Corporations and Small Business
Our Corporations and Small Business Practice
Our corporate and small business practice includes, but is not limited to:
- Limited Liability Companies
- Family Limited Partnerships
- General Partnerships
- Limited Partnerships
- Joint Ventures
- Sole Proprietorships
- Shareholder/Member/Partner Planning Agreements
- Employment, Consulting and Non-Competition Agreements.
What is a Corporation?
A corporation is a entity that exists because of statutes known as the Vermont Business Corporation Act (VBCA). The most important feature of a corporation is that it exists entirely separate and apart from its owners. Virtually all the legal and tax advantages associated with corporations flow from this essential element.
How Does a Corporation Conduct Business?
Although shareholders own the business, unless the corporation is organized as a close corporation under chapter 20 of VBCA, the shareholders do not directly manage the corporation’s daily affairs. Instead, the shareholders meet at least once each year to elect a Board of Directors. The directors’ job is to make general business decisions for the corporation. Their decisions are then implemented by the corporation’s officers, who are appointed by the directors each year at a directors’ meeting.
The officers consist of at least the following: president, treasurer, and secretary. The president is responsible for managing the corporation’s daily operations. The treasurer manages the corporation’s money, while the secretary maintains the corporation’s nonfinancial books and records. In general the president and the secretary cannot be the same person. Corporations may also have one or more vice presidents. A vice president’s duties may vary, depending on the corporation’s needs. For example, the corporation may have vice presidents for sales, marketing, operations, personnel, and so on.
The shareholders may elect themselves as the directors. In their capacity as directors, they may then appoint themselves as one or more of the officers. If you are a sole shareholder, you may elect yourself as the sole director and, as the sole director, you may appoint yourself as president and treasurer, but in general you must appoint another person as secretary.
If the corporation is organized as a Close Corporation, the shareholder’s can waive the requirement of a Board of Directors and the shareholders can manage the corporation themselves without the formality of a board of directors.
What Are Some Advantages of Corporations?
The principal advantage of corporations is limited liability protection. Because a corporation exists apart from the shareholders, the corporation alone is liable for its debts. Even though they own and manage the corporation, the shareholders are not personally liable for its debts, unless the shareholder personally guarantees the liability.
For example, let’s suppose that I am the sole shareholder of Fix My TV, Inc., a corporation through which I conduct my TV repair business. While attempting to fix an expensive flat screen tv, I accidentally drop the tv and destroy it. The corporation alone is liable for the damages to the tv. I am not personally liable. This means that my customer can only look to my corporation’s assets and/or insurance to pay for the damages. All my personal assets, such as my house, my car, and my savings are protected from my customer’s claim.
The result might be different if I had intentionally damaged my customer’s tv or if my corporation had no equipment, bank account, receivables, insurance, or any other assets. Then, I might be personally liable. I might also be personally liable if I do not comply with the requirements of VBCA such as conducting annual shareholder’s and director’s meetings and if I do not keep my corporation’s property, such as its bank account, separate from my own.
What Are the Disadvantages of Corporations?
Doing business through a corporation, unless it is organized as a chapter S corporation, carries several tax disadvantages. Because a corporation has its own existence, it pays taxes on its own income. However, if a corporation has losses, only the corporation, and not the shareholders, can claim those losses as a tax deduction.
Most businesses lose money at some time or other. This often occurs during their start-up phase, when cash is tightest. If you are conducting your business through a corporation, you will be unable to deduct business losses until the corporation makes a profit, even if you have personal income from other sources. This delay can be particularly painful for new business owners with limited resources.
After your corporation becomes profitable, you will face another disadvantage, “double taxation.” Double taxation occurs when you and your corporation pay tax twice on the same dollar of income, a terrible fate indeed. Double tax can best be explained by an example.
What Are S Corporations?
S corporations have the same structure and limited liability protection as regular (also known as “C”) corporations. However, due to a section of the Internal Revenue Code known as Subchapter S, the shareholders of corporations that qualify for Subchapter S status are able to deduct losses in proportion with and to the extent of their investment in the business. S corporation shareholders are also free from double taxation, excess earnings tax, and excess accumulations tax. Unlike C Corporations, in which income is taxed to the corporation, all the income of S corporations, whether from earnings or the sale of assets, is taxed directly to the shareholders in proportion to their ownership interest.
What is a Partnership?
By definition, a partnership is a business with more than one owner that has not filed papers with the state to become a corporation or LLC (limited liability company). There are two basic types of partnerships: general partnerships and limited partnerships.
As a Partner Will I be Liable for Partnership Debts or Bound by my Partner’s Actions?
In a general partnership partners are personally liable for all business debts and obligations, including court judgments. Each individual partner can be sued for and required to pay the full amount of any business debt. This means that if the business itself can’t pay a creditor, such as a supplier, lender, or landlord, the creditor can legally come after any partner’s house, car, or other possessions. If this happens, an individual partner’s only recourse may be to sue the other partners for their shares of the debt. This rule does not apply to limited partners in a limited partnership.
In addition, any individual partner can usually bind the whole business to a contract or other business deal. For instance, if your partner signs a year-long contract with a supplier to buy inventory at a price your business can’t afford, you can be held personally responsible for the money owed under the contract. Generally, unless an outsider has reason to know of any limits the partners have placed on each other’s authority in their partnership agreement, any partner can bind the others to a deal.
Do My Partner and I Really Need a Partnership Agreement?
If you and your partners don’t spell out your rights and responsibilities in a written partnership agreement, you’ll be ill-equipped to settle conflicts when they arise, and minor misunderstandings may erupt into full-blown disputes. In addition, without a written agreement saying otherwise, Vermont’s partnership laws will control many aspects of your business.
A partnership agreement allows you to structure your relationship with your partners in a way that suits your business. You and your partners can establish the shares of profits (or losses) each partner will take, the responsibilities of each partner, what will happen to the business if a partner leaves, and other important guidelines.
What type of items should be in our partnership agreement?
Some items that you and your partners should consider before writing a partnership agreement are:
- Name of the partnership.
- Contributions to the partnership.
- Allocation of profits, losses, and draws.
- Partners’ authority.
- Partnership decision making.
- Management duties.
- Admitting new partners.
- Withdrawal or death of a partner. .
- Resolving disputes.
What is a Limited Partnership?
Limited partnerships have at least one general partner who controls the company’s day-to-day operations and is personally liable for business debts, they also have passive partners called limited partners. Limited partners contribute capital to the business (investment money) but have minimal control over daily business decisions or operations. In return for giving up management power, a limited partner’s personal liability is capped at the amount of his or her investment.
What is a Limited Liability Company?
A limited liability company, commonly called an “LLC,” is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
What is a Family Limited Partnership?
Family Limited Partnerships are limited partnerships formed by family members to be used as vehicles for estate tax and asset protection planning. In general family limited partnership agreements include significant restrictions on the transfer of partnership interests. The transfer restrictions are required in order to obtain the desired estate tax and asset protection benefits.