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52 Cards in this Set
- Front
- Back
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Nature of a sole proprietorship |
One owner, doesn't share decision making Business is not a separate legal entity apart from owner |
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Advantages of a sole proprietorship |
Easy to form and operate (don't require formal filing to begin) Can be sold without obtaining approvals from others Owner has all decision making Owner gets all profits Profits of the business are taxes once (on the personal tax return of the owner) |
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Disadvantages of a sole proprietorship |
Sole proprietor suffers all loss Sole proprietorship cannot obtain capital from partners, shareholders, etc. (limited by funds the owner can borrow) Unlimited personal liability |
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Partnership |
An association of two or more co-owners of a business for profit |
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Partnerships must have (to be a partnership) |
1. Two or more parties (persons/corporations, or partnerships) 2. Must have co-ownership two Key factors: sharing of profits and of management 3. Must be a business operating for profit |
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Partnership agreement: Form of the agreement What happens if you breach the agreement |
Agreement need not be in writing Exception: partnerships impossible to perform in one year require a writing
If a partner breaches the partnership agreement, he is liable to the other partner |
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General partnership: How much liability do partners have? |
Partners have unlimited personal liability:
Jointly and severally liable for all partnership debts and contract obligations Jointly and severally liable for all partnership torts |
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General partnership: Concept of agents |
General partners are agents of the partnership and agents of each other |
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General partnership: What does it mean to be an agent? |
Partners owe the same duties that all agents do
When acting with authority, each can impose liability on partners and the partnership Ex: partner commits tort while acting on partnership business imposes tort liability on himself, the partnership, and fellow partners
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What should a partner do upon termination from the partnership? |
Give actual notice to old customers and published notice to new customers |
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Limited partnership |
Consists of two or more parties formed by filing with a state |
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What makes a limited partnership |
There must be one or more general partners and one or more limited partners A general partner may also be a limited partner in the same partnership |
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In a limited partnership, who must agree to admit a new partner? |
All partners must agree, whether it is admitting a limited partner or a general partner |
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Limited partnership: creditors as partners |
Limited and general partners may be secured or unsecured creditors of the partnership |
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Limited partner rights for limited partnership records |
Limited partners have the right to inspect and copy partnership books and records to specifically include the right to receive copies of any partnership tax returns |
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Liability in a limited partnership for general partners |
Unlimited personal liability |
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Liability in a limited partnership for limited partners |
No liability beyond their capital contribution |
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What are a limited partner's rights to daily management/control of a limited partnership? |
They have no right to daily management or control If they do participate, they are personally liable to any party reasonably believing they were a general partner |
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What may limited partners vote on without incurring liability? |
(1) Dissolution of the limited partnership (2) Fundamental changes in the limited partnership (3) Admission or removal of a general or limited partner (4) Amending the certificate of limited partnership (5) May act as an agent without losing limited liability |
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Upon a partner's death |
His estate is entitled to deceased partner's share of profits and capital, but not to any specific partnership property
Remaining partners have duty to account to the heirs of the deceased for value of interest Heirs not automatically partners |
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Limited partners are allowed to do the following things without risking loss of limited liability |
(a) Acting as an agent or employee of limited partnership (b) Consulting with and advising general partner or limited partnership about partnership business (c) Approving or disapproving amendments to limited partnership agreement (d) Voting on dissolution or winding up of limited partnership (e) Voting on loans of limited partnership (f) Voting on change in nature of business (g) Voting on removal of a general partner (h) Bringing derivative lawsuit on behalf of limited partnership (i) 6 surety for limited partnership |
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Unless otherwise agreed, the following require a unanimous consent of all partners |
1) to admit new general partners or new limited partners 2) to transfer partnership property to others 3) to change a written partnership agreement 4) to admit liability in a law suit or submit a claim to an arbitrator 5) fundamental changes in partnership business to include selling the goodwill |
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Partner's rights to to profits/loss |
Unless there is an agreement otherwise, each partner has a right to share in profits and distribution based on capital contributions
If a division of profits is specified but no losses, losses will follow profits |
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Limited partnership: partner's rights regarding loans |
