The principal forms of business organizations are (1) sole proprietorships, (2) partnerships, (3) limited liability partnerships, (4) limited liability companies, and (5) corporations.
The simplest form of business is a sole proprietorship. Sole proprietorships constitute over two-thirds of American businesses. They are usually small enterprises (99 percent of those in the United States earn less than $1 million per year).
A sole proprietorship is a form of business ownership in which one individual owns a business. The owner may either be the only worker of the business or he may employ as many people as he needs to run the operation. He can use his own name or a trade name. If a trade name is used, oftentimes the business will be identified on official forms and in the case of a lawsuit by use of the designation “d/b/a” (doing business as). For example, “John Jones, d/b/a Multimedia Designs.”
Advantages of the Sole Proprietorship
Sole proprietorships are the easiest and least expensive business forms to set up. They are also the most flexible and, depending on the circumstances, may have the lowest tax rate.
Disadvantages of the Sole Proprietorship
The proprietor bears all of the financial risk of losses and liability, however, and the ability to raise capital is limited. A sole proprietorship cannot issue stock to raise money like a corporation.
The Uniform Partnership Act (UPA), as adopted by the states, governs the operation of partnerships in the absence of an express agreement among the partners to the contrary.
When Does a Partnership Exist?
A partnership is an association of two or more persons to carry on as co-owners a business for profit. Intent is significant. The three essential elements are:
• a sharing of profits or losses;
• a joint ownership of the business; and
• an equal right in the management of the busi¬ness.
Joint ownership of property, or a sharing of profits or losses does not alone create a partnership. Sharing both profits and losses may qualify, however.
Partners may agree in their partnership agreement to any terms, as long as they are not illegal or contrary to public policy.
A partnership for a term ends on a specific date or completion of a particular project. Dissolution without consent of all partners before the end of the term is a breach of the agreement. If there is no fixed term, a partnership is at will, and any partner can dissolve the firm any time.
Partnership by Estoppel
A person who represents himself or herself to be a partner in an actual or alleged partnership is liable to any third person who acts in good faith reliance. When a partner represents that a non-partner is a member of the firm, the non-partner is regarded as an agent of the firm.
Rights of Partners
All partners have equal rights in management unless the partnership agreement states otherwise. Each partner has one vote, and the majority rules in ordinary matters. Some extraordinary matters may require unanimous consent.
• Where the impact on individual partners will be significant, the partnership may wish to resolve these decisions through a unanimous vote in order to protect the interests of individual partners. The partners may want to require unanimous consent for areas that are deemed critical to the success of the partnership, such as hiring/firing of employees or things that will affect the interests of all existing partners and their stake in the enterprise such as bringing on a new partner or acquiring or selling partnership assets or assuming substantial debt.
• Individual partners do not have property rights in partnership property. In order to protect the interests of all partners from unauthorized behavior involving partnership property, the partners may want to enhance the control over the use and disposition of partnership property by requiring unanimous consent on issues involving the use and assignment of property rights in partnership property.
• All partners are jointly and severally liable for the debts and obligations of the partnership. Where expansion of the partnership requires a significant financial investment involving a large debt load, the interests of all partners must be considered before proceeding with that risk. Where the risk is great and where an individual partner may lose some or all of their personal holdings then the partnership may wish to protect the interests of individual partners in the partnership agreement. Within the partnership agreement the partners can agree what level of liability(dollar amount) is acceptable. Any liability over that amount would require the unanimous consent of all partners. Any liability under that amount would only require the consent of a majority of the partners.
• Since all partners are jointly and severally liable for the debts and obligations of the partnership, individual partners may be exposed to varying degrees of personal risk as the result of the failure of the partnership. A wealthy partner may be much more willing to accept substantial risk. A less wealthy partner may be risking all personal assets. To protect the interests of all partners, the unanimous consent of all partners may be required when making substantial purchases.
• Sale of significant partnership assets should require the unanimous consent of all partners so that the interests of all partners are protected. An individual partner cannot sell or otherwise dispose of partnership property. This option includes the situation where an individual partner cannot use partnership property as collateral for a loan (either a personal loan or a partnership loan) without the majority or unanimous consent of the partners where the property could be subject to seizure if the loan was in default.
• Individual partners do not have property rights in partnership property. Where partnership assets are put at risk either by loaning to a third party or placing the asset in an environment where the asset is subjected to theft or loss affects the interest of all partners. In these situations the partnership may wish to require the unanimous consent of all partners.
Interest in the Partnership Unless provided otherwise, profits and losses are shared equally, re¬gardless of the amount of a partner’s capital contribution.
Conducting partnership business is a partner’s duty and gen¬erally not compensable.
Inspection of Books
Books must be kept at the firm’s principal office. Every partner, active or inactive, is entitled to inspect all books and records on demand (and can make copies).
Accounting of Partnership Assets or Profits
An accounting can be called for voluntarily or compelled by a court. Formal accounting occurs by right in connection with dissolution, but a partner also has the right to an account¬ing in other circumstances.
Property acquired in the name of the partnership or a partner, or with partnership funds, is normally partnership property. A partner can use partnership property only on the firm’s behalf. A partner is not a co-owner of this property and has no interest in it that can be transferred.
Duties and Liabilities of Partners
Every act of a partner concerning partnership business and every contract signed in the partnership name binds the firm.
A partner owes the firm and its partners duties of loyalty and care. The duty of loyalty is limited to accounting to the firm for any property, profit, or benefit in the conduct of its business or from a use of its property, and to refrain from dealing with the firm as an adverse party or competing with it. The duty of care is limited to refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. A partner may pursue his or her own interests without automatically violating these duties.
Authority of Partners
Partners can exercise all implied powers reasonably necessary and customary to carry on partnership business. The firm is bound to honor a partner’s commitments to third parties.
Joint Liability of Partners
In a few states, partners are only jointly liable for partnership obligations. A third party must sue all of the partners as a group, but each partner is wholly liable for the judgment.
Joint and Several Liability of Partners
In most states, partners are jointly and severally liable for partnership obligations, including contracts, torts, and breaches of trust. A third party may sue all of the partners as a group or a partner individually, but a judgment against (or a release of) a single partner does not extinguish the others’ liability .A creditor cannot collect a partnership debt from the partner of a non-bankrupt partnership without first attempting to collect from the partnership, however. A partner who is liable for a tort is liable to the partnership for damages it pays.
Liability of Incoming Partner
A new partner to an existing partnership is liable only to the extent of his or her capital contribution for preexisting partnership debts and obligations.
