Business Structure Flashcards
Discuss the formation and Termination of a Partnership
● Formation:
○ Create an agreement between partners (preferably written).
○ Register the partnership if required by local laws.
● Termination:
○ Agree upon dissolution among partners or trigger by events like death or bankruptcy.
○ Settle debts and distribute remaining assets.
○ Partners may have personal liability, depending on the
partnership type.
Discuss the formation and Termination of an LLC
●Formation:
○ File Articles of Organization with the state.
○ Create an Operating Agreement (recommended, not
always required).
● Electing S Corp Status, if requirements are met
● Termination:
○ Follow the dissolution process outlined in the Operating
Agreement or state law.
○ Close out business affairs, settle liabilities, and
distribute remaining assets.
○ Members typically not personally liable for LLC debts.
An LLC can decide to elect S Corp Status
Discuss eligibility and Filing Requirements to elect S Corp Status
○ Eligibility: The LLC must meet the IRS criteria for SCorp status, similar to any S Corp election:
This includes restrictions on the - number
- type of S/H’s
- and share classes.
○ Filing Requirement: To elect S Corp status, an LLC must file Form 2553 with the IRS, usually by March 15th of the tax year for
which the election is sought.
Discuss the Formation, and termination of Limited Liability Partnerships (LLPs)
● Formation:
○ File registration documents with the state, often called a
“Statement of Qualification”
○ Create a partnership agreement outlining the rights and responsibilities of each partner
○ Obtain any necessary licenses for the specific professional services offered.
● Termination:
○ Agree on dissolution among partners or as specified in
the partnership agreement.
○ File dissolution documents with the state.
○ Settle debts, liabilities, and distribute remaining assets.
Partners typically have limited personal liability for the
debts of the LLP.
Formation and Termination of a Limited Partnership
Limited Partnerships (LPs)
● Formation:
○ File a Certificate of Limited Partnership with the state.
○ Clearly define the roles of general and limited partners
in a partnership agreement.
○ General partners manage the business and have unlimited liability, while limited partners have liability only up to their investment.
● Termination:
○ Initiate dissolution as per the partnership agreement or
upon an event like the withdrawal or death of a general
partner.
○ File dissolution paperwork with the state.
○ Liquidate the partnership’s assets to pay off debts, with
any remaining assets distributed to partners. General partners may face personal liability for debts, unlike limited partners.
Formation and Termination of a C Corporation
● Initial Formation
○ Similar to S Corps, it involves filing Articles of Incorporation with the state, creating bylaws, issuing stock, and establishing a board of directors.
● Tax Status
○ By default, a corporation is a C Corp unless it elects to be an S Corp. No additional IRS filings are required to maintain C Corp status.
● Termination
○ Dissolution Process: Involves a formal procedure of shareholder approval, settling debts, liquidating assets, and filing dissolution documents with the state.
○ Tax Considerations: C Corps may face corporate level
taxes on liquidation gains.
Formation and termination of an S Corp
● Initial Formation
○ Same initial steps as a C Corp – filing Articles of Incorporation, creating bylaws, etc.
○ must meet Requirements of S corp status
● Tax Status Election
○ After the corporation is formed, it must file Form 2553
with the IRS to elect S Corp status. This election must meet specific criteria regarding number and type of shareholders, and share classes.
● Termination
○ Dissolution Process: Similar to C Corps regarding the formal steps of shareholder approval, debt settlement, and asset liquidation.
○ Tax Considerations: S Corps, being pass-through entities for tax purposes, have different tax implications upon dissolution. Shareholders might face personal income tax on any distributed assets.
State the Requirements of S corp status
■ must have 100 S/H’s or fewer.
■ Shareholders must be
-individuals,
-certain trusts, and estates.
-Partnerships, corporations,
non-resident alien shareholders are NOT eligible.
■ The entity can only have one class of stock,though differences in voting rights are allowed.
■ All shares must have identical rights to distribution and liquidation proceeds.
■ S/H’s must be U.S. citizens or residents
■ Certain trusts, estates, and tax-exempt organizations are also eligible.
legal characteristics of Sole Proprietorship
● Ownership: Single individual.
● Liability: Owner has unlimited personal liability for business
debts.
● Taxation: Pass-through taxation on the owner’s personal
income tax.
● Continuity: Business ceases on owner’s death or decision to
close.
Legal characteristic of an Limited Liability Companies (LLCs)
● Ownership: One or more individuals/entities (members).
● Liability: Members have limited personal liability.
● Taxation: Default pass-through taxation; can elect to be
taxed as a corporation.
