Business Organizations (Chapters 16-18)

Traditional types of business organizations

Sole proprietorship, General partnership, Limited partnership, Corporation.

Newer types of business organizations

Limited Liability Partnership (LLP) and Limited Liability Company (LLC).

Owner's personal liability for business debt

It depends on the type of organization. Some allow liability solely by ownership (e.g., sole proprietorship).

Judgment-proof business

Even if a plaintiff wins in court, the business might have no assets to collect from.

Difference between equity and debt in business funding

Equity is an investment for ownership and profit sharing; debt is a loan to be repaid regardless of profit.

Key traits of a sole proprietorship

Easy to form and dissolve, full control by one owner, unlimited personal liability, taxed via Schedule C.

General partner's liability in a general partnership

Unlimited liability—even for actions they didn't know about.

Difference between general and limited partners

General partners manage and have unlimited liability; limited partners are passive investors with no liability.

Who uses LLPs and their liability protection

Professionals (e.g., lawyers, accountants); no liability solely for being a partner, but personal liability for negligence.

Protection for shareholders from personal liability in corporations

The corporate veil—as long as corporate formalities are followed.

Disadvantages of corporations

Double taxation and strict formalities.

Two main governing documents of a corporation

Articles of Incorporation (filed with state) and By-Laws (internal rules).

Key advantages of an LLC Limited Liability Company

Pass-through taxation, limited liability like corporations, fewer formalities.

Alter ego liability

When a shareholder can be personally liable if there's no real separation between the person and the corporation.

Example of conduct leading to alter ego liability

Commingling personal and corporate funds, failing to follow corporate formalities.