ENTR 315 Quiz 2

types of business forms

sole proprietorships, partnerships (general and limited), corporations (S and C corp), and limited liability companies

businesses that are entities

partnerships, corporations, LLCs

business entity

fictional construct that acts like a “person” but is completely independent of the individual humans that own it; it’s own separate legal entity

corporate personhood

legal principle that treats a corporation or separate business entity as an individual entity distinct from its owners, directors, or shareholders, and can sue/be sued

how to form corporations/LLCS/limited partnerships

owners must file a document with the state —> gets filed with the Secretary of State of the state the business if formed —> if accepted state issues document establishing existence of the entity

why you want to be an entity / which type of entity is determined by:

desire/lack of from personal liability of business debts, how the business wants to manage its profits, how they want to be taxed, whether business formalities are wanted, whether financing is needed, and who the owners are

personal liability

whether owners are going to be personally liable for the businesses debts (personal pay vs bankrupt company pays)

veil of protection

LLCs & corporations fully protected from personal liability for company’s debts, only thing that can be taken from owners is their investment in the business

pass through taxation

the business itself is not taxed on rpofits it makes

double taxation

the business itself gets taxed on profits and then the owners also get taxed if any profits are distributed to them

business formalities

holding regular meetings, keeping meeting minutes, keeping financial records, maintaining separate financial accounts, following the rules (bylaws)

S corp restrictions

on the number and nationality of the owners

sole proprietorship

one person operating business by themselves, they have no separate legal identity from the owner

sole proprietorship examples

kid mowing your lawn, person with roadside veggie stand, IT consultant running business out their home

DBA / Doing Business As form

filed by sole proprietors that own a business they titled themselves, it technically mean X, an individual, doing business as XYZ

sole proprietor tax treatment

report business income on their personal tax return; separate filing not needed, have to pay 15.3% self-employment tax

pros of being a sole proprietor

provides flexibility (without the wishes/wants of others), easy to organize and maintain (no corporate filings/renewals, meetings, formalities)

cons of being a sole proprietor

liability (100% personally liable as an individual for any/all leases, debts, personal injury claims) harder to get insurance to cover your claims, you either owe personal debt or go into bankruptcy if you can’t pay

investors/financing being a sole proprietor

might be able to get a loan but impossible to obtain financing through investors; if there’s other owners you’re not sole proprietor anymore

partnerships (umbrella term)

business carried on by ≥ 2 people for profit, a partner can be a human being or another business/corporation, must agree on how profits and losses are split (default is 50/50)

general partnerships management

all partners with equal rights, each partner gets 1 vote & majority rules ordinary/everyday decisions, major decisions need unanimous consent (sale of P’ship assets, changing business nature, adding new partner, changing agreement terms)

interest in a partnership

partners can agree to allocate profits and losses in whatever way they want; with absent agreement profits and losses are split equally no matter the $$$ put into the business

fiduciary duties of general partners

each partner is a fiduciary (owe the highest level of care/loyalty to their partners/partnership)

authority of partners in a general partnership

each partner is an “agent” - they can bind the P’ship and other partners to contracts and other obligations even without checking in to their partners

required documents of a general partnership

most states do not require filing, partnership agreement not required but highly advised, without one its governed by the Uniform Partnership Act

tax treatment

benefits of general partnerships

indemnity clause

good to have with partnerships, aka reimbursement to partners of amount they had to pay for your mistakes

cons of general partnerships

unlimited personal liability beyond partnership assets