B Law Exam 3 Mizzou Professor Brand

What are the major forms of business organizations?

Sole proprietorship, General Partnership (GP), Limited partnership (LP), Limited liability partnership (LLP), Corporation (C-corp and S-corp, Joint Venture (JV), and Franchise

Sole Proprietorship definition

unincorporated business owned by one person

True or false:

In a sole proprietorship, the owner has total control.

True

True or false:

In a sole proprietorship, the owner has liability limited to the extent of his or her capital contributions.

False

owner has unlimited personal liability (***the business and the owner are one in the same)

True or false:

In a sole proprietorship, the owner faces double taxation.

False

Profits taxed directly as income to sole proprietor (**business profits flow through taxation to the owner**)

What are the advantages of a sole proprietorship?

1.) Ease of creation (start-up).

2.) Owner has total managerial control.

3.) Owner retains all profits.

What are the disadvantages of a sole proprietorship?

1.) Personal liability for all business debts/obligations.

2.) Funding limited to personal contributions and loans (***hard to get loaned money because it is too risky)

Which business organization is the most common?

sole proprietorship (over 70%)

Why are sole proprietorships the most common form of business ownership?

Ease of creation, complete managerial control, and owner retains all profits, many people have one and do not even know it

General partnership definition

unincorporated business owned and operated by two or more persons who carry on the business for profit (***trying to make a profit)

True or false:

In a general partnership, BOTH partners have equal control of the business and unlimited, personal liability for business debts/obligations

True

-equal control does NOT always mean equal profits

-if one partner burns down a house, the other partner(s) are still liable

True or false:

In a general partnership, the business is a separate legal entity, so profits are not taxed as income to the partners

False

In a general partnership, the business is NOT a separate legal entity, so profits ARE taxed as income to the partners (***profit flow through to the business owners)

What are the advantages of a general partnership?

1.) Ease of creation (start-up); no written partnership agreement or incorporation required.

2.) Partnership income is partner income.

3.) Business losses qualify for individuals' tax deduction.

What are the disadvantages of a general partnership?

1.) Individual joint and several liability for all business debts/obligations, including those created by partners on behalf of partnership

Limited Partnership (LP) definition:

an unincorporated business with at least one general partner and one limited partner. Requires filings with the relevant state to form (incorporate).

General partner in a Limited Partnership (LP) definition:

managerial/operational control over business and unlimited personal liability (***the partner who does all the work and runs day-to-day affairs)

Limited partner in a Limited Partnership (LP) definition:

No managerial/operational control over business (cash cow, investor, gives money and stays out of the way etc.)

liability is limited to extent of his or her capital contributions

Limited Liability Partnership (LLP) definition:

No general partners - all limited partners assume liability for the business and for each other, but only to the extent of the partnership's assets

(***each partner's liability is capped at their capital contribution. They are only responsible for their mistakes and the mistakes of anyone they supervise)

Does a limited liability company require approval from the State (incorporation)?

Yes

Is a limited liability company a separate legal entity?

How do the taxes work?

No.

Each partner pays taxes on his/her share of the business' income

True or false:

In a limited liability partnership, liability for negligence is limited only to personal negligence and negligent supervision

True

In other words, a partner is only liable if they were liable or someone they supervise is liable

C Corporation definition:

state-sanctioned business with legal identity separate and apart from its owners (shareholders) that can sue or be sued on its own

True or false:

In a C-Corp., the owners are the shareholders.

True

True or false:

In a C-Corp., the owners' liability is unlimited personal liability.

False

their liability is limited to the amount of personal investment in the corporation (i.e. the dollar amount owned in sock). usually, owners are not liable, only the corporation is

True or false:

A C-corporation's profits are taxed only at the entity level

False.

they are taxed on profits at the entity (company) level AND as income to owners/shareholders via dividends, distributions, or payouts (double taxation)

True or false:

Board of directors hire officers who run day-to-day business operations

True

Officer ex: CFO, CEO, CMO, etc.

True or false:

Board members are elected.

True

True or false:

There will be an even number of board members elected.

False

There will always be an odd number of board members to break ties (similar to the supreme court)

What are the advantages of C-corporations?

1.) Separation of "ownership" and "control" as defining hallmark of corportion

2.) Limited liability for shareholders and officers

3.) Ease of raising capital by issuing (selling) additional stock (**sometimes companies will buy their own stock, then sell it when they need the cash**)

4.) Generally unlimited transferability of ownership [***any owner can give

(sell) their ownership (stock) to ANYONE (criminals, minors, etc.)***]

What are the disadvantages of C-corporations?

