Business Structure

Question 1

What are the key elements of a valid Partnership?

Answer 1

Elements of a valid Partnership: -Must have two or more partners -Must intend to engage in business for profit -Life of partnership is of limited duration in most cases. -Agency/fiduciary relationship is created. -A partnership interest is always considered personal property

Question 2

Can corporations and other partnerships become partners in a partnership?

Answer 2

Yes. Corporations and other partnerships can become partners of a partnership. Note: Partnerships with a C-Corp partner cannot use the cash basis of accounting if revenue exceeds $25MM.

Question 3

Name the Basics of Partnership Formation, Form of agreement and Intent.

Answer 3

Agreement can be very informal, either: -oral -implied, or -written. Intent is to make a profit.

Question 4

How are profits shared in a partnership?

Answer 4

Profit sharing is equal by default: -Unless partnership agreement says otherwise -Unless specified, sharing of losses follows same pattern as sharing of profits

Question 5

What is the Liability of General Partners in a partnership?

Answer 5

Joint Liability - Partners are collectively liable for debts/torts. Several Liability - Partners are individually liable for debts/torts.

Question 6

Which assets may creditors of a partnership go after, and in which order?

Answer 6

Creditors must go after partnership assets first before suing partners individually.

Question 7

What are the rights of a General Partner in a partnership?

Answer 7

A General Partner has the following rights in a partnership: -General Partners have joint control over the management of the partnership and its affairs. -Unanimous vote needed to change the structure of the partnership. -Each partner has full right to inspect partnership accounting and business. -Partner has the authority to assign their interest to another partner.

Question 8

What does and does NOT happen when a General Partner assigns their partnership interest to someone else?

Answer 8

1. Other party gets that partner’s share of the profits and/or capital contribution. 2. It does NOT give assignee authority to vote on partnership business. 3. Assignee does NOT have the right to inspect partnership books. 4. Assignor still maintains liability. 5. Partner does NOT have the right to assign their interest in partnership property or allow partner’s creditors to attach a lien.

Question 9

What is the actual authority of a partner in a partnership?

Answer 9

A third party reasonably believes partner has authority to bind the partnership to contract. -It cannot use apparent authority to add a new partner. -It cannot use apparent authority to sell or bind partnership assets.

Question 10

With respect to liability on subsequent debts, what happens when a partner withdraws from a partnership?

Answer 10

-Partner is not liable assuming notice given. -A notice must be given to nullify apparent authority. -People who had knowledge of their role must be personally notified. -The public must be notified.

Question 11

With respect to preceding debts, what is the liability of a partner in a partnership?

Answer 11

Old partners: Jointly and severally liable unless creditors grant novation. New partners: Only capital account at risk on preceding debts. For subsequent debts, they are joint and severally liable.

Question 12

What happens upon the death of a partner in a partnership?

Answer 12

-Partner’s estate gets a share of partnership profits and capital account. -Estate does NOT get any partnership assets. -The remainder of partners own the partnership assets. -Heirs of the decedent are not added as partners unless remaining partners unanimously agree.

Question 13

What happens during the winding up of a partnership and in what order?

Answer 13

1. Creditors get paid; Partners can also be creditors. 2. Distributions in arrears get paid. 3. Partners get the return of Capital accounts. 4. Any remaining distributions. Note: No documents need to be filed with the state to dissolve a general partnership.

Question 14

What are the requirements to form a Limited Partnership?

Answer 14

Requirements of a Limited Partnership: -Governed by state L.P. laws -Must file L.P. certificate with Sec. of State -Only General Partners must be listed -Future additions or subtractions of G.P. require a certificate to be updated with the state.

Question 15

How are profits and losses split in a Limited Partnership?

Answer 15

Unlike G.P., L.P. profits/losses are split according to capital contributions by default.

Question 16

True or False: In a Limited Partnership, a General Partner can also be a Limited Partner at the same time.

Answer 16

True. A Limited Partner, however, cannot also be a General Partner and maintain limited liability.

Question 17

Do limited partners have a fiduciary responsibility to a Limited Partnership?

Answer 17

No. Limited Partners do not have a fiduciary responsibility to Limited Partnership.

Question 18

What authority does a limited partner have under a Limited Partnership?

Answer 18

1. Right to inspect records of the business. 2. Can still vote on partnership business without losing limited liability 3. Can consult and advise partnership without losing limited liability (assuming they don’t actually make the decisions)

Question 19

What limitations does a limited partner have in a Limited Partnership?

Answer 19

1. They have no authority as an agent to bind the partnership. 2. They can’t participate in management decisions and maintain limited liability.

Question 20

What is the liability of a limited partner in a Limited Partnership?

Answer 20

Limited partners are liable to the extent of their capital contributions only. - Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions. A limited partner becomes liable to third parties IF they knew of their involvement.

Question 21

When does the dissolution of a Limited Partnership occur?

Answer 21

Dissolution of a LP automatically happens: -Once final General Partner leaves -Time specified in certificate lapses -Event specified in certificate happens -Unanimous consent by partners -Illegal activity

Question 22

What is required to form a Limited Liability Partnership (LLP)?

Answer 22

Requirements of a LLP: -Majority vote required to form LLP -Articles of LLP filed with Secretary of State -Governed by laws of that State -Limited Liability Partnership must be in name -No General Partners - each LLP partner has limited liability. Exception: Negligence of partner or those under partner’s supervision

Question 23

What are the key aspects of a Limited Liability Company (LLC)?

Answer 23

-Members can participate in management and retain limited liability. -Members don’t own any interest in LLC property. -Members can assign interest; but not transfer it. -Members divide profits equally unless otherwise stated.

Question 24

What are the key aspects of Joint Ventures (JV)?

Answer 24

A JV is similar to a General Partnership, except generally a JV is for a single business activity. Example: two companies promote a concert. -Ability to bind other JV partners is limited. -JV partners still have a fiduciary responsibility to JV. -No state filings or paperwork necessary.

Question 25

What are the key aspects of a corporation?

Answer 25

-Shareholders have limited liability to the extent of their capital contribution. -Corporations have a perpetual life and continue even after shareholder death. -Corporations are a separate legal entity from their owners and can own property, sue, or be sued. -Corporations must file Articles of Incorporation in the state of governance.

Question 26

What are some of the advantages of a corporation?

Answer 26

A corporation has: -Ability to raise capital -Limited liability - unless actions occur that pierce the veil -Ease of ownership transfer