Holding Court: Business Entities

Holding Court is a series by retired Rye City Court Judge Joe Latwin. Latwin retired from the court in December 2022 after thirteen years of service to the City.

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By Joe Latwin

You have a great idea for a business – maybe the best idea since sliced bread. Betty White was older than sliced bread. What type of business entity will you choose?

The simplest is a sole proprietorship. The sole usually will mean you are the business. You are responsible for all the business debts and liable for all the business’s civil wrongs – like car accidents. You get to keep all the profits. The business’s income gets reported on your income taxes. You will file a Schedule C with your 1040 form picking up that income and deducting business expenses and deductions. If you use an assumed business name (“Joe’s Comedy Shop”), you should file a certificate of doing business under an assumed name with the State and each county in which the business operates. If the name is valuable and unique, you may wish to register it as Trademark or Service mark.

Let’s say you are going into business with your brother-in-law with each of you owning half. This will be a partnership. You will need a partnership agreement setting forth how you agree to operate the business and who will manage what. Each partner is fully responsible for all the debts of the business (“unlimited liability”) and share the profits according to their percentage of ownership. The partnership will have to file a tax return and issue a Schedule K to show how the profits and losses were divided among the partners. Partnerships are not limited to just two partners. Law firms and accounting firms are often partnerships, some having hundreds of partners.

If you are going to sell interests in the business or have a few managers and many owners, the corporation may be the vehicle for you. Corporations are created by the State. You need to file a Certificate of Incorporation with the Secretary of State where you choose to incorporate. A corporation has more formalities required. You need at least an annual meeting of the shareholders, and an annual meeting of the Board of Directors. The shareholders will choose the Board of Directors, and the Board of Directors will choose the officers. The shareholder must buy shares in the corporation. The shareholders’ interest will be a percentage of the shares owned by him or her and the total number of shares issued and outstanding. There is usually a shareholders’ agreement defining the rights and obligations of the shareholders. There may be single shareholder or millions of shareholders – think of GM or AT&T. There may be different classes of stock – Common Stock (with greater rights), Preferred stock (with certain preferences in terms of repayment), restricted stock (that limits if and to whom it can be transferred). Generally, shareholders are not liable for the debts of the corporation or the civil wrongs committed by the corporation. This means that if the corporation goes bankrupt, the shareholder’s losses are limited to the value of their stock. Corporations have the ability to create certain benefit plans for their employees, like pension plans. There are several types of corporations for tax purposes. The most common types are the C Corporation, where the profits and losses are calculated, and taxes paid at the corporate level with dividends, if any, paid to shareholders to be reported as individual income, and the S Corporation, where the profits and losses are “passed thru” to the shareholders and taxed at the individuals’ level, but not at the corporate level.

There are also limited liability partnerships, limited liability corporations, limited partnerships, and business trusts.