When a partner ceases to be associated in the carrying on of the partnership business, he can have his interest bought by the firm, which otherwise continues to do business.
Events Causing Dissociation
A partner may give notice and withdraw. A partner also dissociates by declaring bankruptcy, assigning his or her interest, or through death or incapacity. Other events can be specified in the partnership agreement, or a partner might be expelled by the firm or by a court.
Effects of Dissociation
On dissociation, a partner’s right to participate in the firm’s business ends. The duty of loyalty also ends, and the duty of care continues only with respect to events that occurred before dissociation, unless the partner participates in winding up. The partner’s interest in the firm may be purchased according to the rules in Uniform Partnership Agreement or a separate Buy Sell Agreement executed by the Partners.
Advantages of a Partnership:
One advantage is that a partnership allows more than one individual to pool financial resources without the requirement of a formal corporate structure and without the expense of organiza¬tional fees.
One disadvantage is that each partner has unlimited personal liability for the debts of the partnership. Also, the partnership is technically dissolved by the death of a partner, although there is some statutory relief with regard to winding up the affairs of the partnership after the death of one of the partners. A new partnership can then be formed.
A partnership may be dissolved by the partners’ agreement or dissociation of a partner. The firm may continue in business if the partners, including the withdrawing partner, agree. A partnership for a definite term or undertaking, or some other certain event, is dissolved when the term expires, the undertaking is accomplished, or the event occurs.
After dissolution and notice, partners complete transactions begun and not fin¬ished (but they can create no new obligations). Partnership assets are collected, debts are paid, the values of part¬ners’ interests in the partnership are accounted for, and profits and losses distributed. Creditors of the partnership have first claim on the assets of the partnership. Difficulties arise when there is a dispute between the creditors of the partnership and the creditors of the individ¬ual partners. The general rule is that the partnership creditors have first claim on the assets of the firm, and the individual creditors (creditors of the individual partners) share in the remaining assets, if any. After the partnership’s liabilities to non-partners have been paid, the assets of the partnership are distributed as follow:
• Each partner is entitled to a refund of advances made to, or for the benefit of, the partnership;
• Contributions to the capital of the partnership are then returned; and
• The remaining assets, if any, are divided equally as profits among the partners unless there is some agreement which would provide for unequal distribution.
• If the partnership has sustained a loss, the partners share it equally unless there is an agreement between them to the contrary.
Limited Liability Partnerships
A limited liability partnership (LLP) offers the pass-through tax advantages of a partnership but limits its partners’ liability. Family businesses and professional services are often LLPs. Organizing an LLP requires filing a form with a state and including “Limited Liability Partnership” or “LLP” in its name. Annual reports must be filed with the state.
Liability in an LLP
The LLP allows professionals to avoid personal liability for the mal¬practice of other partners. The UPA exempts partners from personal liability for any partnership obligation, whether arising in contract, tort, or otherwise.
Family Limited Liability Partnerships
A family limited liability partnership is a limited liability partnership (LLP) in which the majority of the partners are persons related to each other. All of the partners must be natural persons or persons acting in a fiduciary capacity for the benefit of natural persons. The most significant use of the family LLP is in agriculture, e.g., family-owned farms.
A limited partnership is a modified partnership. It is half corporation and half partnership. This kind of partnership is a creature of State statutes. Many States have either adopted the Uniform Limited Partnership Act or the Revised Uniform Limited Partnership Act. In a limited partnership, certain members contribute capital, but do not have liability for the debts of the partnership beyond the amount of their investment. These members are known as limited partners. The partners who manage the business and who are personally liable for the debts of the business are the general partners. A limited partnership can have one or more general partners and one or more limited partners.
Under the ULPA, a limited partnership has to be created by executing a certificate which sets forth the name and business address of each partner, states which partners are general partners and which are limited partners, and states certain details about the partnership and the relative rights of the partners. This, of course, is not true in a general partnership. A general partnership is governed by a partnership agreement which is private and which may be oral or written. The limited partnership certificate usually must be recorded in an office, such as a County Clerk’s office. It must be recorded in the County in which the principal place of business of the partnership is located.
The Revised Uniform Limited Partnership Act is somewhat less restrictive as to what needs to be disclosed in this certificate. For example, the names of the limited partners are not required. Also, a certificate must only be filed with the office of the Secretary of State as opposed to County filing.
If there is no filing of a limited partnership certificate, both the limited and general partners will have the status and liability of general partners.
The general rule is that the limited partner’s name cannot appear in the firm name. If the limited partner’s name is used, and this gives the public the impression that the limited partner is an active partner, the limited partner can lose his protection of limited liability and will become liable as a general partner.
The general partners manage the business of the partnership and are personally liable for its debts. Limited partners have the right to share in the profits of the business and, if the partner¬ship is dissolved, will be entitled to a percentage of the assets of the partnership. A limited partner may lose his limited liability status if he participates in the control of the business.
Both the Revised Uniform Limited Partnership Act and the Uniform Limited Partnership Act lists some activities known as safe harbor activities in which limited partners may participate without losing their limited liability. Pursuant to the ULPA these “safe harbor” activities include:
• Being an agent, employee, or contractor for the limited partnership;
• Consulting with the advising a general partner with respect to the business of the limited partnership;
• Approving or disapproving of an amendment to the partnership agreement; or
• Voting on specified matters.
Also, the partnership agreement may grant to all limited partners, or to a specified group thereof, the right to vote on a per capita or other basis upon any matter.
The RULA expands the safe harbor rules as follows:
• Guaranteeing or assuming one or more specific obligations of the limited partnership;
• Taking any action required or permitted by law to bring or pursue a derivative action in the right of the limited partnership;
• Requesting or attending a meeting of partners; and
• Winding up the partnership.
A limited partner should be careful to follow the principles outlined or face the possibility of being personally liable for all partnership debts.
Dissociation and Dissolution
The death, retirement, or mental incompetence of a general partner does not dissolve the partnership, if the other partners continue business. A general partner’s bankruptcy or withdrawal may dissolve the firm. In the case of a limited partner, none of these occurrences will dissolve the firm. A limited partnership can be dissolved by court decree.
Limited Liability Companies
LLC’s are a relatively new form of business organization that can be formed in almost all, if not all, states. An LLC is a separate legal entity that can conduct business just like a corporation with many of the advantages of a partnership. It is taxed as a partnership. Its owners are called members and receive income from the LLC just as a partner would. There is no tax on the LLC entity itself. The members are not personally liable for the debts and obligations of the entity like partners would be. Basically, an LLC combines the tax advantages of a partnership with the limited liability feature of a corporation.
