• Congress created S corporations (aka "S Corps") to encourage entrepreneurship by offering tax breaks.
• Comes from the provision of the Internal Revenue Code that created this form of organization.
• Shareholders of S corps have both the limited liability of a corporation and the tax status of a partnership. (Page 368)

• Doesn't necessarily mean that it is a small corporation; refers simply to a company whose stock was not publicly traded (in other words, a "privately held" company).
• Most close corporations are small, although some privately help corporations, such as Hallmark Cards, Inc., and Mars, Inc. (maker of Mars candy bars), are huge.

• It doesn't have the tax status of a corporation, but by that of a partnership.
• An LLC offers the limited liability of a corporation and the tax status of a partnership. (page 369)

Sole Proprietorship

Limited Liability Partnership

Limited Liability Companies

Corporations

S Corporations

Taxed as _________ = entity itself pays no income tax, only the OWNERS of organization pay tax on its earnings.

Taxes as _________= entity pays tax on earnings, plus shareholders pay tax on dividends... double taxation.

• Partnership (1)
• Corporation (2)

• A ____ ___________ is an unincorporated business owned by one person. Very common form. 76% of all small businesses are SPs.
• Sole proprietorships are easy and inexpensive to create and operate.
• D/B/A filings = "_____ _________ ___"

• Sole Proprietorship
• "doing business as"

• Evolution of General Parntership into Limited Liability Partnership. (An exception to the general rule about partnerships.)
• Partners in an LLP are not personally liable for debts of the partnership (whether arising from contract or tort).
• Note that creditors can seize the assets of the business, but not personal assets of LLP partners.
• LLP is not a taxable entity and it has the right to choose its duration.
• Once you choose the business form---Pay attention to the technicalitiies or could loose status! Practical & Testable Advice
• Apcar v Gaus (page 375)

• (Michael L. Gaus & John C. West, 2 partners) They go to court, form an LLP
• The Texas statute requires LLPs to renew their registrations each year, but Smith & West never did so.
• Four years after its initial registration, the partnership entered into a lease with MF Partners, which subsequently assigned the lease to Apcar.
• Three years into the lease, Smith & West stopped paying rent and abandoned the premises.
• Apcar filed suit against the two partners individually and against the partnership.
• The trial court granted Gaus's and West's motions while denying Apcar's.

• Corporations have been around since the Greeks and Romans providing shields from liability.
• Industrial Revolution saw rise of Corporation b/c large scale manufacturing required huge amounts of capital to be raised.
• Corporate stock can be bough and sold, making investments easy to get.
• Corprations offer limited liability - it generally protects the managers' and investments... (ran outta time)
• "Close corporation" or "closely held corporation" refer to a corporation whose stock is not publicly traded on a stock exchange.
• Most closely held corporations are small, but some are huge, like Hall-family owned Hallmark Cards in Kansas City. (Not all close corps are subchapter S corps)

• There can be only one class of stock (although voting rights can vary within the class).
• There can be only 100 shareholders.
• Shareholders must be individuals, estates, charities, pension funds, or trusts, not partnerships or corporations.
• Shareholders must be citizens or residents of the United States, not non-resident aliens.
• All shareholders must agree that the company should be an S Corporation.

• There can only be one class of stock
• Eliminates possibility of venture capital
• Venture capital deals usually issue more than one calss to reflect differing rights of shareholders
• There can be no more than 100 shareholders
• shareholders cannot be partnerships or other corporations.
• shareholders much be u.s. citizens or residents. (directly from professor's notes on the overhead)

• An LLC offers the limited liability of a corporation and the tax status of a partnerships, without the disadvantages of an S corporation.
• - No limit on number of shareholders, the number of classes of stock for example.
• Rising in popularity... about 1million LLC's
• The LLC is extremely useful to entrepreneurs because it has:
• - Limited Liability, Favorable Tax Status, Duration, Management Flexibility
• The biggest disadvantage with LLC is the legal uncertainty involved since it is a fairly new type of business. State laws vary, and case precedents are few.

• An LLC offers the limited liability of a corporation and the tax status of a partnership, without the disadvantages of an S corporation.
• (No limit on number of shareholders, the number of classes of stock, for example.)