8.4 & 8.5 - Business Structures Flashcards
Under this type of entity, one person owns the business and manages all of its affairs. It is not considered an entity separate from the business. There is also no formality required to form this entity.
Sole proprietorship
Under this entity, the owner is personally liable for all obligations of the business. The entity cannot exist beyond the life of the entity. For tax purposes profits and losses from the business flow through the business to the owner. The owner is free to transfer their interest at will.
Sole proprietorship
This entity is formed whenever two or more people intend to carry on as co-owners a business for profit.
General partnership
Under this entity, there are no papers needed to be drawn up to form this. Nothing needs to be filed with the state, and an express agreement is not required. An agreement can be implied from conduct.
General partnership
The key difference between a joint venture and a general partnership is that a joint venture:
If formed for a single transaction or project or a related series of transactions or projects
If it is unclear whether the parties intended to enter into a partnership,
An agreement to share profits gives rise to a presumption that the parties intended to form a partnership
As a general rule, a general partnership agreement need not be in writing. However, if the partners ant to enforce an agreement to remain partners for longer than one year:
A writing is required under the statute of frauds
What is necessary to form a general partnership?
Two or more people who agree to carry on as co-owners of a business for profit
This type of entity is treated as entities for most purposes but are not taxable entities for income tax purposes:
General partnership
How are rights to manage the general partnership business divided? How is voting power divided in the general partnership business?
All partners have equal rights
It is not based on the amount contributed unless stated an agreement
Decisions regarding matters within the ordinary course of the partnership’s business my be controlled by:
Majority vote
Matters outside the ordinary course of the partnership business require:
Consent of all the partners
Examples of areas requiring unanimous consent under a general partnership are:
Admitting new partners
Confessing a judgement or submitting a claim to arbitration
Making a fundamental change (selling the partnership)
As a general rule, do partners have a right to possess or use partnership property other than for partnership purposes?
No
What happens when a partner assigns their interest in the profits and surplus of the partnership?
The assignee does not become a partner and has no right to attend meetings, vote, etc. just waits for a check in the mail
A creditor of an individual parter may do what?
Obtain from a court a charging order against an individual partner’s share of profits
What happens to a partnership when a partner dies?
Their right to profits vests in their heirs. The right to partnership property vests in the surviving partners
Are partners personally liable for all contracts enters into and al torts committed by other partners within the scope of partnership business or which are otherwise authorized?
Yes
The partner’s liability is:
Joint and several
What does the partners liability is joint and several mean?
That each partner is personally an individually liable for the entire amount of all partnership obligations
How to partners in a partnership share profits and losses?
Equally unless the agreement states something contrary
Are partners entitled to compensation for services rendered to the partnership?
No, unless agreed otherwise
A change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business
Dissociation
This does not necessarily cause a dissolution (winding up of the business)
Dissociation
A partner is dissociated from the partnership when:
The partner gives notice of withdrawal, dies, becomes bankrupt, or is expelled
When a partner dissociates, what happens?
His right to participate in management ceases although the partner’s apparent authority continues until 3rd parties are given notice of the dissociation
Generally, a dissociated partner remains liable for the debts incurred by the partnership prior to dissociation, unless:
There has been a release by the creditor or a novation
A dissociated parter may be held liable for debts incurred by the partnership for how long? How can a dissociated partner avoid being held liable for that time?
Up to 2 years after dissociation unless the partner gives notice of dissociation
What events would cause a dissolution of a partnership?
A partner gives notice of withdrawal
The partners agree to dissolution
A court orders a dissolution
When a partnership is dissolved and its assets are reduced to cash, the cash must b used to pay the partnerships liabilities in the following order:
- Creditors (including partners who are creditors)
- Partners (in the amount of their contributions)
- If money still remains, divided amount the partners
- If less money than needed to pay creditors remains, loss divided among partners
A, B, and C contributed 30,000, 15,000, and 5,000 to the ABC partnership. Upon dissolution after paying all creditors, there was 20,000 dollars remaining. The partnership agreement is silent on how losses re to be divided, but provides that profits re to be allocated 40% to A, 25% to B, and 35% to C. How will profits and losses be divided amongst A, B, and C?
30,000 + 15,000 + 5,000 = 50,000 Contributed - 20,000 remaining = 30,000 loss
A = 30,000 X 40% = 12,000
B = 30,000 X 25% = 7,500
C = 30,000 X 35% = 10,500
A limited liability partnership (LLP) is similar to a general partnership except for limited liability partnerships:
- Partners are not personally liable for the obligations or liabilities of the partnership
- Partners are liable for their own negligence or wrongful acts of those under their direct supervision
- Partners are not personally liable for the debts and contractual obligations of the LLP
To form an LLP you must:
File with the state
What’s included when filing for an LLP with the state?
LLP’s name
Name and location of its registered office
Number of partners
Description of the partnership business
A partnership made up of one or more general partners and one or more limited partners:
Limited partnership
Partners who have personal liability for all partnership debts:
General partners
Partners who’s liability for partnership debts generally is limited to their investment:
Limited partners
How can limited partnerships be formed?
By filing with the state
Under a limited partnership, partners are like _______. They contribute capital in exchange for _______. But they do not participate in _______.
Shareholders
Partnership interest
Management
In a limited partnership (LP), management is the responsibility of the:
General partners
If there is a loss for a limited partnership (LP), only the _____ can be held personally liable.
General partners
A general partner may also:
- Be a limited partner at the same time
- Be a secured or unsecured creditor of the partnership
How can a new partner be added to a limited partnership?
Only upon the consent of all parters
Do limited partners owe a fiduciary duty to the limited partnership?
No
How do limited partnerships share profits and losses?
In proportion to the value of the partners contributions
limited partners are not liable for any loss beyond their own capital contribution
A limited partnership may be dissolved by:
- The occurrence of the time or event stated in the partnership agreement
- Unanimous written consent of all partners
- Withdrawal or death of a general partner
- Judicial decree
Does the death of a limited partner dissolve the partnership?
No
