability and do not wish to exercise any control over the business activities of the partnership.

The limited partnership is subject to much more regulation on the state level than either the sole proprietorship or regular partnership. Each State in the Union has adopted strict regulations according to the Uniform Limited Partnership Act governing the formation and operation of the Limited Partnership.

A limited partnership consists of two types of partners; the general partner; one or more people who actively manage the partnership; and the limited partner; one or more people who invest in the partnership but take no active role in the management of the partnership. The general partners are at personal risk for their conduct of the partnership, whereas the limited partner risks only that which he has invested in the partnership.

Advantages

The limited partner, as long as he remains passive, has no personal liability and risks only that which he invests.
This low risk for the limited partner and the fact that the limited partner shares in the profits and tax deductions with no duties regarding the active conduct of business may make it easier for the partnership to find investors.

Disadvantages

There is always a chance for a lack of continuity and clear-cut guidelines amongst the partners concerning who does what and how to conduct business.
Due to state regulations, limited partnerships are subject to more paperwork than general partnerships.
General partners maintain full personal risk. The limited partner risks losing the benefits of the limited partner status if they take any active role in the conduct of the activities of the partnership.

The Corporation

A corporation is an artificial entity created by filing Articles of Incorporation with the Secretary of State. This gives the corporation an existence and a legal right to conduct business in the State of incorporation. Corporations are more complex than either a partnership or sole proprietorship and are subject to more regulation by the State.

The internal rules of the corporation, which outline the mechanics of the operation and management, are called the by-laws.

Corporate Structure: A Concise Explanation
Shareholders: They own shares in the business but do not engage in the direct management of the operation, except by electing the directors of the corporation and by voting on major corporate issues.
Directors: They may be shareholders, but as Directors, they do not own any of the business. As a group known as the Board of Directors, they are jointly responsible for making the major business decisions for the corporation as well as appointing the officers of the corporation.
Officers: They may be shareholders and/or directors, but as officers, they do not own any of the business. They are responsible for the day-to-day operations of the corporate business. The usual titles for the different corporate officers are President, Vice President, Secretary, and Treasurer.

Advantages of Incorporation

The potential for limited liability is one of the most important advantages of the corporate form of business structure. The liability of corporate debt is generally limited to the amount of money each investor has invested.
A corporation can theoretically have a perpetual existence.
A shareholder may freely sell, trade, or give away his stock unless this right is formally restricted by corporate decisions.
Taxation can be both an advantage and a disadvantage.

Disadvantages of Incorporation

Due to the organizational structure of a corporation, a certain degree of individual control is necessarily lost by incorporation.
The technical formalities of corporation formation and operation must be strictly observed in order for a business to reap the benefits of corporate existence.
The initial state fees that must be paid for the registration of a corporation can be very high.
Corporations are also subject to a greater level of governmental regulation than any other type of business entity.
Profits are subject to double taxation when distributed to shareholders in the form of dividends.

The Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a hybrid business entity designed to combine the advantages of a corporation with the tax advantages of a partnership. Like a corporation, the owners of an LLC are not personally liable for the LLC's debts and obligations. Like a partnership, an LLC can be treated as a pass-through entity for tax purposes. Beginning in 1997, the IRS no longer taxes these entities as corporations.

They permit the LLC to elect whether taxation as a partnership, sole-proprietorship, or corporation best fits the needs of its business and its Members. This may be advantageous for those who cannot meet the IRS requirements for an "S" corporation and desire the pass-through tax treatment.

Corporate Records

Once organized, the corporation must maintain a continuous record of all authorized actions - approved by its stockholders or directors.

A complete and detailed record of stockholders' and directors' meetings - "minutes" as they are called - is important for many reasons:

Parties dealing with the corporation may want evidence that the corporate action was approved.
Officers and employees within the corporation are entitled to the protection if their acts were approved.
Accurate minutes are frequently necessary to preserve certain tax benefits or to avoid tax liabilities and penalties.
Minutes are oftentimes necessary to prove the corporation is operated as a separate entity independent of its principals.

The forms in this kit will help you maintain a well-documented written record of stockholders' and directors' actions, in a format that meets legal standards.

By using these forms you can create a complete corporate biography, detailing the important events during the life of the corporation.