An LLC is formed by filing articles of organization with the secretary of state in the same type manner that articles of incorporation are filed. The articles must contain the name, purpose, duration, registered agent, and principle office of the LLC. The name of the LLC must contain the words limited liability company or LLC.
Management of an LLC is vested in its members. An operating agreement is executed by the members and operates much the same way a partnership agreement operates. Members may delegate authority to managers who run the LLC much the same way officers of a corporation would run a corporation. Profits and losses are shared according to the terms of the operating agreement.
Advantages and Disadvantages of the LLC
Advantages of the LLC
An LLC is a hybrid form of business enterprise that offers the limited liability of the corpo¬ration and the tax advantages of a partnership. LLCs with two or more members can elect to be taxed as either a partnership or a corporation. If no choice is made, an LLC is taxed as a partnership. One-member LLCs are taxed as sole proprietorships unless they elect to be taxed as corpora¬tions. Other advantages include the LLC’s flexible operations and man¬agement characteristics.
Disadvantages of the LLC
These include the lack of uniformity among state LLC statutes and the lack of case law.
Dissociation and Dissolution of an LLC
Dissociation occurs when a member ceases to be associated with the carrying on of a business. A member of an LLC has the power, but may not have the right, to dissociate from the firm. Events that trigger dissociation under the Uniform Limited Liability Company Act are the same as those under the Uniform Partnership Act.
Effect of Dissociation
On dissociation, a member’s right to participate in the firm’s business ends. The duty of loyalty also ends, and the duty of care continues only with respect to events that occurred before dissociation. The member’s interest in the firm must be bought out according to the LLC agreement, or for its “fair” value.
A dissociating member does not normally have the right to force the firm to dissolve (although the other members can dissolve the firm if they want and a court might order dissolution). On dissolution, any member can participate in winding up. After liquidation of the assets, the proceeds are distributed first to creditors (which may include members), second to capital contributors, and finally to members according to the operating agreement or in equal shares.
How Do You Choose between LLCs and LLPs
One of the most important decisions that an entrepreneur makes is the selection of the form in which to do business. To make the best decision, a businessperson should understand all aspects of the various forms, including legal, tax, licensing, and business considerations. It is also important that all of the participants in the business understand their actual relationship, regardless of the or¬ganizational structure.
Number of Participants
During the last decade or so, new forms of business organizations, including limited liability partnerships (LLPs) and limited liability companies (LLCs), have been added to the options for business entities. An initial consideration in choosing between these forms is the number of participants. An LLP must have two or more partners, but in many states, an LLC can have a single member (owner).
The members of an LLC are not liable for the obligations of the organization. The liability of the partners in an LLP varies from state to state. About half of the states exempt the partners from liability for any obligation of the firm. In some states, the partners are individually liable for the con¬tractual obligations of the firm but are not liable for obligations arising from the torts of others. In either situation, each partner may be on his or her own with respect to liability unless the other part¬ners decide to help.
Distributions from the Firm
Members and partners are generally paid by allowing them to withdraw funds from the firm against their share of the profits. In many states, a member of an LLC must repay so-called wrongful distributions even if he did not know that the distributions were wrongful. Under most LLP statutes, by contrast, the partners must repay only distributions that were fraudulent.
Both LLPs and LLCs can set up whatever management structure the participants desire. Also, all unincorporated business organizations, including LLPs and LLCs, are treated as partnerships for federal income tax purposes (unless an LLC elects to be treated as a corporation). This means that the firms are not taxed at the entity level. Their income is passed through to the partners or mem¬bers who must report it on their individual income tax returns. Some states impose additional taxes on LLCs. The chief benefits of electing corporate status for tax purposes are that the members generally are not subject to self-employment taxes, and fringe benefits may be provided to employee-members on a tax-reduced basis. The tax laws are com-plicated, however, and a tax professional should be consulted about the details.
The Nature of the Business
The business in which a firm engages is another factor to consider in choosing a business form. For example, with a few exceptions, professionals, such as accountants, attorneys, and physicians, may organize as either an LLP or an LLC in any state. In many states, however, the ownership of an entity that engages in a certain profession and the liability of the owners are prescribed by state law.
Financial and Personal Relationships
Despite their importance, the legal consequences of choosing a business form are often secondary to the financial and personal relationships among the participants. Work effort, motivation, ability, and other personal attributes can be significant factors, as may fundamental business concerns such as the expenses and debts of the firm. Other practical factors to consider include the willingness of others to do business with an LLP or an LLC. A supplier, for example, may not be willing to extend credit to a firm whose partners or members will not accept personal liability for the debt.
Checklist for Choosing a Limited Liability Business Form
• Determine the number of participants, the forms a state allows, and the limits on liability the state provides for the participants.
• Evaluate the tax considerations.
• Consider the business in which the firm engages, or will engage, and any restrictions imposed on that type of business.
• Weigh such practical concerns as the financial and personal relationships among the participants and the willingness of others to do business with a particular organizational form.
Business corporations are created when a branch of the State government approves articles of incorporation prepared by incorpo¬ra¬tors. In most states, this branch of government is the Secretary of State. Each State has a Corporation Act which is a series of statutes regulating the creation and operation of a corporate structure. Corporations formed for profit have to have shareholders, directors and officers. The shareholders are responsible for electing the board of directors. The board of directors are ultimately responsible for the management of the business, but they employ or elect officers who run the day-to-day operations. Corporations may range in size from an incorporated one-person business to a large multinational business.
One advantage is that the shareholder’s risk of loss from the business is limited to the amount of capital that the shareholder invested in the business. Also, a corporation can raise capital by issuing stock which can allow the corporation to expand.
A corporation is a separate legal entity (a legal person) and can own property, make contracts, bring lawsuits, and be sued as a person.
A corporation is required to pay corporate income taxes. Share¬holders who receive dividends from the corporation are required to pay personal taxes on these dividends. This results in double taxation which may certainly be a disadvantage against incorporation of small businesses with just a few shareholders (e.g., close corporations). One way around double taxation in a close corporation situation where the shareholders also work for the corporation, is to make sure that they receive salaries and bonuses sufficient to wipe out any profits that would have to be distributed as dividends. However, any salary and bonus paid cannot be more than what would be reasonable considering the type of business the corporation is involved in. If the salary is unreasonable, the IRS may declare that part of the salary is really a dividend, and tax the corporation on this portion as well as the individual.
