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Question 1

when choosing a business entity, entrepreneurs should consider (among other things,5):

Answer 1

-ease of creation/maintenance ( some are harder to create in the 1st place,once created it may be complicated to maintain)

-Owner’s liability (what would liability be as an owner) ; limited liability or personal liability

-Tax considerations (will company be taxed as partnership or corporation)

-management flexibility (how are they made, how are owners acting, each entity has dif managements)

-ability to raise capital(some entities are limited to raise capital,equity or some are flexible on how u raise capital)

(entities have its strengths and weaknesses, owner needs to see the operations done

Question 2

In regards to Owners Liability, what’s Limited Liability VS Personal Liability

Answer 2

(as the owner, you should be thinking about who’s assets creditors will come after )

Limited Liability:
- creditors can’t come for owners assets, you can still lose investments, your other assets not invested in firm is protected.If structured correctly, several of your entities will provide limited liability

Personal Liability:
-creditors try to cease your house, take cars, wages, can come after owners assets

Question 3

In regards to Tax Considerations, what’s Partnership Taxation VS Corporate Taxation

Answer 3

Partnership Taxation:
-owners pay thru their taxes

Corporate Taxation:
-if entities are taxed , they pay income tax
-DOUBLE TAXATION; once at company level, one at shareholder

Examples:
1. you have company taxed as partnership, profit $100, how much is income tax? (answer: 0, the $100 will be passed to owner. The owner has to pay 30%- so $30 dollars in tax. There’s no Double Taxation in Partnership. Leftover profit would be $70)

2.corporate taxation occurring. it’s tax rate is 20%.same $100 of profit. (work for answer: $20 will be paid by corporation in income tax, (100-20= $80 leftover. 15% of the $80 is used for when dividends get paid by shareholders ($12 of dividends. 80-12= $68).

when comparing example 1 and 2. example 1 has more leftover. $70 VS $68

Question 4

Why is Partnership preferred over Corporate taxation

Answer 4

Generally speaking, partnership is preferred but allocation & distribution will be taken into account which can change for owners due to those responsibilities

Question 5

When is “distribution” used instead of dividend”

Answer 5

In corporate invest to shareholder= dividend

entity pays out to owner= distribution

Question 6

in contrast what might you have to look out for for partnership taxation as an owner (payment time difference)

Answer 6

If your an owner of partnership entity,have to pay income tax on the $100 profit.May have to pay for money not that has been received (owners need to be careful as they need to pay for money they’re allocated for

VS

Corporate taxation; shareholders are taxed on dividends until they’re paid

Question 7

What are Sole proprietorships

Answer 7

-for sole proprietorships The Owner is The Business

ex: etsy shops are usually sole proprietorships

Question 8

Advantages of the Sole Proprietorship

Answer 8

-owner receives all profits
-easier & less costly to start
-more flexibility

(no other company,still have to get get ur license,business won’t be separate from u, easiest to get going)

Question 9

Disadvantages of the Sole Proprietorship

Answer 9

-Owner is responsible for all losses ( u can get loans but it will be a personal loan)
-Lacks continuity after death
-Difficult to raise capital
(complete personal liability )

( u cant have a sole proprietorship with another person )

Question 10

What are Partnerships (general partnership) and when do they exist

Answer 10

2nd option, if not a sole proprietorship
- Two or more persons agree to carry on a business for profit (can have 3,5,or 100,not limited to 2)

When do Partnership Exist?
-A sharing of profits & losses
-A joint ownership of the business
-An equal right to be involved in the management of the business

(u can accidentally create a partnership. ex; u and friend make & sell sandwiches for classmates)

Question 11

Entity Versus Aggregate Theory

Answer 11

-Today, most states recognize the partnership as a separate legal entity from its owners (company is distinct to its owners, think of company as a person.ex; there’s Martin,Debbie, and MD company )

-The partnership is a pass-through entity, and the owners pay taxes on income (company doesn’t pay income tax, owners do)

Question 12

How do u create/form a Partnership?;whats partnership by estoppel

Answer 12

-Can be Written, oral, or implied unless a writing is required by the Statute of Frauds (if it follows fraud, partnership also has to be in writing)

-Partnership Agreement: Sets forth right and obligation of the parties( recommended to do it in writing)

-Partnership by estoppel: When persons who aren’t partners hold themselves out to be so, the court may decide to impose liability as if partnership did exist (if it happens on accident,court might treat u as a partnership)

Question 13

Rights of Partners (default rules you can change in Partnership Agreement);money,inspection,compensation,

Answer 13

-Management: all partners have equal rights;each partner has 1 vote (unless contracted differently, can differ but default is it’s managed equal)

-Interest in partnership: profits are shared equally as default( losses where follow profits); unless contracted differently

-Compensation: usually none (owners not entitled for compensation) (if they don’t make money,they’re not entitled for money)

-Inspection of books:accessible to all (reports are sent to all owners)

