Business Structures Pt. 1 Flashcards
Summary of Sole Proprietorship
Formation: no formalities; owner simply operates a business
Liability of owners: unlimited personal liability for all business obligations
Management: sole proprietor manages directly or can appoint manager
Transferability: sole proprietor can sell business at will
Taxation: flow through taxation
Summary of General Partnership/Joint Venture
Formation: can be formed by verbal or written agreement or mere conduct
Liability of owners: unlimited personal liability for all partnership obligations
Management: owners manage directly or can agree to appoint managing partner
Transferability: partners cannot transfer ownership interest without unanimous consent
Taxation: flow through taxation
Summary of Limited Liability Partnership (LLP)
Formation: file statement of qualification with state
Liability of owners: partners are generally not liable for partnership obligations unless caused by their own negligence
Management: partners manage directly or agree to appoint a managing partner
Transferability: partners cannot transfer ownership interest without unanimous consent
Taxation: flow through taxation but partners not managing have passive loss restrictions
Summary of Limited Partnership
Formation: file certificate of limited partnership with state
Liability of owners: general partner - unlimited personal liability / limited partner - only investment at risk
Management: general partner - is exclusive manager / limited partner - ordinarily does not manage
Transferability: partners whether general or limited cannot transfer ownership interest without unanimous consent
Taxation: flow through taxation but limited partners have passive loss restrictions
Summary of Limited Liability Company (LLC)
Formation: file articles of organization with state
Liability of owners: members generally not personally liable beyond their investment
Management: members manage directly or can agree to appoint a manager
Transferability: absent agreement, members cannot transfer ownership interest without unanimous consent
Taxation: flow through taxation but members not managing have passive loss restrictions
Summary of Corporation
Formation: file articles of incorporation or corporate charter with state
Liability of owners: shareholders generally not personally liable beyond their investment
Management: managed by board of directors, which appoints officers to run day-to-day operations
Transferability: shareholders are free to transfer ownership interest unless they agree otherwise
Taxation: income taxed at corporate level and taxed again to shareholders when dividends are distributed
Summary of Subchapter S Corporation
Formation: same as regular corporation plus file S election
Liability of owners: shareholders generally not personally liable beyond their investment
Management: managed by board of directors, which appoints officers to run day-to-day operations
Transferability: shareholders generally may transfer ownership unless they agree otherwise, but cannot transfer to foreign or entity shareholders
Taxation: flow through taxation but shareholders not managing have passive loss restrictions
Sole Proprietorship
simplest form of business ownership; cannot exist beyond the life of the sole proprietor
General Partnership/Joint Venture Pt. 1
is formed when two or more people intend to carry on as co-owners of a business for profit; only time agreement needs to be in writing is if the partnership will remain for longer than a year (per the Statute of Frauds)
all partners have equal rights to manage the partnership unless an agreement says otherwise; management rights and voting power are not based on the amount contributed; every partner is an agent of the partnership for the purpose of its business and the partnership is their principal
decisions in ordinary course of business require majority vote, unless the agreement says otherwise, but matters outside the ordinary course of business, like admitting a new partner, requires unanimous consent
a partner may assign their interest in the profits and surplus at any time, but the assignee does not become a partner and has no right to attend meetings, look at the books, vote, etc; they’re only able to receive the partner’s share in profits
key difference between general partnership and joint venture is that a joint venture is formed for a single transaction/project or a related series of transactions/projects
General Partnership Pt. 2
every partner has the right to inspect and copy the books and records of the partnership; each partner owes a fiduciary duty to the partnership and other partners; absent an agreement to the contrary, all partners have equal rights to profits and losses; unless agreed otherwise, partners are not entitled to compensation for services rendered to the partnership
dissociation is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business; 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 partner may be held liable for debts incurred by the partnership for up to two years after dissociation unless the partner gives notice of dissociation; if a new partner is admitted, they are not personally liable for debts incurred by the partnership before becoming a partner
General Partnership Pt. 3
a partnership is dissolved and its business must be wound up if the partnership is at will (no expiration date) and a partner gives notice of withdrawal, the partners agree to dissolution, or a court orders dissolution; the death of a partner does not cause a dissolution if the remaining partners agree to continue the partnership within 90 days of the partner’s death
when a solvent partnership is dissolved and its assets are reduced to cash, the cash must be used to pay the partnership’s liabilities in the following order: creditors and partners
Limited Liability Partnership (LLP)
similar to a general partnership; important differences are listed below
partners generally are not liable for the acts of fellow partners, employees, or agents; liable for own negligence and the negligence of those under direct control; generally not personally liable for debts and contractual obligations
LLP must file with the state; contents of certificate of limited liability partnership (LLP’s name, name and location of registered office, number of partners, description of business, etc.)
Limited Partnership Pt. 1
has both general and limited partners; it does not have a perpetual life unless the partnership agreement says otherwise; limited partners are like shareholders in that they contribute capital in exchange for a partnership interest, but they do not participate in the management (which is the job of the general partners); they can however review the financial info and tax returns
a general partner is personally liable for all partnership debts; they can be a general and limited partner at the same time and may be a secured or unsecured creditor of the partnership
a limited partner may assign their interest in the partnership (similar to a general partnership - the assignee has the limited partner’s rights to profits; unless otherwise agreed, the assignor ceases to be a limited partner upon assignment of their interest)
a new partner can be added only upon the consent of all partners; a limited partner does not owe a fiduciary duty to the partnership
Limited Partnership Pt. 2
if the partners have agreed on how profits are shared, the agreement governs (otherwise, general and limited partners share profits and losses in proportion to the value of their contributions); dissolution may occur when the time or event stated in the partnership agreement has occurred, unanimous written consent of all partners, withdrawal or death of a general partner (doesn’t apply to limited partners), or a judicial decree
after dissolution, assets are distributed in the following order: creditors, former partners (to satisfy liabilities that were not paid on their withdrawal), and partners; if there is a loss, only general partners are liable
Limited Liability Company (LLC)
it provides its owners, called members, with the limited liability of a corporation and the ability to be taxed like a partnership (under tax laws, LLCs are taxed as a partnership unless they elect to be taxed as a corporation); most states allow one person to form an LLC
unless the articles or an operating agreement states otherwise, all members have a right to participate in the management decisions; member-managed LLC means each member is an agent of the LLC and has the power to bind the LLC by acts apparently carrying on the business of the LLC; manager managed LLC means manager is an agent of the LLC and has the power to bind the LLC, but members are not agents of the LLC and do not have the power to bind the LLC
voting strength is proportional to contributions (as well as profits and losses unless the articles or an operating agreement says otherwise; under the Uniform Limited Liability Company Act [ULLCA], profits are shared equally regardless of capital contributions, but this is only followed by a few states)
each member is entitled to inspect and copy the cooks and records of the LLC during regular business hours; an LLC will dissolve when: the expiration of the period of duration stated in the articles, the consent of all members, the death/retirement/resignation/ bankruptcy/incompetence of a member (unless remaining members vote to continue the business), or a judicial decree or administrative order dissolving the LLC for violation of law
