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Business and Corporate Law - Corporations Distinguished

partnership limited personal liability

A "proprietorship" is a declaration to operate as a business, such as an entrepreneurship. It requires no special documentation to be created, but local regulation may require the filing of "DBA" ("doing business as . . . ") documents in the county clerk's office. The business itself is usually not taxed on its earnings; rather, the earnings (or losses) are passed on to the proprietor as personal income or loss. Taxes are generally lower than that of a comparably-sized corporation, which would also pay taxes on income paid out as nondeductible dividends. This often creates more "up-front" operating funds for the business. However, an important disadvantage of proprietary business is that personal liability attaches to any debts incurred by the business. This means that if a proprietorship defaults on payment for business equipment, the individual proprietor's personal assets are at risk. Civil suits, including those for personal injury, would name both the business and the owner as defendants, or combine them, e.g., "John Doe, individually, and John Doe and Associates, Defendants." Additionally, the assets and liabilities of the proprietorship can only be voluntarily transferred by sale, gift or testamentary disposition, along with the relinquishment of managerial authority.

General partnerships are voluntary associations of two or more individuals who work together for a common business purpose. Profits and losses are shared equally, and principles of agency apply. This means that each partner is an agent of the partnership, is liable for all partnership debts, and can bind the partnership and other partners through his/her actions or conduct. No formal state requirements are necessary to form or maintain a partnership, but partners commonly enter into written agreements to specify their understanding of the allocation of profits or responsibilities. Like a proprietorship, a partnership does not pay income tax, and profits pass directly to the partners as personal income. In addition to the disadvantage of potential personal liability for each partner, partnerships also lack business continuity. A partnership is deemed dissolved as a matter of law, without formal or documentary action, whenever a partner dies, retires, or otherwise violates the terms of the partnership. Bringing in new partners creates a new partnership, often accompanied by the shuffling of responsibilities and new allocations of shared interest according to the respective contributions of time, money or skill to the partnership. Again, the law presumes equal sharing of profits, irrespective of individual contribution, unless there is a contractual agreement between parties to the contrary.

A subspecies of partnership is that of the "limited partnership, " which, as the name implies, limits the liability of the limited partners to the extent of their investment in the partnership. No personal liability can attach beyond that. However, mostly out of concern for an unknowing public which may deal with the limited partnership, its creation is contingent upon the filing of a certificate of limited partnership with a designated state agency, typically the secretary of state. (Most states have adopted the Uniform Partnership Act to standardize the requirements of both general and limited partnerships in the eyes of the law.) Associated with the limited liability of a partner is the restriction of limited management in the affairs of the partnership, and a limited partner who participates in partnership business may be stripped of limited liability in any subsequently-litigated dispute. A limited partnership, therefore, must have at least one general partner who assumes responsibility for the management of the partnership.

Corporations, by contrast, are entities created solely by the state. Upon the filing of requisite forms for incorporation with appropriate state offices, a certificate of incorporation is then granted. The corporation is presumed to exist perpetually unless affirmatively dissolved. Corporations differ from other business forms in that the corporation itself owns corporate property; investors only own shares of interest in the corporation. Thus, a corporation's creditors normally cannot reach a shareholder, and a creditor of a shareholder cannot reach the corporation. An exception to this is the theory of "piercing the corporate veil," where the corporation is used to achieve criminal or personal objectives which serve to defeat public policy or interest.

Management of corporate business is accomplished through a board of directors elected by shareholders having voting rights commensurate with the class of stock they own. Most for-profit corporations are "publicly held" and sell shares of stock on the open market, following the publication of a "prospectus" to potential investors which is intended to advise them of the corporation's financial health, stock performance, anticipated growth, and associated risk. Despite constant changing of shareholders and their respective controls of interest, corporations continue to exist, merge, split into parent and subsidiary companies, and otherwise restructure without interruption of the corporate status in the eyes of the law.

Nonprofit businesses or associations (including trusts) have the added advantage of tax exemption and limited immunity or indemnification of trustees, officers or directors from personal liability. However, in most states, nonprofit corporations can be sued as in thr same manner for-profit corporations.

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