The three basic forms of business enterprises are the sole proprietorship, the partnership and the corporation.

A sole proprietorship is an unincorporated business with a singe owner, regardless of the number of people he has employed to assist him. A sole proprietor has the advantage of dealing with fewer government regulations, and accordingly, his business is less expensive to maintain. Unfortunately, it is sometimes difficult for a sole proprietor to secure financing for his business, since only his personal resources are the only collateral available.

The second form of business is the partnership. It is an association of two or more people who conduct business for profit and share the ownership.

General Partnerships are most common and can be formed with or without a written agreement. All general partners share in operating the firm, and each partner has unlimited liability for the debts or other obligations incurred by the partnership.

Unlike the General Partnership, a Limited Partnership cannot exist without a formal Certificate of Limited Partnership. This document is signed by each of the partners and is filed with the Secretary of State in Tennessee which has adopted the Uniform Limited Partnership Act. Partnership laws may vary from state to state. A Limited partnership may have one or more limited partners and must have one or more general partners. Limited partners are free of general liability for the debts and obligations of the firm. They risk only their investment if the firm fails to pay its bills or obligations. A general partner's liability, whether he is a partner of a general or limited partnership, is not limited only to his capital investment, but also includes his other assets as well.

A limited partner may, but usually does not take part in the management of the partnership. With certain exceptions, if he does choose to take an active part in managing the business, he may be treated as a general partner and be subjected to unlimited liability for the obligations of the partnership.

Neither form of partnership is subject to income tax. Each of the individual partners reports his own distributive share of the income, gains, loses, deductions and credits on his own income tax return.

Tennessee has recently adopted a Limited Liability Company Act wherein under certain circumstances you may form a company which has many of the attributes of a corporation including limited liability but is treated as a partnership for tax purposes. All partners have the protection against unlimited liability that a shareholder in a corporation might have but are not limited in management as a limited partner might be in a limited partnership. Simply stated, a Limited Liability Company is a company that has many attributes of a corporation but is treated like a general partnership for management and tax purposes.

The fourth form of business enterprise is the corporation. A corporation is a legal entity which is separate from the people who own it - the shareholders. The government, sometimes the federal, but usually the state, creates, regulates, taxes and dissolves corporations. For example, a Tennessee Corporation is formed by filing articles of incorporation with the Tennessee Secretary of State. Shares of stock, which represent the shareholder's financial interest in the corporation, may be issued. The life of a corporation is perpetual, unless otherwise provided by law or in the articles of incorporation.

Bylaws are the specific rules adopted by a corporation and are normally prepared by an attorney. They contain such information as the nature and timing of director and shareholder meetings as well as the election of corporate officers. Unlike the other business enterprises which we have mentioned, a corporation is managed by a board of directors which is elected by the shareholders at an annual meeting.

The prime advantages of a corporation are its long life, greater access of capital, limited liability of shareholders and easy transfer of ownership. On the other hand, corporations are more expensive to establish and operate, shareholders do not participate in the management of their property and there are more government regulations. Corporations are required to pay state franchise taxes and excise taxes, as well as U.S. Income Taxes, and shareholders may also pay taxes on their dividends and capital gains.

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The information available through TBALink LawBytes is basic legal information and is not a substitute for legal advice. LawBytes is provided by the Tennessee Bar Association as a public service and for general information only. It should not be considered legal advice. You should consult your attorney if you have questions concerning any specific situation. If you do not have an attorney, may we suggest that you contact your local bar association's referral service. The topics covered through TBALink LawBytes will provide basic information and should make it easier for someone with a problem to decide whether they need professional help from a lawyer or if another agency could provide them with assistance.