Forms of Business Enterprises

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 single 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.

General partnerships are not 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. However, in Tennessee, Limited Partnerships, Limited Liability Companies and Limited Liability Partnerships are not subject to Tennessee’s excise tax and franchise tax.

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 or members 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 third 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.

For information about forming a corporation in Tennessee, refer to "How do I Form a Corporation?"

How Do I Form a Corporation?

Are you thinking about forming a corporation in Tennessee?

There are many questions to be answered before you make a decision to form a corporation. Some of these questions are: What are the tax consequences of incorporation? Are you willing to follow the legal requirements which are imposed upon corporations, such as electing officers and directors, drafting and adopting bylaws, issuing stock, setting annual meeting dates, preparing minutes, and other items of importance? Would your needs be better met by a sole proprietorship, a general partnership or a limited partnership, by a joint venture, by an association, or by a non-profit organization, instead of by a corporation? It is best to consult your accountant and legal advisor before you decide whether or not to form a corporation.

If you do decide to form a corporation, it is important that the name of your new corporation is not too similar to the name of an existing corporation. To prevent your application from being rejected due to a name conflict, you may call the Secretary of State's "name-availability" section in Nashville, at 615-741-0537, and informally clear the name you plan to use. You may then formally reserve for a 4-month period the name you want to use, in writing, for a $20.00 fee.

A corporation is legally born when you file a document called the "charter" with the office of the Secretary of State.

You may obtain a sample charter by writing to or calling 615-741-2286, the Secretary of State, Corporation Division, 18th Floor, James K. Polk Building, Nashville, Tennessee 37219.

When you file the charter, you provide several items of information, including: (1) the name and street address of your corporation; (2) the name of the person or persons who are forming the corporation; (3) the total number of shares of stock which your corporation is authorized to issue; (4) the name and street address of the person in Tennessee on whom legal papers will be served if the corporation ever gets sued (the registered agent and registered office of the corporation); and (5) a statement that the corporation is for profit.

The fee for filing these papers is $100. The completed charter may be mailed to the Secretary of State, Corporation Division, 18th Floor, James K. Polk Building, Nashville, Tennessee 37219. After the Secretary of State returns the charter to you, it must be filed in the county where the principal office of the corporation is located, and a fee of $5 must be paid to the County Register to have this done.

You should consult an attorney to be sure that when your corporation issues stock, The Tennessee Securities Law is complied with.

What is a Patent, Trademark, and Copyright?

WHAT IS A PATENT?

A patent is a grant from a government to an inventor giving him the right to exclude other people from making, using or selling his invention for a certain number of years. After the patent expires, anyone may produce the invention. The patent is a reward to the inventor in return for disclosing his invention to the public and thereby advancing the art.

The United States Government issues three kinds of patents. First, and most common, are utility patents which protect inventions of new, useful and unobvious processes, machines, articles of manufacture, or compositions of matter. Utility patents last for 17 years [if the patent is maintained by payment of appropriate fees periodically]. Second are design patents which protect new and unobvious ornamental appearances of manufactured articles. Design patents last for 14 years. Third are plant patents which protect new varieties of plants such as shrubs, trees and flowers.

If you have made an invention for which you think patent protection may be worthwhile, you may establish the date of your invention by promptly preparing a detailed description of the invention, then signing and dating the description.

Also, explain your invention to one or more trustworthy persons who are capable of understanding the invention and have them read, sign and date the description.

You may apply for a patent by filing a patent application in the United States Patent and Trademark Office. You may prepare and file the application yourself; however, since the value of a patent often depends upon the skill with which the application is prepared, it is usually in your best interest to consult a patent attorney who is skilled in these matters. Ordinarily, the attorney will first recommend a novelty search to determine whether or not the invention appears to be patentable. If a patent application is to be filed in the United States, it must be filed within one year from the time the invention was first offered for sale, used publicly, or described in a printed publication.

In certain other countries, a patent application must be filed before any public disclosure or sale takes place anywhere in the world. The filing of a patent application in the United States Patent & Trademark Office before any public disclosure or sale will preserve the right to file in those countries. It is best to file a patent application as soon as possible since procedures in the United States Patent & Trademark Office favor the first to file when two or more people file applications claiming the same invention. Only after a patent application is filed in the United States Patent & Trademark Office can a product incorporating the invention be marked with the words such as "Patent Pending".

Further information about patents is contained in a booklet entitled "General Information Concerning Patents", which may be obtained upon request from the U. S. Patent & Trademark Office, Washington, D. C. 20231.

WHAT IS A TRADEMARK?

A trademark is a name, symbol or emblem which identifies goods as coming from a particular manufacturer or distributor. The owner of a trademark may prohibit others from using his trademark or other trademarks which may be confusingly similar. Trademarks protect the purchaser from being [confused, mistaken or] deceived as to the source of goods which he buys; further, they protect the good will and reputation of the owner of the trademark.

Service marks are similar to trademarks except that they are used to designate the origin of services rather than of products. Rights in a trademark or service mark are obtained by using the marks on goods or in connection with services that are sold. After the goods or services bearing a mark have been shipped or sold in interstate or foreign commerce, application may be made to register the mark in the United States Patent & Trademark Office. After the mark is actually registered, the owner of the mark may place the familiar abbreviated "Reg. U.S. Pat. Off." or a capital R enclosed in a circle near his trademark to indicate that the mark is registered. Since the choice and protection of trademarks involves meeting various legal requirements, an attorney familiar with trademark and service mark law should be consulted before a mark is adopted. Most patent attorneys are qualified practicioners in this field of law.

Further information concerning trademarks is given in a pamphlet entitled "General Information Concerning Trademarks", which again may be obtained from the U.S. Patent & Trademark Office, Washington, D.C. 20231.

WHAT IS A COPYRIGHT?

A copyright is the right of an artist, author or composer to exclude others from reproducing certain of his original works, such as literature, music, drama, pictures, sculpture, motion pictures and sound recordings. A copyright on a published work is obtained by merely placing a notice of the copyright on the first and every subsequent copy of the work. Unpublished works need not have a notice thereon. The work should then be registered with the United States Library of Congress by making an application for registration to the Register of Copyrights.

The application may need to be accompanied by a specified number of copies of the work together with a small fee. Most patent attorneys are familiar with the forms and procedures required for placing a copyright notice on a work and for registering a copyright. Further information concerning copyrights may be obtained upon request from the Register of Copyrights, Library of Congress, Washington, D. C. 20540.