Business Entities, Laws and Regulations

Business Entities Laws and Regulations

The following paragraphs discuss the formation of different business relationships in the United States. Risks, managing control, taxation, and other issues are presented to provide the best choice for the lawful basis of business entities.

Limited Liability Company's or LLC's are the choice for many people to start business's to limit the personal liability of the business owners. Business entities like general partnerships or sole proprietors do not protect the business owners from personal liabilities incurred by the business. For instance the extermination business scenario could be a good choice for Frank to organize as an LLC. Frank is a wealthy investor and the LLC form of business will protect his personal assets up to Frank's initial capital investment. Law professor and author Henry Cheeseman states on page 269 that "the owners of LLCs are usually called members. The general rule is that members are not personally liable to third parties for the debts, obligations, and liabilities of an LLC beyond their capital contribution." Taxes are another reason to choose an LLC for the business entity.

If Frank chose an LLC Frank can also choose how to be taxed. Law author Cheeseman explains that LLC's profits and losses "flow through" to the member or members' individual tax returns like sole proprietorships. Frank could choose to be taxed at the business level; however, Frank could risk double taxation.

Frank intends to expand the extermination business across the country. One way to do this is franchising. The franchising business relationship will allow Frank to remain in control of the

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company brand and business processes while reaching new markets. Of course Frank must convince interested parties that Frank's success can be duplicated in other markets. Frank, the franchisor can license another person or entity, the franchisee, to use Frank's trade name, processes, even trademarks or copy-write material. Again, liability is limited because the franchisee and the franchisor are separate entities each responsible for their own liabilities, debts, or torts. If Frank had a partner Frank could consider the partner or limited partnership legal business entity form.

The business scenario for a restaurant and bar could be a good candidate for limited partnership form of a legal business entity. The scenario states that two people want to own and operate the restaurant/bar, and there is a wealthy investor who will invest for a percentage of the business. Of course an important issue for the wealthy investor will be liability. As the term states, limited partnership can limit the liability of a partner if there is at least one partner and one limited partner. There can be more than one general and more than one limited partner. A statement of limited partnership must be filed with the appropriate state secretary. A statement of limited partnership lists various information including the "amount of cash, property, or services (and description of property or services) contributed by each partner and any contributions of cash, property, or services promised to be made in the future" as explained by Cheeseman on page 260. The statement lists the limited partner and the general partners. This limits the wealthy investor's liability to only the investment into the restaurant/ bar. However, the general partners are liable personally in the limited or general partnership business debts and torts.

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Taxes, profits or losses, and business management decisions are other considerations. General and limited partnerships are taxed at the individuals' income level and not at the business level.