1.)Double taxation

2.) Significant formalities required in establishing and maintaining corporate form [**reports, meetings, lots of hoops to jump through**]

3.) Limited control over transferability of ownership [**no control over who is a part owner of the business**]

Definition of an S-Corporation:

Business organization formed under federal tax law; considered corporation yet taxed like a partnership

True or false:

S-Corporations avoid double taxation.

True

S Corps are taxed like a partnership

What are the requirements for an S Corporation?

1.) Cannot have more than 100 shareholders

2.) Must have only one class of stock

3.) Shareholders must be domestic individuals (no partnerships, corporations, or non-residents)

4.) Shareholders must report income on their personal income tax forms

Limited Liability Company (LLC) definition:

Hybrid business organization with limited liability of a corporation yet taxed like partnership

True or false:

An LLC is not incorporated

False

An LLC is formed under state law by filing articles of incorporation

True or false:

LLC is the most common "sophistocated" business

True

True or false:

In an LLC, a written operating agreement is required

False

It is very common, but it is not required.

**Operating agreement states all rules, members, important information, etc.**

True or false:

With an LLC, there is a limit of 5 owners

False

There is no limit on the number of owners

True or false:

Owners of LLC (members) pay personal income taxes on shares they receive and report

True

True or false:

In an LLC, individual liability is generally limited to members' capital contribution(s)

True

True or false:

There is limited transferability of ownership in an LLC.

False

There is unlimited transferability unless the operating agreement says otherwise

Joint Venture Definition

A relationship between two or more persons or corporations (**usually companies. working together for a common, specific goal/product. NOT merging as one company*) created for a specific business undertaking. Often subject to antitrust scrutiny (**protects competition. ex: coke & pepsi) when competitors agree to collaborate for specific projects or goals.

Franchise definition

-agreement between franchisor and franchisee.

-consitency is key

Hallmark creation definition:

franchise agreement document

Franchisor definition:

-owner of trade name, trademark, recipes, logos, etc.

-gives franchisee roadmap to success

-Ex: McDonald's

Franchisee definition

-operator who, by specific terms of agreement, sells goods/services under trade name/trademark

-limited control

-pays for the license to own

-gets a roadmap to sucess from franchisor

What are the advantages of a franchise from the franchisee's perspective?

1.) Franchisee receives significant assistance from franchisor in starting franchise

2.) Immediate trade name/trademark recognition and strength of brand

3.) Franchisor directs company-wide advertising campaigns

What are the disadvantages of a franchise from the franchisee's perspective?

1.) Franchisee must meet contractual requirements or possibly lose franchise

2.) Little/no creative control over business strategy. Franchisor retains significant control over business operations

3.) Regulations: many states have special franchise laws that differ from state to state and can make widespread growth more difficult.

What are the advantages of a franchise from the franchisor's perspective?

1.) Low risk in starting franchise because franchisees bear significant risk

2.) Increased income from franchises through passive management and oversight

What are the disadvantages of a franchise from the franchisor's perspective?

1.) Little control (except contractually) over individual franchisees

2.) Can become liable for franchisee liability if franchisor exerts too much control

3.) Regulations: many states have special franchise laws that make widespread expansion more cumbersome.

What are the three types of franchises?

1.) Chain-style business operation

2.) Distributorship

3.) Manufacturing arrangement

Chain-style business operation definition:

Franchise operates under franchisor's business name and is required to follow franchisor's standards and methods of business

Distributorship definition:

Franchisor manufactures product and licenses with a dealer to sell in an exclusive geographic territory

Manufacturing arrangement definition:

Franchisor provides franchisee with technical knowledge and license to manufacture franchisor's product

True or false:

Limited Liability Company is the default form of business organization.

False.

Sole Proprietorships are because there are no hoops to jump through, and you could own one without even knowing it

Which form of business organization is for the "unsophisticated business owner"?

Sole proprietorship

Unlimited personal liability definition:

the owner is fully responsible for all damages

What is the default business organization for two or more people?

General partnership

In which state do most U.S. businesses choose to incorporate?

Deleware

True or False:

Limited Liability Partnerships (LLPs) are very uncommon.

False

They are very common, especially for law and accounting firms