Ownerships: Business & Trusts Flashcards
business that consists of one person (or a married couple that functions legally as one person)
Sole Proprietorships
Sole proprietorships can’t own property as a business. Instead, any property is held by the business’s owner.
each member equally assumes unlimited personal responsibility for the financial liabilities and obligations of the business.
General Partnerships
at least one general partner and one limited partner. Limited partners are limited in terms of their degree of control, participation, AND liability. Basically, limited partners are investors.
Limited Partnerships
A corporation is a company or a group of people who are considered a single entity under the law. 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.
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
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 (so for example, some stockholders might have voting rights in the company while others do not).
C Corps
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. The corporation itself is not required to pay separate taxes.
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.
S Corps
A limited liability company 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 Company
LLCs in Arizona are governed by the LLC Act. This Act authorized any kind of business to form an LLC EXCEPT banking and insurance companies. Because of the way the law was written, LLCs in Arizona offer many advantages to their members. LLCs have become the preferred business structure in the state for small and medium businesses.
To create an LLC, the business has to file Articles of Organization with Arizona Corporation Commission with the LLC’s name, address, the names and addresses of the members or managers, and a few other nuts and bolts about the business. LLCs are governed by a document called an operating agreement that outlines how the business will be run.
LLCS Arizona
A limited liability partnership (LLP) is a 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.
Like all partnership arrangements, LLPs are not taxed as an entity. Instead, they have a pass-through structure, where profits and losses are claimed on the partners’ tax returns.
LLP’s
LLPs in Arizona
To form an LLP in Arizona, the partners have to file a Combined Certificate of Limited Partnership & Statement of Qualification with the Secretary of State.
Both LLCs and LLPs
In other words, both LLCs and LLPs enjoy the partial liability shield of a corporation and the pass-through taxation structure of a partnership.
LLPS Arizona
Let’s go over the three roles or players you’ll find in a trust:
The creator of the trust is the trustor.
The person entrusted to hold and manage the assets is the trustee.
The individual who ultimately receives the benefits or assets of the trust is the beneficiary.
Sounds simple enough, right? Trustor ➡️ trustee ➡️ beneficiary.
However, depending on the kind of trust and the goal of the trust, a single person could play two or even all three of these roles.
Trusts
Trustee and Trustor
The trustee carries out the trustor’s wishes by holding title to the trust and performing according to the trustor’s wishes concerning the property. Think of the trustee as the trusty helper taking care of the title until the property can be transferred.
If they fail to manage the trust as directed, they can be sued. (Plus they’re just, like, not very nice people.)
Trustee & Trustor
A living trust is a trust established when a trustor is still alive. It is sometimes called an inter vivos trust.
The trustor of a living trust can name themselves the trustee and/or beneficiary to control or enjoy the trust’s assets while they’re still alive.
If they do, they’ll need to designate a backup trustee and beneficiary for when they are no longer able to fulfill that role, either due to incapacitation or death.
The two biggest advantages of living trusts as estate planning tools are:
Avoiding probate
Having a process in place in case the trustor becomes incapacitated before their death — the backup trustee is able to step in and manage their assets
Living Trust
A living trust is a great estate planning tool because it keeps the properties from having to go to probate. Probate is the court-supervised execution of a will, and it can be expensive: up to 3-7% of the value of the property, in some states.
Avoiding probate is particularly attractive to people with property in multiple states, as they would have to be probated separately in each state.
Avoiding Probate
Revocable trusts can be changed by the trustor at any time. Property can relatively easily be added or removed, beneficiaries and trustees can be changed, and the trust can even be dissolved if it’s no longer useful.
Sometimes people will use a revocable trust to shield their property from liability or to disguise the true owner of the property.
Other times, a revocable trust is simply a supplement to a will. It’s easy to change if the trustor decides to dramatically disinherit an heir for being a scoundrel.
If a trustor wants to sell the property in a revocable trust, they will generally need to remove it from the trust. Real estate in revocable trusts is not disqualified from the capital gains tax exemption or the mortgage interest deduction.
Revocable Trusts
