Pg 48

Question 1

What is a partnership agreement?

Answer 1

The operating manual for the partnership

Question 2

What does it mean to have flow through or pass through taxation?

Answer 2

When the partnership gets income, it doesn’t pay taxes on it, but the net income after operating expenses is distributed to the partners, and they pay personal income taxes on their share of the income. This avoids double taxation because the profits pass through to individual partners.

Question 3

Do corporations have pass-through taxation?

Answer 3

No, corporations are taxed and then the shareholders are taxed again on the dividends

Question 4

What types of business corporations can choose to be S corporations?

Answer 4

Only small business corporations can choose this because you cannot have more than 100 shareholders and you can only issue one class of stock.

Question 5

How are partnerships treated with regard to taxes?

Answer 5

They are not treated as tax entities under the internal revenue code, but they do have to file information listing their partners and their share of the income.

Question 6

How is a partner’s share of the income taxed?

Answer 6

As personal income.

Question 7

What does it mean that corporations endure double taxation?

Answer 7

Corporations are taxable units that are separate from their shareholders

Question 8

Is there any way for a corporation to avoid double taxation?

Answer 8

If you can meet the S corporation status requirements

Question 9

What is the rule for a corporation to figure out if it should be taxed as a corporation?

Answer 9

It involves the “check the box rules.”

Question 10

Unless a partnership agreement has a prohibition against transfer, can partners transfer the partnership?

Answer 10

Yes

Question 11

If a partner assigns his interest in the firm, does that dissolve the firm?

Answer 11

No, but it also doesn’t substitute the assignee for the partner, it just entitles the assignee to profits.

Question 12

What is involved in the process of winding up and liquidation?

Answer 12

• selling off partnership assets
  – paying creditors
  – distributing profits and losses between the partners
  – settling the affairs of the corporation

Question 13

What is in-kind distribution?

Answer 13

Dividing the assets of the partnership instead of selling things and then distributing profits. This is rarely allowed, but it may be given if:
– no one is interested in the assets of the business
– there are no creditors to be paid
– it is fair to all the partners

Question 14

Why is in-kind distribution not usually wise?

Answer 14

Because it can affect the creditor’s rights to collect since the assets as a whole are likely worth more than they would be once divided.

Question 15

Can any partner dissolve a partnership at any time?

Answer 15

Yes, that just subjects them to damages for breach

Question 16

What are different ways a partner can dissolve the partnership?

Answer 16

• breach
  – death
  – one partner going bankrupt
  – court decree that a partner is insane or guilty of serious misconduct regarding the partnership

Question 17

On dissolution, a partnership is not terminated until what happens?

Answer 17

The winding up is complete

Question 18

What’s the difference between an at will partnership and a term partnership?

Answer 18

• at will: the partners didn’t have any definite term or specific undertaking for the partnership. This is the default form of partnership. It can be dissolved by the express will of any partner without the consent of the others
• term: the partners have agreed either implicitly or explicitly that the partnership will have a definite term or undertaking

Question 19

What are the obligations of a partner after dissolution?

Answer 19

He stays liable for transactions that the partnership entered in the specified period after disassociation if at the time, the other party:
– had no notice of the disassociation
– and reasonably believed the person was still his partner

Question 20

Does a partner have actual authority after disassociation but before dissolution?

Answer 20

No, but he may have apparent authority

Question 21

Once a partnership is wound up, if there are not enough partnership assets to discharge partnership liabilities, what happens?

Answer 21

Individual partners have to contribute their responsible loss shares. If there are excesses, they are distributed to the partners according to profit shares

Question 22

What is the biggest legal fiction in business corporate law?

Answer 22

Piercing the corporate veil

Question 23

What are the things to discuss for business entities on an essay?

Answer 23

The advantages and disadvantages of these:
- liability
– taxation
– cost of formation and ongoing formalities
– management
– transferability of interest