Ch 17: Business Org Flashcards
3 forms of business
Sole proprietorship
Partnership
Corporation
Sole proprietorship
1 owner
Sole proprietorship advantages
- can gain all the profits
-flexible and can make any decision they want
-only pay personal inc tax
-easier and less costly starting out
-Can transfer all/part of bus to another without approval
Disadvantages
-unlimited liability (prop bears all the burden of loss/liabilities)
-can end up putting owner in debt not affecting the bus
-no continuity after death
-ability to raise cap is based on funds of prop and anyone willing to give loans
-lenders less likely to give it to sole proprietors
Partnerships
-An agreement (express or implied) btw 2 or more ppl to carry on a business for profit
-Partners = co owners of business and have joint control over operation/right to share in profits
how is agency relationship similar to partnership
bc each partners is deemed to be the agent of the other partners and of the partnership and are bound by fiduciary ties (trust and loyalty
how is agency relationship diff than partnerships
Diff bc each partner contributes failure and agree to share profits/losses and the agent doesnt usually own part of the business
UPA defines partnership as
an association of 2 or more persons to carry on as co-owners a business for profit”
Under UPA- corp = person
t of. f
key element of partnership is intent to associate meaning one cannot become a partner w/o consent form all existing partners
t
3 essential elements of partnership from UPA
Sharing of profits/losses
Joint ownership of business
Equal right to be involved in mgmt of business
t or f
Joint ownership of property, does not in and of itself create a partnership. In fact the sharing of gross revenues and even profits from such ownership is usually not enough to create a partnership
true- but sharing profits AND losses is enough to prove
what is a pass thru entity
business entity that has no tax liability as income is passed thru owners and owners pay tax on income
(partnerships)
partnerships + tax
Partnerships only need to file info return w irs, not tax return and each partners share of profits is taxed as personal inc.
Partnership formation
Agreement to form a partnership can be oral, writtem, or implied by conduct
Articles of partnership
written partnership agreement which can include any terms unless illegal or contrary to pub. Policy
Usually specifies name of business, location, duration, purpose, and how shares and assets will be distributed
Rights of partners (6)
mgmt, interest in partnership, compensation, inspection of books, accting, and property
partnership for term
specified duration of partnership stating it will continue until said date or upon completion of smth
( withdrawing before agreed date is considered a breach)
Partnership at will
no fixed duration, can leave anytime
mgmt rights
All partners have equal rights in managing partnership
Each party has 1 vote in mgmt regardless of their size of interest at firm
For business matters decisions are made by majority rule but decisions that significantly alter partnership or fall outside reg business activities must have consent form all partners (ex admiting new partners)
Interest in relationship
each partner is entitled to the proportion of profits and losses that is designated in the agreement
what if not profits or losses are agreed in the agreement
If no profit is agreed - it will be shared equally
If losses not agreed - it will be shared the same as profits
Compensation for partners
not compensated for their time/ efforts but instead they earn income (comepnsated) thru the profit distributions
Some exceptions - for ex a managing partner may receive salary + profit share
Inspection of books
books/records required to be kept at firm and accesable to all Ps
partners have right to receive and produce info concerning business
Each partner can inspect books/records on deman & make copies
Accounting of Partnership Assets or Profits
Required to determine the value of each partners share in the partnership
Can be voluntary or court ordered
Property Rights
Property is property of the partnership org not of the partners
Includes all property that was originally contributed and anything purchased later by partnership
Can only use property on behalf of partnership
Duties and liabilities of partners is derived from what law
agency law
t or f
Every act of a partner business/ every contract signed in the partnership’s name, binds the firm
t
Fiduciary duties of partners
Partners have the duty of loyalty and care to the partnership and other partners
duty of loyalty
Requires partner to acct partnership for any property, profit, or benefit” derived by the partner from the partnership’s
Partner must not compete w partnership/ act against partnership
Duty of care
Partners must avoid gross negligence, reckless actions, or violations
They wont be liable for simple or honest negligence
Agreement cant define actions that violate fiduciary duties, but cannot eliminate the duties t or f
t
Partners cannot pursue their own interests t or f
f yes they can as long as they disclose w other partners
Liability of partners + what is true
Partners are personally liable for debts of partnership - essentially unlimited bc even one partners choice can cause personal liabilities for other partners
BUT partnerships assets must all be taken first before going for the partners
Joint liability of partners
Each partner is jointly liable meaning a 3rd party must sue all parties tog to enforce joint L
Ech partner can also be held liable for entire debt but partner that is being sued can demand for others to be sued as well
Dissolution
Dissolution- termination of the partnership/corp and ends the starts the winding up proces
Winding up
process of collecting, liquiding, and distributing assets among the partners
how can dissolution happen
-acts of partners
-operation of law
-judical decree
Limited liability partnerships
LLP- hybrid form of business designed for professionals (attorneys) who do business as partners in partnership
advantage of LLP
continues as pass-thru entity but limits the liability of the partners
FLLP
when majority of the partners are related
Formation of an LLP
Must be formed and operated in compliance w state laws and UPA and file all forms including LLP in name
Must submit annual report to maintain LLP status
Liability in an LLP
Allows professionals to avoid personal liability for the malpractice of other partners (grey chill even tho callie wasn’t) (not like reg partnership)
Limited partnerships (LP)
Limits liability of only SOME owners
LP consists of
GP and 1 or more limited partners
GP and LP roles and resonsibility and liability
Gp - managed partnership and has full responsibility and liability
LP- contribute funds and own stake in firm
Limited partners not personally liable beyond amt of their investment
Limited liability companies
Ideal business w combines tax advantages of partnership w limited liability of corps
States now allow LLC which combines both of these
Limited liability of LLC members and advantage
Key advantage is that is that liability is limited to amt of investments
LLC as an entity can be held liable but the members themselves generally are not personally liable.
How do LLC have flexibility
LLC that has 2 or more members can choose to be taxed as a partnership or corp (avoiding double taxation)
why might LLC choose to be taxed as partner
corps are double taxed thru income paid on profits and thru profits distributed thru dividends so, they might choose to be taxed as a partnership
LLC info + sole advantage
Unless indicated, LLCs will be taxed as partnership meaning LLC as an entity pays no taxes and are passed thru
Only if an LLC’s members want to reinvest the profits in business, hey may prefer that the LLC be taxed as a corporation.
But sometimes corp inc tax can be lower than personal, that’s why this is an advantage w flexibility in choosing
Chain style business operations
Franchise operates under franchisors trade name
Generally required to follow standardized methods of operation
Obligated to obtain materials exclusively from franchisor
The franchise contract
Relationship is defined by contract btw the franchisor and the franchisee which says terms/conditions/duties of both parties
If failed to perform duties, there may be a lawsuit for breach
Location of the Franchise and Territorial Rights
Typically, the franchisor will determine the territory to be served
Some franchise contracts give the franchisee exclusive rights/ “territorial rights,” to a certain geographic area
