Business Law Questions

What is business law?

Business law encompasses the many rules, statutes, codes, and regulations that are established which govern commercial relationships and provide a legal framework within which businesses may be conducted and managed. Business law is highly diverse and includes areas such as:

  • Business formation and organization
  • Transactional business law (contracts)
  • Business planning
  • Business negotiations
  • Mergers and acquisition
  • Divestitures

What factors should be considered in choosing the type of business form for my business?

Although there are many important things to think about when choosing a business form, some of the main considerations include your preference of tax treatment, how you intend to capitalize the business, whether you plan to issue stock and trade it publicly, how you intend to structure the management of your business and issues surrounding the liability of the business owners, among other things. It is very important to plan your business and to work closely with someone who can help you choose the business form that will meet your needs.

What is the difference between a subchapter C and S corporation?

The Internal Revenue Code allows for two different levels of corporate tax treatment. Subchapters C and S of the code define the rules for applying corporate taxes.

Subchapter C corporations include most large, publicly-held businesses. These corporations face double taxation on their profits if they pay dividends: C corporations file their own tax returns and pay taxes on profits before paying dividends to shareholders, which are subsequently taxed on the shareholders’ individual returns.

Subchapter S corporations meet certain requirements that allow the business to insulate shareholders from corporate debts but avoid the double taxation imposed by subchapter C. In order to qualify for subchapter S treatment, corporations must meet the following criteria:

  • Must be domestic
  • Must not be affiliated with a larger corporate group
  • Must have no more than one hundred shareholders
  • Must have only one class of stock
  • Must not have any corporate or partnership shareholders
  • Must not have any nonresident alien shareholders.

 
Additionally, after a business is incorporated, all shareholders must agree to subchapter S treatment prior to electing that option with the Internal Revenue Service.

What is the difference between a joint venture and a partnership?

Joint ventures and partnerships share certain characteristics. A joint venture is a sort of partnership where two or more entities join together for a particular “short term” purpose. In both partnerships and joint ventures, each partner has equal ability to legally bind the entire entity. A partner can represent the entire organization in the normal course of business and his or her legal actions on behalf of the joint venture or partnership create legal obligations.

What is a non-profit corporation?

A non-profit corporation is a corporation formed to carry out a charitable, educational, religious, literary, or scientific purpose. A nonprofit corporation does not pay federal or state income taxes on profits it makes from activities in which it engages to carry out its objectives. This is because the IRS and state tax agencies believe that the benefits the public derives from these organizations’ activities entitle them to a special tax-exempt status.

The most common federal tax exemption for nonprofits comes from Section 501(c)(3) of the Internal Revenue Code, which is why nonprofits are sometimes called 501(c)(3) corporations.

How can a properly established business entity such as a corporation shield me from personal liability for business debts and obligations?

Personal liability arising from business obligations can devastate the accumulated wealth of a lifetime of work. Personal liability may extend to business losses, but other obligations may also reach individuals, including:

  • Damage awards in lawsuits
  • Tax penalties
  • Back wages and benefit payments

Limited liability offered by corporations and other business entities shelters business owners from personal liability. Nonetheless, if an owner or director performs certain personal acts, behaves illegally, or fails to uphold statutory requirements for corporate status, he or she may face personal liability despite the corporate shelter.

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