● Continuity: Can have perpetual existence; not dependent on
any one member.
Legal Characteristics of Partnerships
● Ownership: Two or more individuals/entities.
● Liability: General partners have unlimited personal liability;
limited partners (in LPs) have limited liability.
● Taxation: Pass-through taxation.
● Continuity: Often dependent on the partnership agreement.
Legal Charactertics of Limited Liability Partnerships (LLPs)
● Ownership: Two or more individuals/entities.
● Liability: Limited personal liability for business debts; varies by state.
● Taxation: Pass-through taxation.
● Regulatory Requirements: Compliance with state laws, often used by professional services.
● Continuity: Depends on terms of the partnership agreement.
Legal Characteristics of Limited Partnerships (LPs)
● Ownership: One or more general partners and limited
partners.
● Liability: General partners have unlimited liability; limited
partners have limited liability.
● Taxation: Pass-through taxation.
● Continuity: Subject to terms of the partnership agreement.
Legal Characteristics of S Corporations
● Ownership: Up to 100 S/H’s; all must be U.S. citizens/residents.
● Liability: Shareholders have limited personal liability.
● Taxation: Pass-through taxation; avoids double taxation of C corporations.
● Formation and Dissolution: Similar to C corporations and
must file IRS Form 2553 (form not necessary to file for C corp)
● Regulatory Requirements: Significant; must adhere to
corporate formalities.
● Continuity: Perpetual existence; not dependent on any single shareholder
Legal characteristics of a C Corp
C Corporations
● Ownership: Unlimited number of shareholders; open to
foreign investors.
● Liability: Shareholders have limited personal liability.
● Taxation: Subject to corporate tax; potential for double
taxation.
● Formation and Dissolution: Complex; involves significant
paperwork and compliance.
● Regulatory Requirements: High; strict corporate governance rules.
● Continuity: Perpetual existence; not affected by changes in shareholders.
The rights, duties, legal obligations, and authority of owners and management in a business can vary significantly based on the type of business entity
To summarize, while owners typically have rights related to profit sharing, decision-making, and access to information,
their duties often involve legal and tax compliance and, in some cases, fiduciary responsibilities (act in the best interests of another person or group. Fiduciaries are often responsible for managing money or other).
Management’s authority primarily covers
operational and personnel decisions, and they are bound by legal obligations including fiduciary duties and compliance with laws and regulations. The specifics can vary greatly depending on the
business structure, size, and industry.
Fiduciary Duties: Although shareholders in a C corporation
typically do not have fiduciary duties to each other or the
corporation, they expect the Board of Directors to adhere to
these duties.
Rights of Owners
● Profit Sharing
● Decision Making: In smaller businesses or partnerships- direct say in business decisions. In corporations - exercised indirectly through voting for the board of directors.
● Access to Information: Owners have access to relevant business information, financial records, and operational reports.
● Transfer of Interest: Owners can usually sell or transfer their
interest in the business, subject to any restrictions in the
entity’s governing documents or agreements.
● Liquidation Rights: Upon dissolution of the business, owners have the right to a share of any remaining assets after debts and obligations are paid.
Duties and Legal Obligations of Owners
● Compliance with Laws:
● Tax Obligations: Proper reporting and payment of taxes.
● Fiduciary Duties (in certain entities): In partnerships, LLPs,
and corporations, owners may have fiduciary duties to the
entity and other owners, including duties of loyalty and care.
● Contractual Obligations: Adherence to agreements made on behalf of the business
Authority and Duties of Management
● Operational Decisions: Managers have the authority to make decisions on the day-to-day operations of the business.
● Policy Implementation: Implementing policies and strategies set by the owners or board of directors.
● Legal Compliance: Ensuring the business complies with all
relevant laws and regulations.
● Financial Management: Responsibility for financial planning, record-keeping, and reporting to owners or shareholders.
● Human Resources: Overseeing hiring, training, managing,
and firing of staff.
Legal Obligations of Management
● Fiduciary Duties: In many businesses, especially
corporations, managers have fiduciary duties to the
company and its shareholders, including duties of care,
loyalty, and good faith.
● Contractual Obligations: Fulfilling and managing contracts entered into by the business.
● Compliance with Employment Laws: Adhering to labor and
employment laws.
What are the Exceptions to contracts of $500 or more for goods that do NOT have to be in writing to be enforceable (mnemonic)
SWAP
● S - Specially manufactured goods
● W - Merchant sends another
merchant Written confirmation of
a contract.
● A - Admittance in court
● P - Performed contracts, to the
extent that performance has been
accepted.