-Accounting of assets is required

-Property is owned by the partnership (owners cant treat company property as their own) (ex: partnership has a truck to make deliveries, a partner can’t use that truck for personal reasons) property

Question 14

examples on how Partner Profit and Losses splits differ

Answer 14

examples with $100 profit given:
default rule ex- u have partner with no agreement. each partner will get $50 profit or each partner loses $50

another ex- there’s a 60/40 partner split. profits are split based on contribution, one gets $60 other gets $40

another ex (TRICKY)- they state 60/40 profit split. Even if it’s not stated losses will also be 60/40

another ex(TRICKY)- they state 60/40 loss split. 60/40 will be for losses, however there will be 50/50 profit split

Question 15

Duties & Liabilities for Partners;what duties do partners have,who is liable if someone wants to sue?

Answer 15

• Fiduciary duties: owes the other partners the duty of care & loyalty

-Binds the partnership to contracts & imports

-Joint & several liability: a 3rd party can sue the partners individually or the partnership
( 3rd party can recover liability of all of them, ex: ur friend doesn’t put sandwich on fridge so causes food poisoning. they can sue u , partner, and partnership even if it wasn’t ur fault. ppl suing can recover entire amount to any, if they have no money they will charge u for the liability)

( this is why 100 partners can be an issue, if any of them fuck up it will go to u. u should trust who u partner with and make sure they have money so u don’t have to cover for them)

Question 16

Partners Dissociation ( what if 1 partner wants out); what are events that can cause dissociation?(4)

Answer 16

-severs the relationship between the partner & the business

Events causing dissociation:
-Voluntary withdrawal (1 partner wants to leave)
-partnership agreement terms( listed reasons on why u would get kicked out prior. ex: agreement says if u get convicted of crime or divorced ur kicked out)
-unanimous vote of the other partners (if all partners vote u out)
-court order
-Bankruptcy, assignment of interest, or death( generally the partnership interest u can share profit or vote, ppl may receive ur profit right but not voting, otherwise that part would be lost)

Question 17

Upon dissociation (what happens if partner dissociates?);management,what happens to said partners stuff,”apparently authority “

Answer 17

-Management of the business ceases

-requires the other partners to purchase the interest in the business (may or may not happen immediately)

-for 2 years, the partnership may be bound by the acts of the dissociated partner based on “apparent authority” (once a partner dissociates and doesn’t alert other ppl, they can still be part of it for another 2 yrs) ex: other 2 partners don’t say debbie is out, debbie can still act like a partner,cuz of agency they can be held accountable for debbie’s actions

Question 18

Partnership Termination (altogether partners wants out) ; in what situations does it occur? how does winding up look like?

Answer 18

-dissolution: disbanding the partnership
occurs in the following situations:
-acts of the partners
-the subsequent illegality of the firms business (forced to dissolve)
-the expiration of a time period states in a partnership agreement( time limit)
-judicial decree ( court says for partnership dissolve)

-Winding up: ending business after the dissolution ( process to wrap it up,finish contracts, sell assets, pay creditors, leftover gets split among owners)
* u cant just dissolve a partnership

Question 19

Limited Liability Partnerships (LLP); what is it, formation, who most likely uses LLP, liability

Answer 19

(LLP in many ways is a general partnership, it’s the 1st entity that has to be written)

-A hybrid form of business: Like a partnership, an LLP is a pass-through entity for tax purposes. Usually used in professional firms, like accounting or law( rare to see out outside professional firms)

Formation: must be formed & operated in compliance with state statutes (official with state)

Liability: The personal liability of the partners is somewhat limited. Allows pattens to avoid personal liability for the wrongful acts of other partners, but still personally liable for their own wrongful acts

Question 20

Limited Partnerships (LP); what is it, formation ,certificate

Answer 20

(it’s the next liability type,not the same thing as LLP, 2 dif on how entity is formed)

-Limited Liability of some of its owners(but not all)(at least 1 of the partners has general liability, other limited)
general partner: responsible for managing the partnership & liable for any debts
limited partner: contributes capital ($) but can’t participate in the management, assumes no liability for debts since they don’t participate in management
(ex: pirate teacher said that the student in LB is general cuz broke but knowledgeable while Chapman student is limited cuz they rich but dumb. they contribute by providing money , both share its profits. students combine their skills for it, one does more than work, other money. same profit)

-Formation of the Limited Partnership: requires a certificate of limited partnership( doc has 1 or 2 pages)

Question 21

How does liabilities work of partners in a limited partnership ( gen vs limited)

Answer 21

-General partners are personally liable to the partnerships creditors

-Limited partners enjoy limited liability as long as they don’t participate in management( limited can’t participate in management unless they want personal liability)

Question 22

Dissociation & Dissolution of Limited Partnerships ;what happens if gen partner dissociates,when can’t they dissociate ,usually what happens if gen partner leave,what happens to limited partners?

