Enterprises, entities, and all that

The word “enterprise” means “undertake for a prize or cause.” An enterprise is a group of activities organized as a business for profit, as a not-for-profit association, or as a government agency, and comprises one or more entities. An entity is formed, organized, and operated under Federal and/or state laws, which may permit or deny certain activities. Operators of enterprises have to be aware of those entities that are suitable to their situation.

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Enterprises…

Entrepreneurs transform ideas into products and/or services or causes through activities that may ultimately become enterprises. Under Federal and/or state laws, these activities must be conducted through appropriate legal vehicles. A legal vehicle is the type of entity for a specific situation based upon purpose, location of property (situs), and physical presence (nexus). The choice of legal vehicle and nexus determines the protections that are available for assets and the methods of taxation or exemption from taxes.

Associations, organizations, businesses, and not-for-profits…
An association represents a group of individuals who have voluntarily formed an organization to achieve a certain purpose. An organization is a generic term for an enterprise, entity, or a component thereof.

A business is an occupation, profession, or trade delivering products and/or services for an intended profit. “Not-for-profit” is a general term; “non-profit” entities include those that are exempt from certain taxes under the Internal Revenue Code and state laws. Non-profits are associations that are either unincorporated or incorporated, or trust funds and foundations. Their activities address agricultural, arts and entertainment, educational, health care, labor, religious, social, scientific, sports, or other charitable causes. Government agencies exist at Federal, state, county, and municipal levels.

An organizational unit is a component of an enterprise, such as a division, department, branch, plant, product line, business line, or business unit. Organizational units can exist within or across entities.

Entities…

A legal entity exists either as an individual or a corporation; a business entity has an accounting and tax reporting structure. A legal (juristic) person is either an individual natural person, or an entity as a group of natural persons behaving collectively as if they were a single individual. An entity is domiciled in the jurisdiction where it is organized or incorporated, or lives permanently if a natural person. If an entity has nexus in multiple jurisdictions, then it is subject to both domestic laws and foreign for local transactions, including taxation. All jurisdictions have licensing requirements for certain activities, and may have to grant authority to transact business before operations can begin locally.

For example, an entity incorporated in Arizona is considered to be foreign in California; an entity incorporated in the United Kingdom is considered to be foreign in both Arizona and California.

Sole proprietorship:

  • Simplest business structure
  • Unincorporated business owned by one individual proprietor
  • Proprietor liable for obligations
  • Files schedule C or F on the individual proprietor’s “1040” tax return

Partnership:

  • Formed by an agreement as a general partnership between two or more persons (active partners), or as a limited partnership (one or more passive partners and one or more active general partners) – includes joint ventures and syndicates
  • General partners are liable for obligations
  • Files “1065” tax return; tax liability is passed to individual partners via schedule K-1
  • If a husband and wife operate an unincorporated business, then it is treated a partnership – however, they may be able to elect for treatment as a qualified joint venture if there are no other partners and if they are both active – this election creates two sole proprietorships on an individual joint tax return

For profit corporation:

  • Formed by articles of incorporation
  • Owned by persons who are shareholders, who elect directors, who in turn appoint officers
  • Legal entity separate from its shareholders with its own bylaws
  • Liable for its obligations separate from the shareholders, directors, and officers
  • Files “1120” tax return and is either taxed on income in its own right with dividends taxed on the shareholders’ returns (C corporation), or as a pass-through where the entire income tax liability is passed to shareholders via schedule K-1 (S corporation)
  • As a “professional” corporation, activities may be restricted to licensed professions

Limited liability company:

  • Formed by articles of organization
  • Owned by one or multiple persons under an operating agreement, who are members and in turn may appoint managers if not member managed
  • Liable for its obligations separate from the members and managers
  • If it comprises multiple members, files a tax return and elects to be treated as either a partnership or a corporation; if it comprises a single member only, then it may file a tax return as a corporation, or be disregarded and treated as either a division of a corporation or a sole proprietorship

Limited liability partnership:

  • Formed as either a general limited liability partnership or limited liability limited partnership by two or more persons
  • Activities may be restricted to certain licensed professions
  • Qualifies for limited liability status with the approval of its partners
  • Liable for its obligations separate from the partners
  • Files “1065” tax return; tax liability is passed to individual partners via schedule K-1

Unincorporated association:

  • Formed by a group of individuals by a charter or agreement, whether organized for profit or not
  • May have to file its charter or agreement with a government agency in the local jurisdiction
  • May obtain tax exempt status if organized for not-for-profit activities

Non-profit corporation or limited liability company:

  • Formed by articles of incorporation or organization
  • Organized by persons who are members, who elect directors or trustees, who in turn appoint officers
  • Legal entity separate from its members with its own bylaws or operating agreement
  • Liable for its obligations separate from the members, directors or trustees, and officers
  • Has obtained tax exempt status from Federal and/or state jurisdictions
  • Files “990” tax return if exempt from Federal income tax, which is open to public inspection
  • May be eligible to receive public and private grants

Other types of entities include estates, trusts, employee benefit plans, and debtors in bankruptcy.

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Whether organized for profit or not, management has to be concerned about managing capital, net assets, or funds, and earning income, whether it be revenue sourced from sales, membership fees, or taxes.

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