The organization and operation of a corporation does involve some expenses which would not be required in a sole proprietorship. For example, certain filing fees have to be paid upon filing the articles of incorporation. Also, State corporation laws may also require the filing of an annual report, as well as other reports. In many states, this is not really a problem since the filing fees are very low (e.g., $50.00 for the filing of the articles). Also, the reports that must be filed on a yearly basis are not that difficult to prepare and file.
CLASSIFICATION OF CORPORATIONS
A public corporation is one established for governmental purposes and for the administration of public affairs. A city is a public or a municipal corporation acting under authority granted to it by the State.
A private corporation is one organized by persons, either profit or nonprofit. Private corporations are often called “public” when the stock is sold to the public and traded on the stock exchanges.
A corporation is called a domestic corporation with respect to the State under whose law it has been incorporated. Any other corporation going into that State is called a foreign corporation. For example, a corporation holding a Texas Charter is a domestic corporation in Texas, but a foreign corporation in all other States. A foreign corporation must qualify to do business in a foreign State.
Special service corporations are corporations formed for transportation, banking, insurance, and similar specialized functions. These corporations are subject to separate codes or statutes with regard to their organization.
A corporation whose shares are held by a single shareholder or a closely-knit group of shareholders (such as a family) is known as a close corporation. The shares of stock are not traded publicly. Many of these types of corporations are small firms that in the past would have been operated as a sole proprietorship or partnership, but have been incorporated in order to obtain the advantages of limited liability or a tax benefit or both.
A corporation may be organized for the business of conducting a profession. These are known as professional corporations. Doctors, attorneys, engineers, and CPAs are the types of profes¬sionals who may form a professional corporation. Usually there is a designation P.A. or P.C. after the corporate name in order to show that this is a professional association or professional corporation.
A nonprofit corporation is one that is organized for chari¬table or benevolent purposes. These corporations include certain hospitals, universities, churches, and other religious organizations. A nonprofit entity does not have to be a nonprofit corporation, however. Nonprofit corporations do not have shareholders, but have members or a perpetual board of directors or board of trustees.
A Subchapter S corporation is a corporation in which the shareholders elect to be treated as partners for income tax purposes. Shareholders still have limited liability protection of a corporation, but income is treated like partnership income. Subchapter S refers to a particular subdivision of the Internal Revenue Code. The number of shareholders is limited to 75 shareholders and neither corporations nor partnerships can be shareholders in a Subchapter S corporation. Also, shareholders must be U.S. citizens or resident aliens.
IGNORING THE CORPORATE ENTITY
Ordinarily, a corporation will be regarded and treated as a separate legal person, and the law will not look beyond a corpora¬tion to see who owns it.
Piercing the Corporate Veil
A Court may disregard the corporate entity and pierce the corporate veil in exceptional circumstances. The decision whether to disregard the corporate entity and go directly against the shareholders is made on a case-by-case basis. Factors that may lead to piercing the corporate veil are:
• Failure to maintain adequate corporate records and the commingling of corporate and personal funds;
• Grossly inadequate capitalization (debt/equity ratio too high);
• The formation of a corporation to evade an existing obligation;
• The formation of a corporation to perpetrate a fraud;
• Improper diversion of corporate assets; and
• Injustice and inequitable circumstances would result if the corporate entity were recognized.
Courts generally will look to more than one factor.
Hypothetical: Susan sued the Mobile Construction Company. Philip was the only shareholder of the corporation. Susan obtained a judgment against the corporation. Philip then dissolved the corporation and took over all its assets. He agreed to pay all outstanding debts of the corporation except the judgment in favor of Susan. She sued Philip on the ground that he was liable for the judgment against the corporation. He claimed that the judgment was only the liability of the corporation and that he was not liable because he was merely a shareholder and had not assumed the liability for the judgment. Is Philip liable on the judgment? YES. If the corporation alone were liable to Susan, an injustice would be done because the corporation had been stripped of all its assets and therefore could not pay the judgment. The timing of the dissolution of the corporation and assumption of all of its debts but Susan’s judgment showed that Philip maneuvered the corporate assets to his personal advantage. It would be unjust to allow him to keep the corporate assets after he had made it impossible for the corporation to pay the judgment to Susan. To prevent this injustice, the corporate entity would be ignored, and Philip would be liable on the judgment against the corporation.
It is extremely difficult to pierce a corporate veil in most situations. Some Courts use different terminology when disregarding the corporate entity. The Court may state that the corporation is the alter ego of the shareholders, and the share¬holders should therefore be held liable.
The Court will not go behind the corporate identity merely because a corporation has been formed to obtain tax savings or to obtain limited liability for its shareholders. One-person, family, and other closely-held corporations are permissible and fully entitled to all of the advantages of corporate existence. However, factors that lead to piercing the corporate veil more commonly exist in these kinds of corporations.
Promoters are the people that bring the corporation into existence. They bring together other people interested in the company, solicit stock purchasers, and sometimes make contracts to be assigned later to the corporation. A corporation is not liable on a contract made by a promoter unless the corporation takes some sort of affirmative action to adopt the contract. The promoter still remains personally liable on the contract unless released by the other contracting party. The contract can provide that the promoter will be released from personal liability upon adoption of the contract by the corporation.
One or more natural persons or corporations may act as incorporators of a corporation by signing and filing Articles of Incorporation with the designated government official (usually the Secretary of State). These Articles are filed in duplicate, and the Secretary of State, when satisfied that the Articles conform to the State’s corporation statutes, stamps filed and the date on each copy. The Secretary of State then retains one copy and returns the other copy, along with a filing fee receipt, to the corporation.
The Articles of Incorporation must contain the following:
• The name of the corporation;
• The number of shares of stock the corporation is authorized to issue;
• The street address of the corporation’s initial registered office and the name of its initial registered agent; and
• The name and address of each incorporator.
The Articles may contain optional provisions such as the purpose for which the corporation is organized. However, if the Articles contain no purpose clause, the corporation will automatically have the purpose of engaging in any lawful business. Also, if no reference is made to the duration of the corporation in the Articles, it will automatically have a perpetual duration.
Under the RMBCA, corporate existence begins when the Articles are filed with the Secretary of State. Under the older practice still followed by many States, corporate existence begins upon the issuance of a Certificate of Incorporation by the Secretary of State.