Each partner has the right to be reimbursed for loans and advances made to the partnership
A partner is entitled to repayment only after all other creditors are paid |
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Limited partnership: partner's rights regarding information |
All partners and limited partners have the right to full information about the partnership at reasonable times |
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Limited partnership: how does ownership of partnership property work? |
Each partner is not a co-owner of partnership property Equal right to use property for partnership purposes, but for no other purpose unless there is consent from other partners Property may not be attached by an individual partner's creditors |
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Limited partnership: rules regarding sharing interest in property |
Partner cannot transfer or assign his individual interest in partnership property to others |
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Limited partnership: rules regarding assigning interest |
Assignment does not dissolve partnership Assignor is still a partner and still liable for partnership debts Assignee does not become a partner without consent of all other partners Assignee only has rights to receive assignor's profits without liability of losses |
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Three steps required for a partnership to formally end |
1. Dissolution - caused by partner ceasing to be associated with the business Terminates actual authority, but does not terminate apparent authority
2. Winding up / Liquidation - settlement of the partners' affairs
3. Termination - the completion of the winding up process |
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What causes a partnership dissolution? |
Changes in general partners (not limited) Any partner withdrawing, even if prohibited by the partnership agreement May occur by operation of law (death, bankruptcy of partner or partnership) |
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Exceptions to what normally causes a partnership dissolution |
Under the revised uniform partnership act - Partners that own majority of partnership may choose to continue general partnership within 90 days of partner’s withdrawal, death or bankruptcy
Must include names of all the general partners |
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New partner's liability to creditors of the old partnership (joining partnership after dissolution) |
Liability is limited to his/her share of partnership property |
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Non-continuing partners' liability to creditors after a dissolution (and continuation) |
Non-continuing partners are credited with profit or charged with loss Liable to creditors (original partnership) even if continuing partners agree to hold them harmless Not personally liable to creditors (new partnership) unless there is a notice problem |
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Oder of distribution upon dissolution of a general partnership |
1. Pay creditors Partnership creditors have first claim on partnership assets Personal creditors have first claim on personal assets 2. Pay loans made by partners to the partnership 3. Pay capital contributions made by the partners 4. Distribute profits to partners |
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Silent partner (in a general partnership) |
One who does not help manage but still has personal, unlimited liability for the debts of the partnership |
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Is a partnership a separate legal entity? |
Yes |
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How many members are required to form an LLC? |
Most states require at least 2 members |
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What are the differences between an LLC and other businesses? |
Liability advantage - LLC owners (called members) have no personal liability beyond their investment in most cases
Participate in management - an LLC member may fully participate in management like partners
An LLC can have the same federal tax advantage of a partnership or S corporation |
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What must an LLC file with the state? (and what must be included?) |
Must file its articles of organization with the state
1. Name must clearly indicated LL of its owners 2. Includes agreement between LLC members governing the operation |
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Operating agreement |
Agreement between LLC members governing the operation
Not filed with the state |
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Two main methods of managing an LLC |
Member managed Manager managed |
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Member managed LLC |
Each member has an equal right to manage unless otherwise agreed Each member has actual and apparent authority to bind the LLC |
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Manager managed LLC |
LLC members elect managers Members have no actual or apparent authority unless also a manager LLC managers have the same limited liability as LLC members |
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LLC members have the following rights |
a. right to profits, losses and distributions is determined by the operating agreement |
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How may an LLC continue after dissolution? |
there must be unanimous consent |
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Is an LLC taxed? |
No |
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S corporation |
No limited on members Not taxed |
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How long can an LLC exist? |
Limited time unlike corporations |
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Can you transfer interest in an LLC? |
Yes, but it is very difficult; not freely transferrable |
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LLP |
Cross between a general and limited partnership |
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An LLP is treated by law as a |
general partnership for almost all purposes - all general partners - not jointly and severally liable for contracts, debts, and torts - taxed as a partnership |
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In an LLP, partners have what liability of other partners? |
Limited liability for negligence, wrongful acts, or misconduct of other partners |
