Level 2 Chapter 3: Ownership as a Business Flashcards
Sole Proprietorship
A business assumed by an individual (or legal spouses as a single legal entity). As a sole proprietorship, a business operates as an extension of the owner — the business is incapable of owning real estate on its own.
For this reason, the owner is personally liable for the profits, debts, and obligations of the business. Consequently, the owner’s personal assets are at risk in the event of business failure or debt.
This type of organization can operate under the name of the owner or another name, just so long as it is properly registered with the state.
Partnerships
Businesses that have a co-ownership structure. In a partnership, two or more people enter into a for-profit enterprise and share the risks and rewards of the business. In other words, like a corporation, it creates a separate “partnership” entity that can sue, be sued, and hold property separate from a partner’s individual property (and protect that property from a partner’s creditors).
An individual partner’s property and the partnership’s property are separate things. RUPA also gave limited liability protections to general partners in limited liability partnerships (more about what that means in a moment).
Can hold property in two ways: as tenants in partnership and as individual partners
2 types of partnership: general partnerships and limited partnerships.
Uniform Partnership Act
A law created by the National Conference of Commissioners on Uniform State Laws. This body aims to create uniform legislation that states can choose to adopt (or change, then adopt).
As Tenants in Partnership
This grants each member of the partnership equal and undivided interest in the property. The property is purchased and owned by the partnership, as a separate entity.
As Individual Partners
This establishes either tenancy in common or joint tenancy. Partners can convey their share of the property, but only with the approval of all partnership members. In this setup, the property is held by the partners themselves, not by the partnership entity.
General Partnerships
Each member equally assumes unlimited personal responsibility for the financial liabilities and obligations of the business. Often, the partnership is created because the real estate investment requires more time, talent, or resources than one person can provide on their own. That said, general partners are “hands on” partners, actively involved in day-to-day operations.
If any member of the business organization dies, goes bankrupt, or chooses to withdraw, the partnership will need to either be dissolved or reorganized.
Limited Partnerships
Business organizations comprised of at least one general partner and one limited partner. Limited partners are limited in terms of their degree of control, participation, AND liability, basically operating as investors. Unlike general partners, they are only liable to the extent of their investment.
A limited partnership can survive the death or departure of either a general or limited partner. This is because of contingency plans set out in the partnership documents.
Corporations
Legal entities that can be public, private, for profit, or nonprofit. They are created in accordance with state law (by way of a charter or certificate of corporation) and exist only as a matter of law. A corporation is a company or a group of people who are considered a single entity under the law. Corporations are people, too — from a purely legal standpoint, that is! That’s right, a corporation is considered a legal person, separate from the individual stockholders in the corporation.
And because a corporation is legally treated the same as a single person, the corporate ownership of real estate is ownership in severalty. Individual stockholders are NOT liable for the corporation’s debts.
Who’s Who in a Corporation
Here’s a quick look at the major players/groups you’ll find within a corporation:
The owners: Shareholders (or stockholders) own the corporation in stocks.
The board: The owners of the company (shareholders) are represented by the board of directors, who are elected by shareholders.
The managers: These corporate officers run the day-to-day operations of a corporation.
Corporations come in two flavors, C corps and S corps.
C Corporations
A C corporation, or C corp, is the most common type of business legal structure that a corporation can take. It can be any size and can be multinational in its composition. C Corps are required to have annual shareholder meetings and publish annual reports, along with other reporting requirements that vary by state.
C corps can issue different classes of stock, as well. For example, some stockholders have voting rights in the company while others do not.
This structure is subject to double taxation: The corporation itself pays income tax AND shareholders are taxed on dividends received.
Subchapter S Corporations
Also known as “S corps,” this less-common corporation type passes its income or losses through to the shareholders (this is called having a “pass-through” taxation structure). They then report those gains or losses on their individual tax returns. It’s sort of like a corporation that is treated like a partnership for tax purposes. These are limited to 100 shareholders or fewer, and the shareholders must be U.S. citizens or legal residents.
Limited Liability Companies (LLC)
Can be set up with one or more members. It’s not a corporation, exactly — it’s an “unincorporated association.” The owners of LLCs are called members.
LLCs can have as many members as they like, and corporations, foreign entities, regular people, and even other LLCs can be members. They aren’t required to do all of the reporting that corporations are required to do, and they aren’t taxed like C corps are — LLCs are pass-through entities.
LLC members can manage the business themselves, or hire someone else to do it. Though the LLC structure protects members from personal liability for business debts, they can be held liable if another member does something illegal.
Many states have regulations that prevent certain types of businesses, such as financial services businesses, from operating as LLCs.
Limited Liability Partnerships
Kind of partnership arrangement. It’s similar to a limited partnership, except that all partners have limited liability — there is no general partner. Instead, any partners can be involved in management, but are still shielded from liability.
Partners cannot be held personally responsible for other partners’ mistakes, though their investment in the partnership can still be at risk. Many medical practices are organized as LLPs, because the partners are protected from other partners’ potential malpractice suits.
The limits in the limited liability of the partners in an LLP depend on the laws in the state where it was formed.
Like all partnership arrangements, LLPs are not taxed as an entity. Instead they are a pass