FORFEITURE OF CHARTER
Under the RMBCA, the Secretary of State may administratively dissolve a corporation if:
• the corporation does not pay franchise taxes (these taxes are payable to the State, and the amount depends on the capital assets of the corporation);
• the corporation does not file its annual report within 60 days after it is due;
• the corporation is without a registered agent or a registered office for 60 days or more.
An annual report is a report filed with the Secretary of State which sets forth information such as the name of the corporation and the State where incorporated, the address of its registered office and name of its registered agent, the address of its principal office, the names and businesses addresses of its directors and principal officers, a brief description of the nature of the business, and information regarding the total number of authorized shares of stock.
Owners and officers of a dissolved corporation are not shielded from personal liability by using the corporate name in making contracts.
In some States, statutes provide that a judicial dissolution of a corporation may be implemented if the management of the corporation is deadlocked, and the deadlock cannot be broken by the shareholders.
Corporations have some of the same powers as a natural person, such as the right to own property. If a corporation acts beyond the limits of its powers, the act is ultra vires. This is an act or contract that the corporation did not have authority to do or make. Modern corporation statutes give corporations broad powers, and the likelihood that a corporation will act beyond its powers is rare.
All corporations do not have the same powers. For example, corporations that operate banks, insurance companies, and railroads generally have special powers and are subject to special statutory restrictions.
As long as the Federal and State Constitutions are not violated, a State Legislature may give corporations any lawful powers. The RMBCA grants a corporation the same powers as an individual to do all things necessary or convenient to carry out its business and affairs.
Modern corporation statutes give corporations a wide range of powers. A corporation has perpetual succession or continuous life. In other words, it has the power to continue as a unit indefinitely or for a stated period of time regardless of any changes in the owner¬ship of its stock. If no period of time is fixed for the duration of the corporation, the corporation will exist indefinitely until it is legally dissolved. If the period of existence is limited, the corporation can extend the period by meeting certain statutory requirements.
• A corporation may issue certificates representing corporate stock.
• Corporations have the power to enter into contracts just like an individual.
• Corporations have the power to borrow money in carrying out their business purposes.
• A corporation can borrow money by issuing bonds. The bonds issued by a corporation are subject to Article 8 of the UCC (“Investment Securities”).
• A corporation may sell or lease its property. However, in most States a corporation may not sell or mortgage all or substan¬tially all of its assets without the consent of the majority of the shareholders.
• Obviously a corporation has the power to incur debt and mortgage its property as security for debt.
• A corporation may be a member of a partnership and may be a limited or general partner of a limited partnership.
• Corporations can pay pensions and establish pension plans for its employees.
• The RMBCA even authorizes a corporation to make charitable contributions.
A corporation must have a name to identify it. Most States require that the corporate name contain some indication that it is a corporation, such as corporation, company, incorporated, limited, or an abbreviation of these words.
A corporation may have a seal which can be used to show that a contract or a document is being executed pursuant to valid corporate authority.
Bylaws are the rules and regulations of a corporation which govern its internal affairs. They are adopted by the shareholders, though in some States they may be adopted by the directors of the corporation. Of course the bylaws cannot conflict with the general corporate statutes of a State or the bylaws will be void.
Corporations may acquire the stock of another corporation and be a stockholder of another corporation. A corporation owning stock in another corporation can own such a large percentage of the stock that it controls the operations of the corporation. In such a case, the corporation owning the stock is commonly called a holding company. Sometimes a holding company is organized solely for the purpose of controlling other companies. These other companies are called subsidiary companies. Courts normally recognize the holding company and its subsidiary company as separate and distinct legal entities. A corporation does not have to be a holding company to own a subsidiary.
Generally, a corporation may purchase its own stock if it is solvent, and this stock will be known as treasury stock. Treasury stock maintains the status of outstanding stock, but is regarded as inactive and cannot be taken into consideration regarding votes by the shareholders. Also, dividends cannot be declared regarding treasury stock. The RMBCA eliminates the concept of treasury stock and calls this type of stock authorized, but unissued, stock.
A corporation has the power to do business in other States. However, by doing business in other States, the corporation may have to qualify as a foreign corporation to do business in that State which usually involves registering with the Secretary of State.
ULTRA VIRES ACTS
If a corporation acts beyond the scope of the powers granted by its charter and the statutes of the State under which it is governed, the corporation’s act is declared as ultra vires. However, modern corporation statutes give such a broad scope of powers that it is difficult to find an action that is ultra vires. The text gives an example of a mining corporation which begins to manufacture television sets. In such a situation, there might be an ultra vires transaction if the corporate charter restricted the corporation’s powers to mining and related-such activities. How¬ever, this type of situation is extremely rare.
Nonprofit corporations have a more restricted range of powers than business corporations, and it would be more likely to find an ultra vires act in a nonprofit corporation than a profit corporation.
CONSOLIDATIONS, MERGERS, AND CONGLOMERATES
In a consolidation of two or more corporations, their separate existences cease, and a new corporation with the property and the assets of the old corporations comes into being.
A merger is different from a consolidation in that when two corporations merge, one absorbs the other. One corporation preserves its original charter and identity and continues to exist. The other corporation disappears, and its corporate existence terminates.
A conglomerate is the term describing the relationship of a parent corporation to subsidiary corporations engaged in diversified activities which are unrelated to the activity of the parent corporation. A subsidiary corporation is a corporation whose majority shareholder is another corporation (parent corporation). An example of a conglomerate could be a wire-manufacturing corporation that owns all of the stock of a newspaper corporation and of a drug-manufacturing corporation.
Consolidations, mergers, and asset acquisitions are sometimes prohibited by federal antitrust legislation on the grounds that the effect is to lessen competition in interstate commerce.
LIABILITY OF SUCCESSOR CORPORATIONS
When corporations are combined in any way, the question arises as to who is liable for the debts and obligations of the predeces¬sor corporations.
Generally, the corporate entity which continues the business after a merger or a consolidation will succeed to all of the rights and property of the predecessors and will also be subject to all of the debts and liabilities of the predecessor corporations. For example, A merges into B. Suppose A had a contract with C. B did not. After the merger, B is liable to C on the contract.
A corporation may merely purchase the assets of another business. This would not be a merger or consolidation. In an acquisition situation, the purchaser does not become liable for the obligations of the business whose assets are being purchased.
A joint venture is a relationship between two or more people who combine their labor or property for a single business under¬taking. They share profits and losses equally, or as otherwise provided in the joint venture agreement. The single business undertaking aspect is a key to determining whether or not a business entity is a joint venture as opposed to a partnership.
