Biz Law - Business Structures Flashcards
Sole proprietorship
Extension of individual owner.
No formalities required for formation. Easy and inexpensive.
Not recognized as a legal entity. Plaintiffs must sue the individual. Individual may sue anyone that causes harm to the business.
Not taxable entity for federal income tax.
Partnerships: basics
Two or more persons as co-owners of business for profit.
Governed by UnIform Partnership Act (UPA) or revised UPA (RUPA).
Trading (commercial): buying and selling or leasing property. Partner has great deal of implied authority to act for partnership.
Nontrading: rendering a service, practicing a profession. Partner has less implied authority.
Partnership is not legal entity for insulating partners from personal liability.
It is legal entity for owning property and employing persons.
Partnerships types: Limited partnerships
– Governed by ULPA and RULPA.
– Must have one or more general partners and one or more limited partners
– Must file certificate with state
– Name cannot use last name of a limited partner
Order of distribution of assets on dissolution:
– Creditors
– Limited partners for profit
– Limited partners for return of capital contribution
– General partners for loans to partnership
– General partners for profits
– General partners for return of capital contribution
Partnership types: joint ventures
Similar to general partnerships.
Typically established to conduct a single enterprise or transaction, usually shorter duration.
Most courts hold that joint ventures are governed by partnership law.
Partnership types: limited liability partnership
LLP is created by filing forms with Secretary of State’s office.
Generally must maintain some level of professional liability insurance and pay annual fee to state.
Unique: partner’s liability for fellow partner’s professional malpractice is limited to partnership’s assets.
But partners retain unlimited personal liability for their own malpractice as well as for any other partnership obligations.
Partnership: creation
No formalities required; is voluntary contractual relationship. Can be express or implied agreement, oral or writing.
Tests of existence:
– Sharing of profits and losses
– Coownership of property
– Joined control and management
Partnership by estoppel: holds person liable as partner to third-party when they either hold themselves out as partner or consents to holding out of themselves as partner.
Partnership: types of partners
– General: has right to manage business. Has unlimited personal liability to creditors for partnership debts
– Limited: merely investor whose liability is limited to possible loss of their capital contribution. Does not participate in management.
– Nominal/partner by estoppel: not actually partner but holds himself as one or allows others to. May be liable as a partner to third persons who rely on this holding out.
Partnership: partner eligibility
Minor may become partner, but can disaffirm the contract.
Insane person cannot make a contract.
Corporation can become partner, but some states do not allow.
Partnership: partner admission and withdrawal
Admission
– New partners liable for all partnership obligations that arise after admission
– Also those before admission, but only to extent of their share of partnerships assets.
Withdrawal
– Existing creditors entitled to actual notice of withdrawal. If none, withdrawing partner could still be liable to a creditor.
– Creditors who have not dealt with partnership previously are entitled only to constructive notice.
Partnership: rights of partners
– Profits – Return of capital – Participate in management – Inspection of the books – Accounting of activities – Partnership property – Compensation for winding up affairs – Reimbursement
Partnership: duties of partners
– Fiduciary duty: trust and confidence, loyalty and good faith to firm, obedience to partnership agreement, exercise of reasonable care, providing needed info, and providing accounting of partnership matters.
– Duty to share in losses: same percentage as sharing a profits unless otherwise agreed.
Partnership: individual liability of partners
Each partner is agent of partnership. Partnership bound by all transactions negotiated by partner if within usual course of business.
– Torts: partners and partnership will be jointly and severally liable.
– Crimes: only partner who commits crime is liable
– Contracts: partners are jointly liable for contracts made by a partner.
Partnership: assignment/transfer of partnership interest
Partner may assign or transfer all or part of interest to someone else:
– Does not dissolve partnership
– Consent of other partners not required for valid assignment or transfer
– Assignee does not automatically become partner nor have rights of partner. Can if other partners agree.
– Assignee obtains only right to assignor’s share of profits and what assignor would receive if partnership is dissolved
Partnership: partnership agreement
A.k.a. articles of partnership.
Formal written agreement not required, but is good idea.
Can be oral. If any part of agreement falls under statute of frauds, writing is needed.
The UPA fills in rules unless agreement specifies different rule.
Partnership: ending a partnership
- Dissolution: beginning of discontinuing partnership
– Winding-up: settling affairs after dissolution. No new business.
– Termination: end of winding-up period
Partnership: causes of dissolution
Without violation of agreement:
– Agreed time limit ends
– Agreed purpose completed
– Partnership with no state duration “partnership at will” and partner quits
– Mutual agreement of all partners to terminate
In violation of agreement:
Any partner may dissolve, but may be liable for damages.
By operation of law: – Business becomes illegal – Bankruptcy of partnership or partner – Death of partner(s) – Court decree
Partnership: priority of payments on dissolution
– Partnership creditors paid first
- Individual creditors
– Loans to partnership by partners
– Return of capital contributions by partners
– Profits or losses divided among partners as follows:
– – As agreed-upon
– – Equally if no agreement
– – Losses same as profits if no agreement
Partnership: partnership property
– Partnership capital: money and property contributed by partners for permanent use by partnership
– Tenancy in partnership: ownership by partners of partnerships properties. All partners have equal rights to use for partnership purposes.
– Partnership property: partnership capital plus retained profits
- Real property: partnership may acquire in name of business
Partnership: profits and losses
General hardship
– Equal share, unless agreed otherwise
– If agreement allocates profits but not losses, losses shared same as profits
– if agreement allocates losses but not profits, profits shared equally
Limited partnership
– Same ratio as capital contributions, unless agreed otherwise
– Limited partner not liable for losses exceeding their capital contribution
Partnership: business matters
Ordinary business matters: majority vote of partners as long as not violate agreement.
– A tie vote leaves matter as it was, is deadlock
Extraordinary matters: unanimous agreement necessary.
– Examples: decision to go out of business, change to nature of business
Corporation
Organization formed under state or federal law
Is legally separate and distinct from owners.
Shareholders not liable for corporate obligations; corporation not liable for personal obligations.
Not separate regarding fraud/crime.
Ignoring corporate entity is “piercing the corporate veil”.
Operation of business may continue indefinitely: perpetual life.
Corporation: other types
S Corporation: - Must meet certain requirements – Limited to 100 owners – Only one class of stock allowed – No double taxation
Limited liability company:
– Treated as separate legal entity. Members have no personal liability.
– Has operating agreement
– Can follow corporation or partnership depending on tax election
Corporation: types
– Private
– Public/governmental
– Quasi-public
– For-profit
– Nonprofit
– Domestic: to state is incorp. in
– Foreign: to other states
– Alien: incorp. in foreign country
– Closely-held
– Publicly-held
– Professional corporation
– Personal service corporation
Corporation: state incorporation laws
States grant corporate charter to give permission to operate as corporation in the state.
Model Business Corporation Act
– Most states use this model as basis for incorporation laws
Foreign corporations:
– All states allow to do business in state
– Intrastate commerce, must qualify and obtain certificate of authority
– Interstate commerce doesn’t need to qualify or certificate