Answer 22

• A general partner can dissociate unless the agreement states otherwise
  —normally this will dissolve the partnership unless other partners agree to continue
  (If gen partner leaves, usually means company is done but a near general partner can take the spot)

-On dissolution, the limited partner is entitled to return of capital contributions after debts are paid( debt-entitled to be paid, equity- might not get money back) (they aren’t entitled unless there’s leftover money)

Question 23

What are Limited Liability Companies( LLC)

Answer 23

(might be a strong contender compared to the rest, owners of liability are called “members”

• A hybrid form that offers the limited liability of the corporation but the tax advantages of a partnership (major benefit is all owners have limited liability but taxed as partnership)

Question 24

How does a Formation of an LLC look like;what must be filed, entity type?,publid or private ,when is it taxed

Answer 24

-Articles of organization must be filed with the state agency ( 1 or 2 pages)

-An LLC is a legal entity separate from its owners (it’s separate person)

(LLC doesn’t go public, most of amazons operating companies are LLCs)
*don’t create a LLC for nothing as u have to spend money to make it, also annually taxed)

Question 25

Advantages of the LLC

Answer 25

-Limited liability - “members” aren’t personally liable
-taxation: can choose to be taxed as a partnership or corporation
-Foreign investors can participate (an advantage compared to S corporation)

Question 26

Disadvantages of the LLC(2)

Answer 26

-The main disadvantage is (was?) the lack of uniformity with state laws(there are dif state by state)

-Relatively harder to form than some entity types (gen pattern & sole proprietorship) & relatively less easy to raise capital than other entity types (like corporation) (if u want entity to be public u won’t want LLC)

Question 27

What’s the LLC Operating Agreement (or governed); what laws/rules are considered (what if not clearly stated)

Answer 27

-The same as corporations bylaws( or partnerships partner agreement)

-Partnership law may apply: if the operating agreement is silent, courts will apply partnership principles or rules ( all those default partnership rules will apply to LLC)

Question 28

How does Management of an LLC look like/work,what duties do they have

Answer 28

-Companies can either have it member or manager-managed to make decisions (run by the owners-vote on decisions, etc vs manager can be a member but don’t have to )

members-owners would vote as groups
manager- designate one or small group of ppl for decisions
(manager managed can be substitute as a limited partner VS can pick either depending on situation. Most entrepreneurs are manager managed)

-Managers and members owe fiduciary duties to the LLC & eachother

Question 29

Dissociation and Dissolution of an LLC;what happens to dissociating member?what happens to their interests?can they affect the LLC?can it get to 1 member?

Answer 29

• Dissociating member loses the right to participate in the management and to act as an agent

-Member who dissociates also has the right to have her interest bought out by other members

-A dissociated member has no right to force the LLC to dissolve

-Remaining members can choose whether or not to continue or dissolve (you can have a single member LLC,u can have a single partner partnership)

(only cuz u get to 1 member doesn’t mean it has to dissolve)

Question 30

What are Franchises ;what type of arrangement is it?

Answer 30

( Franchise ISNT a entity type, it’s a contractual arrangement between two separate entities)

-The owner of a trademark, trade name, or copyright licenses the franchisee to use it intellectual property of selling of goods or services

-Franchisee is an independent business owner but receives the benefit of being associated with a well-known name

-Franchise is NOT a type of entity

Question 31

3 types of Franchises

Answer 31

(1) Distributorship: A manufacturer licenses a dealer to sell its product
(ex:car dealerships aren’t owned by actual ford product, Galpin Ford is separate from Ford)

(2)Chain style business operation: The franchisee follows certain standard of operation( to be called that name brand)
(ex:starbucks, subway, taco bell, hotels)

(3)Manufacturing or processing-plant arrangement: the franchisee tells the franchisee how to make a particular product ( don’t rlly run into this)

Question 32

Laws Governing Franchises;type of law , what regulates franchisor from going to far

Answer 32

-Primarily governed by contract law (however regulated by FTC(fed trade commission)

-FTC requires franchisors to disclose material facts informed decision concerning the purchase of a franchise
—costs of operation, recurring expenses,profits earned, etc

Question 33

The Franchise Contract (What they have to disclose or require)(4)

Answer 33

• Franchisee’s type of business entity including capital structure, sales quotas & record keeping (where are they borrowing money,outside accountant, contributing?, etc)

(FTC regulates as it’s expensive to apply for franchise)

-Payment terms ( are u sharing portion of revenue, is there a upfront payment ?)

-Business premises ( leased or purchased (land)

-Location( are they allowed to operate near you? how close) ( Franchisor can make money from application fees,that’s why FTC gets involved)

-Quality control by franchisor

Question 34

Termination of the Franchise

Answer 34

-Agreements usually specify when franchises can be terminated for cause

-If the franchisor unfairly terminates a franchise, the franchises will be provided with a remedy for wrongful termination ( can sue for wrongful termination) ( termination for reason can be an issue )

(Franchisor used to be bad with this; if u have no brand to your hotel,it can be devastating for franchise as ppl don’t rlly go to off brand places)