Hypothetical: Elizabeth, Josephine, and Mark entered into an agreement to purchase a tract of land, build houses on it, sell the houses, and then divide the net profit. What kind of business organization was this? This would be a joint venture because resources were pooled, and the profit-sharing operation was limited to one particular operation. The fact that a long period of time might pass before the venture ended would not cause this organization to lose its status as a joint venture.
A joint venture is very similar to a partnership. In fact, some States treat joint ventures the same as partnerships with regard to partnership statutes such as the Uniform Partnership Act. The main difference between a partnership and a joint venture is that a joint venture usually relates to the pursuit of a single transaction or enterprise even though this may require several years to accomplish. A partnership is generally a continuing or ongoing business or activity. While a partnership may be expressly created for a single transaction, this is very unusual. The duties owed by joint venturers to each are the same as those that partners owe to each other. For example, partners have a duty of loyalty to one another, and joint venturers would also have the same duty. If a joint venture is entered into to acquire and develop a certain tract of land, but some of the venturers secretly purchase and develop land in their own names to compete with the joint venture, the other joint venturers may be liable for damages for the breach of this duty of loyalty.
A joint venture will last generally as long as stated in the joint venture agreement. If the joint venture agreement is silent on this, it can be terminated by any participant unless it clearly relates to a particular transaction. For example, if a joint venture is created to construct a particular bridge, it will last until the project is completed or becomes impossible to complete because of bankruptcy or some other type situation.
With regard to liability to third persons, generally, joint venturers have the same liability as partners in a general partnership.
An unincorporated association involves two or more persons who combine their efforts to further a common purpose, usually nonprofit. Social clubs, fraternal associations, and sororities are common examples of unincorporated associations.
Unless provided otherwise by statute, an unincorporated association does not have any legal existence. It is not a separate legal entity. It cannot sue or be sued in its own name.
Generally, the members of an unincorporated association are not liable for debts or liabilities of the association merely because they are members. Generally, they must authorize or ratify the act in question before they can be held liable for it. A case in point is the Golden Spike Little League case. In this case, Golden Spike Little League was an unincorporated association of persons who formed to promote Little League Baseball in Ogden, Utah. They sent one of their members to arrange credit at a local sporting goods store. After getting this credit, various members went to the store and picked up and signed for different items of baseball equipment and uniforms. When the store requested payment, the members had a fund-raising activity, but this only produced $149.00. The store was owed $3,900.00. The store sued Golden Spike Little League as an entity, as well as the members who had picked up the equipment and signed for it individ¬ually. The individuals argued that they would not have any personal liability since only the association could be held responsible. The Court held for the store against the individual members. The Court also held that the store could not recover from the unincorporated association since it is not a legal entity. However, the Court pointed out that the individuals that were sued did enter into contracts, and therefore they were personally liable to the store even though they argued that they were making these contracts for the association.
It is generally preferable to form a non-profit corporation than do business through an unincorporated association.
A cooperative consists of two or more persons or enterprises that cooperate with respect to a common purpose or function. An example would be farmers who pool their farm products and sell them. Statutes commonly provide for the special incorporation of coopera¬tive enterprises. For example, an agricultural association in Mississippi can incorporate. The suffix used on the name of the corporation is “AAL” rather than “Inc.”
There is a definition of a franchise which has been developed by the Federal Trade Commission. Basically, a franchise involves an owner of a trademark, trade name and/or copyright giving others a license under certain conditions to use these trademarks, trade names or copyrights in providing goods or services to the public. The franchisor is the party who grants the franchise, and the franchisee is the party who receives the franchise.
THE FRANCHISE AGREEMENT
Technically, the relationship between a franchisor and franchisee is a relationship between two independent contractors. Their rights are determined by the franchise agreement. A franchise then is not a separate business entity, but is a business relationship between two separate business organizations such as a sole proprietorship, a corporation, or a partnership. The relationship between the franchisor and franchisee is controlled by the franchise contract. A corporation, sole proprietorship, or partnership may own the franchise contract or may be the entity entering into the franchise contract.
The word franchise does not have to be used in order to create a franchise. A relationship is treated as a franchise if it meets the applicable legal test for a franchise.
A franchise may last as long as the parties agree. In other words, this is set forth in the franchise contract. Franchise contracts also will specify events which will cause the franchise to terminate. For example, the contract may provide that it will terminate upon the franchisee’s death, bankruptcy, failure to make franchise fee payments, or failure to meet sales quotas.
SPECIAL PROTECTION UNDER FEDERAL LAWS
There are laws that restrict termination of some franchises. In some States, prior notice of termination is required. Owners of automobile dealership franchises are protected from termination of their dealerships in bad faith. This protection is provided by the Federal Automobile Dealers Franchise Act.
Governmental regulation of franchises generally has to do with problems of fraud in the sale of the franchise and protecting the franchisees from unreasonable demands and bad faith terminations. The FTC adopted extensive regulations to protect franchisees from deception. These regulations require a franchisor to give a prospective franchise a disclosure statement ten days before the franchisee signs a contract or pays any money for a franchise. If a franchisor fails to follow the regulations, he may be fined up to $10,000.00 for each violation.
FAQ Regarding Small Business Law
What is a business?
A business is an activity performed for the expectation of profit in a systematic, continuous and commercial manner.
What are the most common types of business organizations for small businesses?
The most common forms of business organizations include:
- Sole proprietorship;
- General Partnership;
- Limited partnership;
- Limited liability partnership;
- Subchapter S corporation; and
- Limited liability company.
What is a sole proprietorship?
A sole proprietorship is an informal business that doesn’t involve the complexities and expenses of formal incorporation procedures. It is typically owned by an individual or family members. The owner operates the business, is personally liable for all business debts, and can freely transfer all or part of the business. If a lawsuit is filed because the business owes money or because someone was harmed by the business, the owner (the sole proprietor) is personally liable for any judgment that the plaintiff might be awarded by the court. In this form of business, the law and the taxing authorities (IRS, etc.) do not distinguish the business from the individual who owns it. Profit or loss is reported on the owner’s personal income tax return and all net income is taxed to the individual at his/her personal tax rate. If the business has employees, the owners are required by law to withhold federal income taxes, state income taxes and FICA (Social Security) Insurance from the wages paid to employees.
What are some advantages and disadvantages of a sole proprietorship?
