EXAM 3- CH 17 Business Organization

Franchises are not included in the EXAM. Three cases to review

Sole Prioprietoship

Simplest form of business, in which the owner is the business. The owner reports business income as personal income tax return and is legally responsible for all debts and obligations incurred by the business.

ADV- Receive all profits, less costly, run entire business, flexible, and is easy to create.

DADV- total personal L$, lasts only as long as the owner is alive.

Taxes- pays only personal income taxes (including self-employment)

Partnerships

An agreement, express or implied (or by estoppel), between two or more persons to carry on a business for profit. Both people have control over the operations and the rights to share its profits.

• Taxed ONCE

  • File informational return (tax return) with IRS

• Generally governed by common law concepts and statutory laws.

• is made with a voluntary contract who agree to contribute financial capital, labor, and skills to a business with the understanding that profits and losses will be shared.

• In most instances, can sue or be sued, collect judgments, and have all accounting procedures performed in the name of the entity.

• Rights- written agreement, otherwise follow the UPA. (See general partnership)

• Duties & L$- derived from agency law. Each partner is an agent of every other partner and acts as both a principal and agent in any business transaction within scope of the agreement. Fiduciary Duties- Loyalty

Uniform Partnership Act

governs partnerships in the absence of express agreement. Drafted by the National Conference of Commissioners on Uniform State Laws. A majority of states have adopted this act.

Three essential elements for the ___ Act to define a partnership:

1. A sharing of profits and losses

2. A joint ownership of the business

3. An equal right to be involved in the management of the business.

General Partnership

In a limited partnership, a partner who assumes responsibility for the management of the partnership and L$ for all partnership debts.

Pass-through entity

A business entity that has no tax L$. The entity’s income is passed through to the owners, and the owners pay taxes on the income. Thus, income/losses partnerships are “passed through” and attributed to the partners individual tax returns.

Articles of Partnership

A written agreement that sets forth each partner’s rights and obligations with respect to the partnership.

• includes any terms the parties wish (unless illegal or contrary to public policy/statute)

• specifies names, location, duration, purpose, profit splitting, management, asset distribution/dissolutions etc.

Joint Liability

In partnership law, the partners’ shared liability for partnership obligations and debts. A 3rd party must sue all of the partners as a group, but each partner can be help liable for the full amount.

Joint and Several Liability

A doctrine under which a plaintiff can file a lawsuit against all of the partners (jointly) or one or more of the partners separately (severally)

Dissociaion

The severance of the relationship b/t a partner and a partnership when the partner ceases to be associated with the carrying on of the partnership business.

• Also called Dissolution

Winding Up

The second of two stages in the termination of a partnership or corporation, in which the firm’s A$ are collected, liquidated, and distributed, and L$ are discharged.

Limited Liability Partnership (LLP)

A hybrid form of a business organization that is used mainly by professionals who normally do business in a partnership.

• Taxed ONCE

• Adv- allows partnership to continue as pass-through entity for tax purposes, but limits the personal L$ of the partners.

• Liable for own acts but generally not liable for malpractice of partners.

• Requires filing a form w/ the state and the use of “LLP” in the name.

Limited Partnerships

A type of partnership consisting of one or more general partners (who manage the business and are liable to the full extent of their personal A$ for debts of the partnership) and one or more limited partners (who contribute assets and are liable only up to the extent of their contributions)

• Revised Uniform Limited Partnership Act (RULPA)

• Requirements":

  • At least 1 GENERAL PARTNER (subject to total personal L$)

  • And at least 1 LIMITED PARTNER

• Must file certificate of LP AND

• LP is not allowed to participate in management.

• The GP can voluntarily dissociate from an _____ unless partnership agreement says otherwise.

Limited Partner

In an LP, a partner who contributes capital to the partnership but has no right to participate in the management and operation of the business. The ___________ assumes no liability for partnership debts beyond the capital contributed.

Limited Liability Companies (LLC)

A hybrid form of business enterprise that offers the limited Liability of the corporation and the tax advantages of a partnership.

• can choose to be taxed as corp. +Limited L$ or as a partnership

• Formation- “___” required in name & articles of organization must be filed.

• Jurisdiction- considered a “citizen”; Fed. Diversity of Citizenship cases.

• Management- Can be MEMBER managed (All members of a ___ participate in management) or MANAGER managed (Management group can consist of both members and non members or of just nonmembers)

• ADV- Limited Liability- members not generally Liable.

• DADV- State ____s are not uniform

Member

A person who has an ownership interest in a LLC

Articles of Organization

A document filed with a designated state official to form a LLC.

• must be filed with a central state agency- usually secretary of state’s office.

Operating Agreement

In a LLC, an agreement in which the members set forth the details of how the business will be managed and operated