erchant Level Salespeople (MLSs) should have some understanding of the different types of business organizations when filling out applications for potential merchant accounts. In my experience, some MLSs consistently submit merchant applications that are inconsistent. For example, I have seen applications where the business/corporate name is listed as ABC, Inc., and the check is in the name ABC or is a personal account of the owner. This usually means that the business is really not a corporation and that the owner just liked the name ABC, Inc.

In another instance I've observed, the business/corporate name is filled out with a name like ABC, Inc., and the sole proprietorship box is checked. Sometimes the reverse is true and the business corporate name is shown as ABC (without 'Inc.' or 'Corp.') and the corporate box is checked to indicate type of ownership. Remember, to get the protection of being a corporation, the corporation must hold itself out as a corporation, which is why corporations add 'Inc.,' 'Corp.,' etc. to their names.

We know that MLSs should make sure any applications they submit are legible and completed in their entirety, and all the required materials are submitted along with the application. It also helps if the application is consistent throughout. Otherwise, underwriters might put those applications aside pending further investigation or have the agent go back to the merchant to request more information. For faster approval, it's best to get it right the first time.

MLSs need a basic understanding of the various categories of ownership in order to properly fill out merchant applications. It's as important as having good handwriting and complete, accurate information. To get a better understanding of the differences, I asked Greg Brown, Vice President of Integrity Bankcard Consultants, Inc. and a licensed attorney, to explain the 'Type of Ownership' boxes found on most merchant applications.

Sole Proprietorship

A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from the owner. Its liabilities are the owner's personal liabilities and he/she undertakes all the risks of the business for all assets owned, whether used in the business or personally owned. Signing the personal guarantee has no meaning in the case of a sole proprietor, but should be completed for all merchant applications.

Corporation

A corporation is a separate legal entity with its own identity separate and apart from its shareholders (owners). A corporation can own property, enter into contracts and conduct business under its own name. As a separate legal entity, a corporation is responsible for its own debts. Generally, an officer (but not necessarily every person that has a title that might indicate that he/she is an officer) can sign and bind the corporation.

It is usually best to get the signature of the president. For larger entities and for added protection, some merchant applications require that a corporate resolution be signed to ensure that the officer signing the merchant application has the authority to bind the corporation. 'Managers' generally do not have the authority to sign for a corporation.

Shareholders, directors and officers are typically not responsible for corporate liabilities. If the corporation suffers losses, the corporation itself must bear those losses to the extent of its own resources, and not the personal assets of the individual shareholders. Because the corporation protects the owner(s) of a business against personal liability, the personal guarantee is usually required of the principal owner(s).

Partnerships

A partnership is a for-profit business association of two or more 'persons.' Because the business component is defined broadly by state laws and because 'persons' can include individuals, groups of individuals, companies and corporations, partnerships are highly adaptable in form and vary in complexity.

Each partner shares directly in the organization's profits and shares control of the business operation. Generally partners are jointly and independently liable for the partnership's debts and one partner signing the merchant agreement will bind the partnership.

A partner relationship usually has a partnership agreement, but can be implied if no formal document exists. Partnership agreements can be drafted to limit, to some extent, these general rules above.

Limited Partnerships, usually designated as 'LP,' differ in that the limited partners cannot sign contracts and are not liable for the debts of the limited partnership. A general partner must sign the merchant agreement.

Limited Liability Companies

Limited liability companies, or 'LLCs,' are becoming more prevalent. An LLC is a separate legal entity (business structure) from the owners of the LLC. Think of an LLC as a hybrid of a corporation and a partnership.

Like a corporation, the owners of an LLC are not personally liable for the debts of the LLC. Like a partnership and sole proprietorship, an LLC has operating flexibility and is a pass-through entity for tax purposes. LLC owners are frequently referred to as 'members.' A personal guarantee should be signed by the member who owns the largest percentage of the LLC.

Not-for-Profit

Not-for-profit or nonprofit organizations must be registered and approved by the IRS and are known as IRS Section 501(c)(3) or IRS Section 501(c)(6) organizations that then receive tax-exempt status. This type of organization is one that is organized and operated primarily for religious, charitable, scientific, educational and other purposes. They have officers and boards of directors like corporations. MLSs should consider them to be like corporations.

PA or PC

A professional corporation, or 'PC,' sometimes referred to as a professional association, ('PA') or service corporation ('SC'), is a type of corporation or 'association' organized for the sole purpose of rendering a specific professional service.

Generally only an individual or group of individuals, each licensed or otherwise legally authorized to render the same type of professional service that are licensed in that state, may form a professional corporation such as in the following professions: certified public accountants; licensed public accountants; architects; attorneys; chiropractors; dentists; pharmacists; optometrists; physicians; surgeons; psychologists; professional engineers; veterinarians; occupational therapists; physical therapists; registered nurses, etc. These should be treated in the same manner as any other corporation.

Corporations including PAs, PCs, LLCs and-usually-limited partnerships and not-for-profit organizations must be registered in the state(s) where they conduct business.

A corporation can be incorporated in one state, and if it conducts business in another state, it must register in that state as well as a 'foreign' corporation. To continue to receive its corporate protection status, the corporation must regularly file paperwork in each state to maintain its 'active' status.

It is recommended that all signers of the merchant agreement sign the personal guarantee no matter what type of ownership the business uses. If a sole proprietor signs the personal guarantee, it may not have any additional legal effect, but may have a psychological effect on the merchant to cover any losses incurred.

If it turns out the merchant is a corporation and has limited liability, the personal guarantee could be important in recovering any losses. It also creates a good reason for MLSs to make sure they get the personal guarantee signed.

David H. Press is Principal and President of Integrity Bankcard Consultants, Inc. Phone him at 630-637-4010, e-mail dhp@integritybankcard.net or visit www.integritybankcard.net.