R6 - M4 - Business Structures Part 1 Flashcards
Which entities do you have to file formalities with the state? EX: file to do business with the state?
For sole proprietorships and general partnerships/joint ventures you do not need to.
For Limited Liability Partnerships, Limited Liability Company, Corporation, and S Corporation you have to.
Explain the liabilities of each type of entity?
Sole proprietorship - You have unlimited personal liability for all business obligations. The entity and your personal assets are not separate. You have personal liability, even personal assets.
General Partnership/Joint Venture - You have unlimited personal liability for all business obligations. The entity and your personal assets are not separate.
Limited Liability Partnership - Partners are normally not liable for the partnerships obligations, unless caused by their own negligence.
Limited Partnership - General Partner: Unlimited Liability. Limited Partner: Only investment is at risk.
LLC, Corporation, and S Corp - Members and shareholders are not personally liable beyond their investment.
Who manages the operations for each type of entity?
Sole proprietorship - The sole proprietor manages the business, but they can appoint a manager.
General Partnership/Joint Venture - Owners manage directly, or they can appoint a managing partner.
Limited Liability Partnership - Partners manage directly, or they can appoint a managing partner.
Limited Partnership - General Partner: is the exclusive manager. Limited Partner: Normally do not manage.
LLC - Members manage directly, or they can appoint a managing partner.
Corporation - Managed by board of directors that appoint officers to run day to day operations.
S Corp - Managed by board of directors that appoint officers to run day to day operations.
How can partners and shareholders transfer ownership to other people?
Sole proprietorship - Sole proprietor can sell the business at will.
General Partnership/Joint Venture - Partners cannot transfer ownership without unanimous consent
Limited Liability Partnership - Partners cannot transfer ownership without unanimous consent
Limited Partnership - Partners cannot transfer ownership without unanimous consent
LLC - Unless there is an agreement stating otherwise members cannot transfer ownership without unanimous consent
Corporation - Shareholders are free to transfer ownership unless they agree otherwise
S Corp - Shareholders are free to transfer ownership unless they agree otherwise, unless a foreign entity.
How are all of these entities taxed?
Sole proprietorship - Flow through taxation.
General Partnership/Joint Venture - Flow through taxation.
Limited Liability Partnership - Flow through taxation, but partners not managing have passive loss restrictions.
Limited Partnership - Flow through taxation, but partners not managing have passive loss restrictions.
LLC - Flow through taxation, but members not managing have passive loss restrictions.
Corporation - Income taxed at corporate level, and again to shareholders once the dividends are distributed.
S Corp - Flow through taxation, but shareholders not managing have passive loss restrictions.
What is the duration of a sole proprietorship?
Cannot live past the life of the owner, may be terminated at any time by the owner.
What are the pros and cons of a sole proprietor?
Pros: You manage the whole business, all income and losses pass to your personal return, no paperwork needs to be filed.
Cons: all of your personal assets become liable, no separation.
For a general partnership, how is it formed?
Two or more people decide to do business together for a profit.
No filling with the state is needed, and no express agreement is required. It can be from conduct, you just show up and work together and bill people. That is a valid general partnership.
What is the main difference between a joint venture and a general partnership?
A joint venture is for a single project or a related series of projects, while a general partnership is an ongoing business.
So a joint venture would be like, two people come together to sell their hot dogs at a sports game, but only for that game. It’s not an ongoing business, or think of a lemonade stand between two people for a day.
If it is hard to tell which is which, just look to see if a creditor is getting profits in a company. That is a partnership.
What is the exception where a general partnership would need writing to continue as a partnership?
If the partners agree to be partners for more than one year, then they would need this in writing.
What are the advantages of a general partnership?
Ease of formation, and they are their own entity. For legal purposes, people can sue the partnership, but for tax purposes, you get a K-1 to report on your individual return.
For a general partnership, how are the partners share of ownership in the general partnership determined?
Unless their is an agreement stating otherwise, for general partnerships, it does not matter how much you put up, you are all equal partners. So for example, if there are 5 partners, you all own 20% no matter if one partner contributed more to the business.
This also applies for profit and loss earnings.
For general partnerships, what is the required approval for when you make changes to the partnership?
There are two types:
If there are changes with the ordinary course of business, you need majority vote from all the partners to make that change. As always, if there is a partnership agreement stating otherwise, then that would apply.
If there are changes outside the ordinary course of business, then you would need the consent of all the partners. EX: selling or buying a business, admitting new partners, legal cases, etc.
How does agency law work in a general partnership?
We have to remember that in a partnership, the partnership is the principle, and the partners are the agent. This gives the partners apparent authority to third parties, and actual authority is granted by the other partners in the business.
Now if a partner acts outside of their actual authority and gets into an agreement that were not supposed to do, the partnership can still be bound, and then they can sue the partner for damages.
The partnership can also ratify and accept the agreement if they want.
Who owns the assets in a general partnership? The partnership or the partners?
The partnership owns all the assets, the partners do not have any ownership in those assets. The partners can sell those assets on behalf of the partnership, but they cannot sell them for personal use, they cannot use them for personal use, they cannot attach the partnerships assets on their personal debt.
Can a partner in a partnership assign their interest in a partnership to someone else without consent?
Yes, they are assigning interest to someone else, but they are not making a new partner. Assigning interest, just means that part of the business’s profits are going to go to someone else, but they do not have the ability to run operations, and look at books and records. For this reason, you can do this with no consent.
Same rules applies to creditors, and heirs if a partner passes. They cannot touch the PP&E, but they can go after the interest the partner made.
