Business Law Flashcards
What is General partnership
two or more individuals agree to do business together. Each partner contributes capital, labor, skill, or some combination of these, and each shares in the profits and losses.
All partners in a GP have unlimited personal liability for the partnership’s debts, which means that if the business can’t pay its debts, the partners’ personal assets can be used to satisfy those debts.
Profits are not taxed at the partnership level but are “passed through” to the partners, who pay income tax on their share of the profits.
What is limited liability partnership
Limited Liability Partnerships (LLPs): An LLP is similar to a GP, but it provides some liability protection for its partners.
In an LLP, a partner is not personally responsible for the debts of the partnership or the negligent acts of other partners.
Like a GP, an LLP is a “pass-through” entity for tax purposes.
What is LP limited Partnership?
Limited Partnerships (LPs): An LP has two types of partners: general partners and limited partners.
General partners manage the business and are personally liable for its debts. Limited partners contribute capital but do not participate in management and are not personally liable for the partnership’s debts beyond their invested capital.
Like GPs and LLPs, LPs are pass-through entities for tax purposes.
What is the Limited Liability Companies (LLCs):
Limited Liability Companies (LLCs): An LLC is a separate legal entity that provides its owners (called “members”) with liability protection.
This means that members are not personally liable for the LLC’s debts. LLCs can be managed by their members or by appointed managers.
An LLC can choose to be taxed as a sole proprietorship (for a single-member LLC), a partnership (for a multi-member LLC), or a corporation. If it does not choose to be taxed as a corporation, it is a pass-through entity for tax purposes.
What are the major factors that must be taken into account in deciding which type of business association to choose for a particular business?
Liability: The extent to which the business owners or partners are personally liable for the debts and obligations of the business is a crucial consideration. Some business associations provide limited liability protection, such as corporations and limited liability companies (LLCs), while others, like sole proprietorships and general partnerships, offer unlimited personal liability.
Control and Decision-Making: The desired level of control and decision-making authority can influence the choice of business association. In sole proprietorships and partnerships, the owners have direct control, but in corporations, control is typically shared among shareholders, directors, and officers. LLCs offer flexibility in decision-making, allowing members to define their governance structure.
Taxation: The tax implications of different business associations are significant. Some structures, like sole proprietorships and partnerships, have pass-through taxation, where business profits and losses are reported on the owners’ individual tax returns. Corporations, on the other hand, face double taxation, as the entity itself is taxed, and shareholders are taxed on dividends. LLCs provide flexibility in choosing their tax treatment, either as pass-through entities or as corporations.
Funding and Capital Structure: The type of business association may affect the ease of raising capital. Corporations, especially publicly traded ones, have more options for accessing capital through issuing stocks and bonds. Partnerships and sole proprietorships often rely on personal funds or loans. LLCs can be flexible in attracting capital, but it depends on the specific operating agreement and the willingness of potential investors.
Control and Decision-Making: The desired level of control and decision-making authority can influence the choice of business association. In sole proprietorships and partnerships, the owners have direct control, but in corporations, control is typically shared among shareholders, directors, and officers. LLCs offer flexibility in decision-making, allowing members to define their governance structure.
Taxation: The tax implications of different business associations are significant. Some structures, like sole proprietorships and partnerships, have pass-through taxation, where business profits and losses are reported on the owners’ individual tax returns. Corporations, on the other hand, face double taxation, as the entity itself is taxed, and shareholders are taxed on dividends. LLCs provide flexibility in choosing their tax treatment, either as pass-through entities or as corporations.
Funding and Capital Structure: The type of business association may affect the ease of raising capital. Corporations, especially publicly traded ones, have more options for accessing capital through issuing stocks and bonds. Partnerships and sole proprietorships often rely on personal funds or loans. LLCs can be flexible in attracting capital, but it depends on the specific operating agreement and the willingness of potential investors.
Formalities and Compliance: Different business associations have varying degrees of formalities and compliance requirements. Sole proprietorships have the least formalities, while corporations have more stringent requirements, such as holding regular shareholder meetings, keeping records, and filing annual reports. LLCs offer a balance between flexibility and reduced formalities compared to corporations.
Longevity and Succession: Consideration should be given to the long-term plans and potential for succession. Sole proprietorships and partnerships may face challenges in terms of continuity if the owner or a partner withdraws or passes away. Corporations and LLCs provide better continuity and succession planning options, allowing for the transfer of ownership through stock or membership interest.
Industry and Future Growth: The nature of the business and its growth prospects can also impact the choice of business association. Some industries may have specific regulations or requirements that favor certain types of associations. If the business has plans for expansion, accessing public markets, or attracting institutional investors, a corporate structure may be more suitable.
Formalities and Compliance: Different business associations have varying degrees of formalities and compliance requirements. Sole proprietorships have the least formalities, while corporations have more stringent requirements, such as holding regular shareholder meetings, keeping records, and filing annual reports. LLCs offer a balance between flexibility and reduced formalities compared to corporations.
Longevity and Succession: Consideration should be given to the long-term plans and potential for succession. Sole proprietorships and partnerships may face challenges in terms of continuity if the owner or a partner withdraws or passes away. Corporations and LLCs provide better continuity and succession planning options, allowing for the transfer of ownership through stock or membership interest.
Industry and Future Growth: The nature of the business and its growth prospects can also impact the choice of business association. Some industries may have specific regulations or requirements that favor certain types of associations. If the business has plans for expansion, accessing public markets, or attracting institutional investors, a corporate structure may be more suitable.
How does the UPA define a general partnership?
A partnership is an association of two or more persons to carry on as co-owners a business for profit.”
According to the UPA, a general partnership is formed when two or more individuals come together with the intention of conducting a business and sharing its profits and losses. The key elements of a general partnership, as defined by the UPA, are:
Association: There must be an agreement or understanding between the partners to form a partnership. This agreement can be written, oral, or implied by the conduct of the parties involved.
Co-ownership: The partners must have joint ownership and mutual control over the business. Each partner has an equal say in the management and decision-making process unless otherwise agreed upon.
Business for Profit: The primary purpose of the partnership is to conduct a business or commercial activity with the intention of making a profit. Non-profit organizations or charitable activities typically do not fall under the scope of a general partnership.
Sharing of Profits and Losses: The partners agree to share the profits and losses of the business in a manner defined by the partnership agreement. The UPA assumes equal sharing unless otherwise specified.
If the partners do not address issues such as voting rights of the partners, the splitting
of profits and losses, or the right to receive compensation for work done on behalf of the partnership, what is the “default” rule that the UPA provides for each of those issues?
Voting Rights: Under the UPA, each partner in a general partnership has an equal vote regardless of their capital contribution or ownership interest. This means that absent an agreement stating otherwise, decisions relating to the partnership’s ordinary course of business require the unanimous consent of all partners.
Splitting of Profits and Losses: In the absence of a partnership agreement specifying the distribution of profits and losses, the UPA assumes that partners share them equally among themselves. This default rule applies regardless of the partners’ capital contributions or their involvement in the partnership’s day-to-day operations.
Right to Receive Compensation: According to the UPA, partners are not entitled to receive compensation for their work on behalf of the partnership. Absent an agreement stating otherwise, partners do not receive salaries or wages for their services rendered to the partnership. However, partners may be entitled to reimbursement for expenses incurred on behalf of the partnership.
