chapter 20 Flashcards
Forms of business Ownership.
A.(77%) Individual Proprietorship
B.(6%) Partnership
C.(17% Corporation
D. Total of 800,000 firms–10% do 80% of volume
- Easiest and least expensive to establish
- Maximum degree of freedom from governmental regulation.
- Needs only:
a. Insurance
b. Tax registration
c. License - Proprietor
owns and operates the business. - All transactions in his name.
- Organizationally simple.
Individual Proprietorship
When dealing with an individual partnership, the ____ is responsible and personally liable for all
debts, obligations, responsibilities.
a. This includes all personal assets whether related to the business or not.
b. Has no continuity in event of death or incapacity.
c. Will / may provide for transition to new owner.
d. Owner must pay income tax on proceeds of
business.
Owner
An issue with Individual partnership is that ________
–can’t take advantage of fringe-benefit plans available to employees (e.g., retirement benefits).
self-employed
Partners are co-owners. Partners usually share in management. Profits and losses shared in proportion to the amount of ownership specified in agreement.
General Partnership
What are the advantages of a general partnership?
- Concentration of assets (increased bonding capacity)
- Pooling of equipment and facilities
- Consolidation of talents
Partners usually share in managementProfits and losses shared in proportion to the amount of ownership specified in agreement.
General partnership
why is general partnership not considered a legal entity.
- Pays no tax (but must file a form)2.Partners are not employees
a. No withholdings for Income Tax, FICAb. No payments for Unemployment
In some cases partnership can act like a legal entity:
- Own property–some restrictions on real estate
- Have employees
- Sue and be sued
Partners usually receive draws or salaries that are considered ____________ of the partnership.
operating expenses
are restricted from selling, assigning or mortgaging his interest without ___________.
consent of other partners
Exception: a partner’s share of profits can be assigned to _________.
another party
In General Partnership each partner is an _____ of the other partners.
agent
Each can bind the others in normal business with or without others’ consent –including contracts. Notice to one partner is notice to all. Partners are individually liable for all the debts of the partnership. An injured partner can claim against the others. Careful judgment should be exercised in selecting partners. If a partner withdraws from the partnership, he is responsible for all obligations up to time of withdrawal.Must publish notice of withdrawal and send to creditors and other involved parties to protect self against future claims.
General partnership
Partnership automatically dissolve upon the _________.
death of one partner
Partnership agreements may provide for continuation for a time for ____________.
reorganization
Dissolution is not _________.
termination
Has no effect on outstanding debts and obligations to others.
dissolution
Partners are still liable up to actual _____.
dissolution
In settlement of debt, outside creditors have_________.
first priority
In settlement of debts, return loans and advances made by _________.
partners
In settlement of debts, return initially invested _______ to partners
capital
In settlement of debts, remainder treated as ______ and distributed.
profit
Dissolution may be precipitated by
- Bankruptcy
- Expiry of the stated duration of partnership agreement
- Withdrawal of a partner
- Insanity or incapacitation of a partnerCourt of equity decree
- Mutual consentDeath of a partner
- A partner who invests cash but does not share in the operation or control of the business.
- Partner-Owner shares in profit or loss3. Liable only to the extent of capital contributed
- Must not exercise any involvement in partnership management or control, even by indirect pressure
- Otherwise might lose limited status and become general partnership
- At least one partner must be general partner
- Certificate must be filed with a public office and published as required by state law
Limited Partner
Partnership not dissolved due to death of ___________.
limited partner
Limited partner is not a creditor but an ______.
owner
Shares in profits and return of capital at dissolution.
The limited partnership
Limited partnership used principally for obtaining _____.
capital
- Preferable to borrowing from a lending institution because a lender may apply pressure, therefore control.
- Lower priority than lender on dissolution –no pressure, no control.
The limited partnership
An agreement between a partner and an outside party to share in profits and losses.
Sub-Partnership
is not a member of the firm and brings no new money to the firm
A sub-partner
performs no active function and has no voice in management
A sub-partner
is not personally liable to creditors
A sub-partner
A legal entity under a special name. Regulated by law [state(s) where it is incorporated].
The corporation
A corporation can be…..
1. Public 2. Private 3. Profit 4. Non-profit5. Quasi-public (essentially public but under private ownership or control)
6. Foreign 7. Domestic
A _______ can
- Do business as per its charter
- Own real and personal property
- Enter into contracts
- Sue and be sued in its own name
- Otherwise act as an individual
corporation
Advantages of a corporation are……
Advantages
- Perpetual life
- Limited liability to owners (stockholders)3. Ability to easily aggregate large capital via the large number of stockholders
- Employees can be owners
- Owners pay taxes only on receipts and corporation pays corporate tax on profit
- A corporation is considered foreign any place outside the state of incorporation2. To practice business in a foreign state, the corporation must be licensed (certified) in that foreign state
- Otherwise Construction contracts are unenforceable (no lien rights)
- No access to foreign state courts
- Pays taxes wherever business is done
foreign corporation
The rights of the ______ are:
- To subscribe to new issues first
- To reasonable inspection of the books
- To sue the corporation
- To share in declared dividends, which are paid only from earned surplus
- To share in assets of corporation if it is dissolved
- To enact bylaws of the corporation
- Tot elect directors, who in turn elect officers
- Cannot act as an agent of the corporation, only designated officers can9. Not liable for failure or debt
stock holder
are not agents of the corporation. Are fiduciaries, who must serve in the corporation’s interests with prudence and reasonable care
Directors
They appoint four necessary officer positions:
- President
- Vice-President
- Secretary
- Treasurer
Directors
______ positions may be more for larger corporations and may be doubled-up. May not be directors
officers
Are agents of the corporation. They are also fiduciaries and may be held personally liable for losses due to neglect or misconduct
Officers
- Created by the IRS for tax purposes.2. Can be taxed as a partnership ifDomestic corporation.
- Less than 35 stockholders who are individuals or estates.
- Has only one class of stock (Common).
- Personal liability is still limited.
- Shareholders taxed on share of earnings whether or not declared as dividends.
- No corporate tax is paid.
- Once made, the status must continue until unanimous vote of the stockholders to terminate.
The Subchapter (S) Corporation
A special purpose partnership. Members of the ___ can be proprietors. The ___ is a separate legal entity –a special purpose partnership used to Pool resources, Obtain special skills, Spread risks, Pool management
Joint Venture
Each member of the JV participate in conduct of business according to abilities and __________.
JV agreement
Legal requirements for the existence of the joint venture are complicated. They have to cover at least:
- A contract
- A common purpose
- A community of interest and equal right to control