Advantages of a Sole Proprietorship over other Business forms:
- It is simpler to form than a corporation, LLC, LLP, partnership or LP, and the startup costs for a sole proprietorship are minimal.
- The sole proprietor controls all of the financial and management decisions and receives all of the profits.
- The business’ net earnings are not subject to corporate income tax, but are taxed as personal income. All profits and losses of the business are reported directly to the owner’s income tax return. A separate tax return for the business or balance sheet is not required.
- Decision-making is in the direct hands of owner.
- The owner is subject to unlimited personal liability for the debts of the business. Both the business and personal assets of the sole proprietor are subject to the claims of creditors.
- It is difficult for a sole proprietorship to raise capital. Financial resources are generally limited to the owner’s funds and any loans outsiders are willing to provide. Corporations can issue stock and raise capital that way.
- Owner could spend unlimited amount of time responding to business needs.
- Because a sole proprietorship is not a separate legal entity, it usually terminates when the owner becomes disabled, retires, or dies. As a result, the sole proprietorship lacks continuity and does not have perpetual existence like other business organizations.
- Some employee benefits, such as owner’s medical insurance premiums, are not directly deductible from business income (only partially deductible as an adjustment to income).
What is a general partnership?
A partnership involves combining the capital resources and the business or professional abilities of two or more people in a business. It is a business enterprise entered into for profit which is owned by more than one person, each of whom is a partner. A partnership may be created by a formal written agreement, but can also be established through an oral agreement or just a handshake. Each partner has an agreed percentage of ownership in return for an investment of a certain amount of money, assets and/or effort. Each partner is responsible for all the debts and contracts of the partnership even though another partner may have created the debt or entered into the contract. General partners share in management decisions, and share in profits and losses according to the percentage of the total investment or partnership agreement.
What are some of the advantages and disadvantages of a partnership form of business?
One advantage is that a partnership allows more than one individual to pool financial resources without the requirement of a formal corporate structure and without the expense of organizational fees. Some disadvantages are:
- Each partner has unlimited personal liability for the debts of the partnership.
- The partnership is technically dissolved by the death of a partner, although there is some statutory relief with regard to winding up the affairs of the partnership after the death of one of the partners. A new partnership can then be formed.
What is a limited partnership?
A limited partnership is a modified partnership. It is half corporation and half partnership. This kind of partnership is a creature of state statutes. In a limited partnership, certain members contribute capital, but do not have liability for the debts of the partnership beyond the amount of their investment. These members are known as limited partners. The partners who manage the business and who are personally liable for the debts of the business are the general partners. A limited partnership can have one or more general partners and one or more limited partners.
What is a limited liability company?
A limited liability company (LLC) is a separate legal entity that can conduct business just like a corporation with many of the advantages of a partnership. It is taxed as a partnership. Its owners are called members and receive income from the LLC just as a partner would. There is no tax on the LLC entity itself. The members are not personally liable for the debts and obligations of the entity like partners would be. Basically, an LLC combines the tax advantages of a partnership with the limited liability feature of a corporation.
What is a limited liability partnership?
A Limited Liability Partnership (LLP) is essentially a general partnership with the limited liability of an LLC. It is owned by partners rather than members. It is may be easier in some respects to convert a general partnership into an LLP as opposed to an LLC. The partnership agreement would only have to be amended for an LLP, but redrafted as an operating agreement for an LLC.
What are the advantages and disadvantages of operating as a corporation?
- The shareholder’s risk of loss from the business is limited to the amount of capital that the shareholder invested in the business.
- A corporation can raise capital by issuing stock which can allow the corporation to expand.
- A corporation is required to pay corporate income taxes. Shareholders who receive dividends from the corporation are required to pay personal taxes on these dividends. This results in double taxation which may certainly be a disadvantage against incorporation of small businesses with just a few shareholders (e.g., close corporations). One way around double taxation in a close corporation situation where the shareholders also work for the corporation, is to make sure that they receive salaries and bonuses sufficient to wipe out any profits that would have to be distributed as dividends. However, any salary and bonus paid cannot be more than what would be reasonable considering the type of business the corporation is involved in. If the salary is unreasonable, the IRS may declare that part of the salary is really a dividend, and tax the corporation on this portion as well as the individual.
- The organization and operation of a corporation does involve some expenses which would not be required in a sole proprietorship. For example, certain filing fees have to be paid upon filing the articles of incorporation.
- State corporation laws may also require the filing of an annual report, as well as other reports
What are S Corporations?
An S corporation combines the limited liability of a corporation and the “pass-through” tax-treatment of a partnership. It is a business structure suited to small business owners who want the continuity and liability protection of a corporation but wish to be taxed as a sole proprietorship or partnership. An S corporation is essentially a corporation that has elected to become an S corporation for tax treatment purposes. The S corporation election form 2553 is filed with the Internal Revenue Service. Instead of being taxed at the corporate level, the income “passes through” to the individual shareholders. This is the same basic “pass-through” treatment afforded partnerships and limited liability companies. Any income or loss generated by the S corporation is reported on the individual tax returns of the shareholders, rather than being taxed at the corporate level. Thus, the S corporation election is a popular choice for many small businesses.
Can I run a business out of my home?
For some types of businesses, especially those where you visit your customers rather than being dependent on their coming to your place of business, this is fine. In some situations, you may be able to deduct the value of the space you use for your business operations on your income tax return. To qualify for the deduction, however, your home office must, as a general rule, be your principal place of business (i.e., your main location for administrative/management activities) and be regularly and exclusively used by the business.
Some zoning ordinances in some strictly residential areas will absolutely prohibit all in-home businesses. Other communities permit a home business, but may have restrictions like the following:
- Specification of the kinds of work that can be run out of your home (e.g.,, music, beauty salon, tutoring);
- Limit the amount of floor space that can be utilized;
- Restrict the hours the business can operate;
- Limit the use of on-street parking;
- Prohibit or limit the number of employees you may hire;
- Ban or require a entrance to your business that is separate from your residence; or
- Ban advertising signs.
Do I need a taxpayer identification number?
Any business that has employees must generally have a taxpayer identification number, which is often referred to as an “EIN” (employer identification number). An EIN is a number assigned to a business for tax reporting and withholding deposit purposes. It is different from your individual social security number. Both a federal and a state EIN are required.
An EIN is required so that withholdings (federal and state income tax, social security and Medicare taxes, unemployment insurance, and other taxes) can be remitted to the Internal Revenue Service and state tax authorities. The Internal Revenue Service and many state tax authorities publish pamphlets and booklets which can help you determine whether you need a separate EIN for your business.
