Chapter 14 Business Organizations

Question 1

Types of Business Entities:

Answer 1

1. Sole Proprietorship
2. General Partnership
3. Limited Partnership
4. Corporation
5. Limited Liability Company
   How we will examine each entity:
   Part 1: Ease of formation, duration, management, and liability.
   Part 2:Transferability, taxation, and sources of capital.

Question 2

Sole Proprietorship (Part 1)

Answer 2

A. Ease of Formation: Easily Formed,“Hang out a shingle”
B. Duration: The lifetime of the owner.
C. Management: Full and complete right to manage; full and solitary control of business.
D. Liability: Full and unimpeded personal liability for all business debts. Full personal liability for torts of your employees.
Key: Sole proprietorship and corporations are on the opposite sides of the spectrum! (Important)

Question 3

Sole Proprietorship (Part 2)

Answer 3

E. Transferability: None
F. Taxation: Owner is taxed–Business income reported on owner’s return.
G. Sources of Capital: Limited to owner’s assets and loans-no “investors” other than creditors.

Question 4

General Partnership (GP) Definition:

Answer 4

An association of 2 or more persons to carry on, as co-owners, a business for profit.

Question 5

GP: Association

Answer 5

Voluntarily and consensual. You can leave at anytime. You can bring in partners at anytime as long as all partners are in agreement! Partners do not have to be humans! They can be LLC, Corp. etc.

Question 6

GP: Carry on a Business

Answer 6

Usually requires a series of transactions over a period of time. Be engaged in some affirmative activity.

Question 7

GP: Co-Owners

Answer 7

The key is co-ownership of the business, not of partnership assets or contributions.
A and B own a building. A is partners in an accounting firm with C & D. A contributes her right to receive rents to the partnership (A, C & D). B is not a member of the partnership.

Question 8

GP: For Profit

Answer 8

Intend to make profit. Distinguish from charitable purposes or voluntary association.

Question 9

General Partnership (Part 1)

Answer 9

A. Ease of Formation: Easily formed. Two people hang up the shingle. “It is what it is”.
B: Duration: If any partner leaves, then the partnership ends. Just because the partnership ends, does not mean the business ends.
C: Management: Each and every partner has a right to be involved in management.
D: Liability: Joint and several liability.

Question 10

Is this Business a Partnership? (Two Factors)

Answer 10

Sharing Profits and Sharing Management.

Question 11

Joint and Several Liability

Answer 11

Each partner is liable and all partners are liable, separately and together. There is PERSONAL LIABILITY too.
Agency Law applies: Each partner is both an agent and a principal for every other partner; each is a master and servant of the other.

Question 12

General Partnership (Part 2)

Answer 12

E. Transferability: None, unless all partners agree.
F. Taxation: PS return is informational only–individual partners pay personal taxes on income received from PS, reported on their personal returns as income.
G. Sources of Capital: Debt, only. Taking on new partners forms a new PS.

Question 13

Partnership by Estoppel:

Answer 13

Be clear and precise in your disclosures.
Misrepresentation another person has relied on, you are estopped that the other person is liable because they failed to encounter the representation (the Donald Trump incident). You created the impression although its not true.

Question 14

Enea v. The Superior Court of Monterey County

Answer 14

Enea acquired a 1/3 interest in the PS. Upon discovering William’s low rent he sued for breach of fiduciary obligations.
The Court said: Partner cannot benefit himself at the expense of the PS and other partners! Fiduciary obligation imposed by law, regardless of agreement among partners.

Question 15

Limited Partnership (Different from an LLP) (Part 1)

Answer 15

A. Ease of Formation: Requires registration with the state-a formal filing. Failure to file means the entity does not exist-may cause a LPS to be treated as a GPS. Name must include “LP” designation.
B. Duration: May have perpetual existence, that is, Limited Partners may withdraw and enter without dissolving LPS.
C. Management: Two types of partners-General Partners and Limited Partners. Only General Partners have rights in management. Limited Partners are “silent” on management issues. If a Limited Partner gets involved in management, it can have dire consequences.
D. Liability: Next slide!

Question 16

Limited Partnership: Liability

Answer 16

General Partners have full personal liability.
The liability of Limited Partners for business debts or obligations is limited to their capital investments.
If a Limited Partner engages in management, she loses her limited liability status! No longer “silent”?–treated as GP.

Question 17

Limited Partnership (Part 2)

Answer 17

E. Transferability: If LPS agreement provides, Limited Partners may sell interest; new Limited Partners may enter. General Partners in same position as PS.
F. Taxation: Like general PS.
G. Sources of Capital: Potentially unlimited access to investors in the form of Limited Partners.

Question 18

Corporation (Background)

Answer 18

The corporation is the most common form of doing business. Closely held by a small number of shareholders. Must maintain a distinction between yourself and the corporation. Must treat Legolas as a distinct person.

Question 19

Harold Lang Jeweler’s Inc. v. Johnson

Answer 19

Lang, Inc., A Fla. Corp. did business in NC for many years, but when it sued in NC court to collect a large debt, the case was dismissed. Lang never filed the proper paperwork to do business as a corporation in NC.

Question 20

Coopers and Lybrand v. Fox

Answer 20

The Court: One cannot be an agent of a non-existent principal. A promoter is personally liable for contracts made on behalf of a future corporation.

Question 21

Corporation: Unique name–Must include corporate designation

Answer 21

Two names here. Birth to the corporate entity (that owns the business). Then the name you are doing business as (d/b/a). You can do business under different name by filing a trade name certificate in the town/city.

Question 22

Corporation (Part 1)

Answer 22

A: Ease of Formation: Legal formalities required for formation AND for continuation.
B. Duration: Perpetual existence.
C. Management: Owners (shareholders) have NO rights to manage.The most they can do is vote for directors.
Directors manage (make policy) for Officers to carry out (day to day operation). Fiduciary obligation owed by directors to shareholders.
D. Liability: Owners (shareholders) have NO personal liability. This is the reason why corporations exist.

Question 23

Corporation (Part 2)

Answer 23

E. Transferability: Easy for publicly traded corporations; close corporations likely have transfer restrictions.
F. Taxation: Corporation does its own tax return, after their after tax income it distributes to shareholders as dividends. Then the shareholders pay tax on the dividends. (Double taxation issue?)
G. Sources of Capital: Advantageous–Debt & sale of shares/stock.

Question 24

Limited Liability Company (Part 1)

Answer 24

A. Ease of Formation: Legal formalities required for formation AND for continuation. Unique name–must include LLC designation.
B. Duration: Potential to be perpetual–depends on state law.
C. Management: LLC gives you management rights with a liability shield! Members give the management the shield.
D. Liability: Members (owners) have NO personal liability for contracts-this is why LLC’s exist.
Tort Liability: The LLC shields one from liability for the torts of the LLC.

Question 25

Limited Liability Company (Part 2)

Answer 25

E. Transferability: Some laws allow for transfer of membership interest, usually.
F: Taxation: LLC members may choose to be taxed as a PS or as a corporation.
G. Sources of Capital: Generally limited to debt and new membership shares.
H. Other Issues: Product of state statute; laws not uniform; interpretations of law have not matured. Conversion from other forms of enterprise to LLC may be taxable event.