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Corporations and Partnerships

 
This LegalCapsule,™  prepared by the Auerbach Law Firm, is a plain-English explanation of corporations and partnerships. In an effort to be brief, many points may be oversimplified. Readers are therefore cautioned to check with our offices or another lawyer as to the particulars of their case; this generalized information should not be construed to be formal legal advice.


Corporations and partnerships are distinctly different forms of ownership of a business and are usually formed in the early stages of the business. These business entities are formed for a variety of reasons such as limiting the legal liability of the individuals, establishing the division of ownership, and establishing the rights and liabilities of the owners.

Corporations

Partnerships

Corporations

A corporation can generally be described as an organization that is created and owned by individuals for the purpose of conducting a business. It is a legal entity that is separate and distinct from its creators and owners. A corpora­tion can own property in its own name, have employees, sue and be sued, and enter into agreements.

To form a corporation, the organizers file "Articles of Incorporation" with the appropriate state office. The Articles, sometimes known as the corporate charter, contain information related to the general structure of that particular corporation. This infor­mation includes the name, address, and purpose of the corporation, the number of shares (ownership interests) authorized to be issued, and the name and address of a resident agent (a person desig­nated to receive official papers and notices for the corporation).

There are distinct types of corporations available under various state laws, including non-profit corporations and professional corporations which serve specialized types of organizations.

The usual type of corporation is a general corporation with indefinite existence. Upon the formation of the corporation, the shareholders may elect to have the losses or profits of the corpo­ration flow through to their own personal taxes. This is referred to as an "S Corporation."

A corporation is owned by its shareholders. Shares of stock represent ownership in the corporation. Stock certificates are issued by the corporation based on the amount paid to the corporation. Shares of stock can be sold by its owner, however, some restrictions in stock transfers can be included in the Articles of Incorporation or By-Laws. Generally, stockholders have the right to inspect the books and records of the corporation.

Shareholders elect a Board of Directors, which is responsible for the corporate operations. The Board of Directors adopts By-Laws, which include details about administering the corporation, such as the method of selecting officers and issuing stock, as well as procedures required for stockholder and Board of Directors meetings. The Board of Directors appoints officers, such as President, Vice-President, Treasurer, and Secretary, who normally make the day-to-day decisions of the corporate business.

There is usually no prohibition against shareholders, directors, or officers being personally employed by the corporation or entering into contracts with the corporation, though restrictions on these mat­ters can be established by the corporation.

In most circumstances, neither the stockholders, directors, officers, nor other individuals are person­ally responsible for the debts and liabilities of the corporation. This limited liability is often the principal reason for forming a corporation to conduct the business. There are circumstances, however, when individuals can be held responsible for corporate debts. The most common situation is one where the corporation is not conducting its business as an entity separate from its owners.

There also may be individual liability under the Internal Revenue Code in situations where certain tax obligations of the corporation are not paid.

Partnerships

A partnership is formed when two or more per­sons enter into an agreement to carry on a busi­ness for profit. The distinct difference between a partnership and a corporation is that unlike share­holders, who are usually not liable for corporate debts, each partner is individually responsible and liable for the debts of the partnership.

An essential characteristic of a partnership is that profits are shared by the partners. Often, the agreement provides that losses are shared, though this is not essential. The duration of the partnership is usually specified in the agreement.

The partnership can adopt any name it chooses. Like a corporation, it is a distinct and separate legal entity and can acquire and own property, as well as conduct business in its own name.

Partners have a duty to act in good faith in all their transactions affecting the partnership and each other. Partners are presumed to have an equal interest in partnership property and the right to control partnership business, but can agree otherwise.

One distinct type of partnership, known as a "limited partnership," is a partnership having "general" partners and "limited" partners. The essential characteristic of this type of organization is that limited partners, unlike general partners, are not personally responsible for the debts of the partnership and do not participate in the control of the partnership business. Typically, limited part­ners are financial investors in the partnership who participate in profits but are not liable for general partnership obligations.


 

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This web site is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer/client relationship. Send mail to webmaster@auerbachlawfirm with questions or comments about this web site. Copyright © 2013, Auerbach Law Firm. All rights reserved.