What is a close corporation?
A close corporation is one in which, as a general rule, all or most of the shareholders are actively involved in managing the business. Most corporations could qualify as a close corporation.
What is a buy-sale agreement?
A buy-sell agreement is an agreement between the owners of the business for purchase of each others interest in the business. Such an agreement will spell out the terms governing sale of company stock to an outsider and thus protect control of the company. It can be triggered in the event of the owner’s death, disability, retirement, withdrawal from the business or other events. Life insurance owned by the corporation is often used to provide the funds to purchase the shares of a closely held company if one of the owners dies.
What is a professional corporation?
A corporation may be organized for the business of conducting a profession. These are known as professional corporations. Doctors, attorneys, engineers, and CPAs are the types of professionals who may form a professional corporation. Usually there is a designation P.A. or P.C. after the corporate name in order to show that this is a professional association or professional corporation. Shareholders must be licensed to practice in the profession for which the corporation was created.
Do I need any licenses or permits?
Whether you need a license or permit depends upon the type of business you engage in, the location of your business, and federal, state, county, city, and local rules and ordinances. Cities and counties require permits for many business activities (such as construction or elevator operations permits). In addition, many local governments require a business license before you start your business (a license requiring payment of an annual fee or tax to do business in that city or town).
In addition to municipal license requirements, each state has its own system of licensing and its own restrictions, whether you work for yourself or for someone else. Typically, licensing is required:
- For those businesses or professionals that go through extensive training before practicing, such as lawyers, physicians, nurses, accountants, dentists, teachers, or
- Before carrying on a particular trade or business, in order to protect the environment and consumers from fraudulent activities and unsafe products or services. Real estate agents, restaurants, bars, insurance agents, pawnbrokers, peddlers, cosmologists, private investigators, and mechanics are representative of this group, to name a tiny fraction.
Do I need a fictitious business name statement?
Depending on your state law, most businesses that operate under a fictitious name are required to complete a fictitious business name statement, publish the statement in a newspaper of general circulation, and then record this information with the County Recorder where the business is located. Corporations are generally exempt, as are businesses that use the individual proprietor’s own name. If you are “doing business as” (d/b/a), generally you need to comply with fictitious business name rules.
What types of insurance will I need to start a business?
Whether you need insurance depends on your business activities and the amount of liability exposure that you have from the activity. In addition, insurance may be required for employees (such as worker’s compensation insurance, state disability insurance, or unemployment insurance).
Some common forms of business insurance include:
- Commercial multi-peril policies (covering a variety of exposures);
- Liability insurance covering premises, activities, and products;
- Business interruption insurance;
- Surety and performance bonds;
- Employee fidelity bonds; and
- Malpractice and errors and omissions coverage;
In deciding whether to purchase insurance, an analysis of your risk exposure should be performed. If you are unable to determine your risk of loss from engaging in business, consider contacting a commercial lines insurance broker.
Is a business required to provide medical, life and similar insurance coverage for its employees?
While it is common to provide these types of “employee benefit” coverage for workers, the law generally does not require a business to do so. Many businesses provide these and similar benefits to attract and retain good employees and as an additional form of compensation. However, businesses that employ unionized workers must provide whatever benefits are required by the terms of their union contracts, and it also may be necessary to provide certain types of employee benefits as a condition of doing business with or for certain governmental entities or agencies. Some states have adopted laws requiring employers that are of a certain size to provide health insurance.
Are all companies required to have a pension plan?
No, but if a company adopts a pension plan, it has to be managed according to standards established under Federal law.
What is a franchise?
Basically, a franchise involves an owner of a trademark, trade name and/or copyright giving others a license under certain conditions to use these trademarks, trade names or copyrights in providing goods or services to the public. The franchisor is the party who grants the franchise, and the franchisee is the party who receives the franchise. Technically, the relationship between a franchisor and franchisee is a relationship between two independent contractors. Their rights are determined by the franchise agreement. The relationship between the franchisor and franchisee is controlled by the franchise contract.
What kinds of fees and costs must a franchisee pay to the franchisor?
Typically, the franchisee will pay a franchise fee, which can often be spread out over a period of years, for the right to use the trademarks, trade names, and trade secrets of the franchisor and for managerial services involved in getting the franchise established. Frequently, a franchisee will also be required to purchase all its initial equipment, including signs and trade fixtures, from the franchisor. The franchisee may also be required to purchase many of its supplies from the franchisor or from franchisor-approved sources. In addition, a franchisee will normally pay the franchisor a royalty, which is usually based on a percentage of the gross receipts from the franchised goods or services. The royalty covers such items as advertising and continuing managerial services as well as a licensing fee for use of the franchisor’s trademark and trade names. If the franchisor owns the franchised location, the franchisee will obviously have to pay rent for the building to the franchisor.
What is the Fair Trade Commission franchise disclosure rule?
Governmental regulation of franchises generally has to do with problems of fraud in the sale of the franchise and protecting the franchisees from unreasonable demands and bad faith terminations. The FTC adopted extensive regulations to protect franchisees from deception. These regulations require a franchisor to give a prospective franchise a disclosure statement ten days before the franchisee signs a contract or pays any money for a franchise.
What kind of tax liabilities do I have to worry about in my business?
There are federal, state and local taxes assessed against every business, and a lot of the time you can be held personally liable for them. These taxes can include:
- Business license fees (essentially a tax on the cost of doing business);
- Payroll taxes and withholdings (both the employer and the employee portions);
- Excise taxes on products, goods or services (e.g., petroleum products);
- Franchise taxes (for the privilege of doing business);
- Permit and application fees (essentially another tax on the cost of doing business);
- Sales and use taxes;
- Property taxes;
- Federal and state income taxes (personal and corporate);
- Federal and state capital gains taxes (personal and corporate); and
- Penalties and interest that accrue on taxes that are not timely paid.
As an employer, a business has the responsibility for withholding certain taxes from an employee’s paycheck (for example, income tax withholdings, social security, federal and state unemployment and disability taxes). These amounts are not the employer’s money and the employer is responsible for collecting them on behalf of the government. The IRS and other tax authorities are very unforgiving about failing to pay over these withholdings in a timely manner. In addition, the employer is responsible for the business’s portion of social security and other payroll taxes that must also be paid on time. If the employer fails to pay in these taxes and withholdings, penalties can be assessed against the owners and/or managers of the business up to 100% percent of the amounts owed.