Generally, you need only complete the resolution that conforms to the corporate action voted. Occasionally, you may need to modify the form to suit your particular needs. Always be certain the resolution accurately states the corporate action approved. In some cases - particularly the more important transactions - you may find it necessary to have an attorney decide what the resolution should contain. While these prepared forms can greatly simplify your recordkeeping requirements, they are not a substitute for your good judgment in deciding how you should document the actions of your corporations.

Records of Stockholder Actions

Stockholders can usually vote on the broadest issues relating to the corporation. These typically include changes in corporate name, address, purpose, the amount of authorized or type shares, and other matters involving the corporate structure. Stockholders' action may also be needed on major legal or financial issues such as whether to mortgage, encumber, pledge, or lease all or substantially all of the corporate assets or to file bankruptcy, merge or consolidate. There are, of course, many other actions that can be taken by stockholders. The primary function of the stockholders, however, is to elect the Board of Directors, through whose governance the corporation is actually managed.

Stockholders can act officially only as a group. This means that a formal meeting is needed before they can legally bind the corporation. There are some exceptions where the stockholders can consent in writing to a particular action without having to hold a meeting. These instances, however, are rare.

Certain rules and procedures have to be followed for stockholders to properly conduct an official stockholder meeting.

Every stockholder has to be properly notified about the time and place of the meeting, who is calling the meeting, and any matters that will be considered at the meeting. It is common in small corporations for the stockholders to do without formal notice, especially where the by-laws set out the time and place of the regular annual meeting of stockholders. This can be done by having all the stockholders sign a waiver of notice at the meeting. Unscheduled or special meetings of stockholders may require notice, although a signed waiver of notice can be used at these meetings. For an unscheduled meeting to be legally convened, it is essential that the records show that proper notice was given or that the stockholders signed a waiver of the notice requirement. Your articles of incorporation or by-laws will specify where and when a stockholder meeting can legally be held, and the book of minutes should show the time and place of each meeting. In this way, you can prove the meeting complied with legal requirements.

No business can be transacted at stockholders' meetings unless a quorum is present. Therefore, it is essential that the book of minutes reflects a quorum of stockholders who attended the meeting. The articles of incorporation or by-laws will usually state the size of the quorum, either in terms of the number of stockholders or the number of shares that must be represented at the meeting. If there is no rule on a quorum, then whatever number of stockholders shows up for the meeting will constitute a quorum.
Stockholder meetings must have a chairperson to preside over the meeting. It must also have a secretary to record what happened at the meeting. The by-laws will ordinarily designate these officials, such as by specifying that the president serves as chairperson and the secretary acts as secretary. However, substitutes are usually allowable.
The first item of business at every stockholder meeting should be to read and approve the minutes of the previous meeting. Once the minute is approved, they legally document what occurred at the meeting. They are most nearly conclusive proof of what the corporation is authorized to do. That is why it is important to show that the minutes have been read and approved as accurate or that necessary changes have been made.
Parliamentary procedure governs the conduct of meetings. It is not generally necessary to identify the person making the motion or seconding a motion. Nor is it essential to record the exact tally of votes as long as the action approved is clear.

Record of Director Actions

Most of the rules and procedures that apply to stockholder meetings apply equally to meetings of the Board of Directors, with several exceptions:

Directors will meet far more often than stockholders and, in large corporations, may meet monthly. The directors can also hold special meetings for interim board action, and in more active corporations, they will routinely meet more often.
The board - as with stockholders - can only function through a duly called meeting where a quorum of directors (as defined in the by-laws) is present. Directors who may be in conflict with the interests of the corporation may, however, not be counted toward the quorum or be entitled to vote.
The board must be particularly careful to document not only its actions but why the action was taken. Because the board has the responsibility to stockholders - and potential liability to other constituencies - it may be called upon to show why its action was prudent - particularly in the areas of dividends, loans to officers, major contracts, compensation, and policymaking. It is especially critical for the minutes to include or refer to reports, arguments, opinions, and other documents to support the reasonableness of the board's actions.
Frequently the board will be called upon to issue "certified resolutions" or "certificates of vote," which conclusively show to third parties dealing with the corporation that the person acting on behalf of the corporation has the required authority.

All records, resolutions, and minutes should be kept for no less than six years - although retaining records for longer is recommended considering the numerous types of claims that are possible and the varying statute of limitations.

Properly used, the forms in this kit will provide you with a simple, easy-to-use, and legally sound record system for your corporation.