A business is said to be defined as any commercial entity or association engaged in professional, commercial, or economic activity. Businesses may be either for-profit or non-for-profit enterprises that conduct to meet a social cause or further a charitable purpose. The enterprise may be any form of business, whether it is physical intellectual or nonprofit. In a country like the United States, businesses are often the main source of employment and a substantial portion of the Gross Domestic Product.
There are two types of commercial law: general and specific. General commercial law governs transactions between corporations, partnerships, and individuals. Specific commercial law covers state and local governments, but also some international agreements and restrictions on transfer of technology. Prohibitions against discrimination and actions based on race, age, sex, religion, sexual orientation, or any other protected class are common in many businesses.
Many people think that in order to protect their legal rights, they must be a corporation. This is not true; corporations do have rights, just as individuals do. Corporations may have a right to bring lawsuits, such as in the case of pollution, but they cannot have their main article of property (such as land) taken from them in order to gain protection in court. The main article in a corporation is its stock.
Shareholders in corporations are not citizens; they are only creditors. Because shareholders are not considered legally obligated to support the corporation, they can choose to reduce the amount of profits the corporation makes through dividends. However, dividends are income that flows out of the corporation in the form of profits. Dividends are usually paid out at regular intervals to the shareholder(s).
Some partnerships are also classified as corporations. Partnerships are not strictly speaking a business but they can be treated as one if the partners agree to treat the partnership as a business. To do this, all partners have to register the partnership as a business. They will each receive one share of the partnership’s stock (hence the partnership). This means that profits and losses cannot be transferred between the partners in a partnership.
Not all partnerships are actually corporations though. A partnership is sometimes considered a C corporation instead of a corporation because some partnerships are started as a C corporation and turn into a partnership when it reaches a certain size. When this happens, some partnerships do not revert to a C-corporation status and are treated as a sole proprietorship, corporation, or S corporation. All three of these types of entity structure have different tax requirements and they each have their own advantages and disadvantages.
A sole proprietorship is similar to a corporation; only it is not a partnership. This type of entity must register as a sole proprietorship and is only able to issue shares to its shareholders. It has no liability for debts or taxes and has limited liability. A sole proprietor is usually limited to the amount it can invest in its own accounts or can transfer its investments to another account held by the company. It usually has no employees and has its own buildings.
A corporation is a separate legal entity from its shareholders. It usually has assets, property, and payroll but is not connected to any one else. The corporation can have debts and taxes but is not responsible for those debts and taxes. It also has separate legal forms for creating and owning stocks and partnerships.
The formation of corporations is done differently than sole proprietorships. A corporation must first be created in the state by filing its Articles of Organization with the Secretary of State. Next, it must be registered with the secretary of state. Once it is registered, all shareholders must sign their names and pay their annual fee to become a shareholder. Once all shareholders have done so, the corporation is formally established and its Articles of Organization will be submitted to the state for review.
The last main types of entity structure are partnerships and sole proprietorships. Partnerships are formed between two or more people who own property. The property can be in many forms but typically includes some form of equity. A partnership is not considered a corporation and does not have the same limitations as corporations.
Sole proprietorships and partnerships generally do not need to register as corporations because they are not separate legal entities. Therefore, their owners report the income on their personal income tax returns. If the business is a sole proprietorship, then only the partner(s) report their income on their personal income tax returns. The IRS administers the federal laws that govern partnerships and sole proprietorships and will provide certain forms of information and guidance to assist you in understanding the complex legal documents.
