Lesson 23: Legal Responsibilities and Business Strategies Flashcards
What structures do for-profit businesses typically operate under?
- sole proprietorship
- partnership
- corporation
What is a sole proprietorship?
It is a business owned and operated by one person.
How does a sole proprietorship exsist?
As long as the owner operates the business and profits from the business belong to the owner.
In a sole proprietorship, there is no ________ ____ that shields the actions of the business from the personal responsibility of the owner.
corporate veil
When an owner of a sole proprietorship conducts business under a different company name, does the personal responsilibty of them (being the owner) still reside on them?
Yes
What are the cons of a sole proprietorship PT business?
- no corporate veil to protect you from personal responsibility/fees
- incoming revenue can be decreased if you take time off
- if any lawsuit should occur, the financial loss is far greater and can cause you to sell assets
What is the definition of a partnership business?
When two or more people agree to operate a business, share profits/losses.
Partnerships can be created without filing paperwork, why should you file these documents though?
Any partnership should have legal documents to establish the rules of operation that outlines the structure of authority, partners’ rights, expected performance/contributions from each party, buy-out clauses, income distribution and responsibility for debts.
It basically protects each partner’s finances and job.
What should be included in a partnership rules of operation legal document?
It should outline and clearly define:
- structure for authority
- partners’ rights
- buy-out clauses
- income distribution
- expected performance and contributions from each partner
- responsibility for debts
In extreme cases, the lack of a partnership agreement can result in what?
The courts requiring the business to be dissolved to settle financial disputes
Partnership paperwork should be designed to address any eventuality, what is an example of one?
Potential death or incapacity of one of the partners.
What is a general partnership?
The joining or 2 or more individuals to own and operate a business.
Why will most attorneys advise against a 50-50 partnership split?
Because this can result in a stalemate because neither partner can institute policy without the other’s permission as business decisions must be approved by a majority of 50.1%.
Why can a disproportionate ownership in a partnership cause issues?
Because the minority partner ultimately cannot make decisions without permission from the other and may not want to invest as much as they get less profit/income.
What is the difference between an express partnership and an implied partnership?
An express partnership is created and recognized by a contract whereas an implied partnership is created and recognized by the judicial system without a contract necessarily.
What is an implied partnership?
One that is created and recognized through the judicial system as the individuals act as partners but don’t necessarily have a binding contract.
Such as opening a business bank account together or co-signing a loan.
What is an express partnership?
One that is created and recognized by the parties signing a contract.
In some cases, minority partners may be personally liable for a greater share of the companies’ liabilities than their % of ownership - why?
If their partner files for bankruptcy, the minority partner may be required to cover the financial obligation of the insolvent general partner even if they own 45%.
Why do some partnerships involve limited patners?
Limited partners are only liable for their direct financial contribution so this protects the partner from covering financial obligations should their partner pull out.
What do limited partners not gain in a partnership?
Any formal managerial input regarding the operations of the business.
Why has it proven to have issues in a partnership where one partner is the ‘hands on’ person and the other is the ‘office/admin’ person?
Because it creates problems where one partner maybe doesn’t fully value/appreciate the other partner’s input/work.
When/why does a partnership end?
When a partner dies, becomes bankrupt, the other partner engages in any illegal activity or if the court rules a partner as being medically incapacitated. It can also occur when the company is not making money and all parties wish to dissolve the partnership.
If a business is not making any money, what could happen for the partnership?
The partnership is dissolved unless one or more partners have different opinions on the financial future of the company.
A resolution must be met between all parties - these may include court intervention to determine dissolving of the partnership or compensation for one’s exit.
What is flow-through taxation?
When financial profits and losses flow from the business directly to the investors. The business does not pay any taxes, rather, the profits are taxed on the investors’ individual tax return and losses can be used by investors to offset other personal income.