R8.3 – Business Structures Flashcards
Sole Proprietorship
Simplest form of business ownership
Sole proprietor not a separate entity from business
No filing with state
– publish true name of business owner if using fictitious name
Unlimited liability
Profits and losses flow-through the business to the sole proprietor
– Report net income on owner’s Form 1040 on Schedule C.
Can’t exist beyond the life of the sole proprietor
Can terminate business or transfer interest in sole proprietorship at will
Business Structures
- Sole Proprietorship
- General Partnership
- Joint Venture
- Limited Liability Partnership (LLP)
- Limited Partnership (LP)
- Limited Liability Company (LLC)
- Corporation
General Partnership
General partnership = 2 or more people intend to carry on, as co- owners, a business for profit
General Partnership – Formation
Nothing needs to be filed with the state
– Exception: Partnerships doing business under a fictitious name must register with the state.
Express agreement not required
– Agreement can be implied from conduct
– To enforce agreement to remain partners for longer than one year, writing is required under the statute of frauds
Any party competent to make a contract
– An individual, corporation, partnership can be a partner
– A minor can be a partnership, but partnership voidable at option of minor
General Partnership – Nature
General partnership not separate entity for federal income tax purposes
– Partnership does not pay federal income tax
– Partner’s report share of partnership profits and losses flow on their individual returns
General partnership treated as separate entity for other purposes
– partnership can be used in its own name
– Separate entity for employment so pay FICA, FUTA, and workers’ compensation
General Partnership – Operation
All partners have equal rights to manage the partnership business unless partnership agreement states otherwise
Matters within the ordinary course of business decided by simple majority unless partnership agreement states otherwise
Matters outside the ordinary course of business decided by consent of all partners
– Admitting new partners
– Confessing a judgment of submitting a claim to arbitration
– Making fundamental change in the partnership business
– Changing partnership agreement
– Assigning partnership property to others
General Partnership – Agency of Partners
Each partner is a mutual agent of other partners
Each partner has
– Actual authority granted
– Apparent authority for transactions within regular course of business
– No apparent authority for transactions outside the regular course of business
Partner’s apparent authority cannot be limited by resolutions or instructions of which the third-party is unaware
A partner who acts outside scope of actual authority liable to the partnership for any damages caused
General Partnership - Rights in Partnership Property
Partnership owns all money and property contributed by partners and any acquired by partnership
Partners not treated as co-owners of partnership property
– Can’t assign or transfer his rights in a specific item of partnership property
– Partner’s creditor can’t attach to partnership property to satisfy partner’s obligation to creditor
– Partnership property is not subject to individual partner’s liability for alimony
– Upon death, rights in partnership property vest in surviving partners and do not pass on to partner’s estate
Partner can’t mortgage partnership property without authority
General Partnership – Rights in Partnership Interest
Partner’s interest in partnership consisting of partner’s right to his share of the profits and surplus
Partner can assign his interest in the partnership
– Assignee has rights to partner’s share of the profits and surplus, but has no management rights
– Assignee has to be admitted as a partner to get management rights
Partner cannot assign his interest in specific partnership property
A creditor of an individual partner can attach a partner’s interest
When a partner dies, his rights to profits vests in his heirs
General Partnership – Rights to Indemnification & Contribution
Partnership must indemnify every partner for expenses incurred by the partner on behalf of the partnership
If partner pays more than his share of a partnership debt, can seek repayment from other partners
General Partnership – Right to inspect books and records
General Partnership – Rights to bring legal action against partnership
Every partner has the right to inspect and copy the books and records of the partnership
Partners can bring legal actions against the partnerships under most circumstances
General Partnership – Duties & Legal Obligations
Each partner owes a fiduciary duty to the partnership and is bound to use partnership property and his best efforts for the benefit of the partnership
Each partner is personally liable for all partnership obligations
Partners are personally liable for all contracts entered into and torts committed by other partners within the scope of the partnership business or which are otherwise authorized
Partner’s liability is joint and several
General Partnership – Profit & Loss Allocation, and Distributions
Partners have equal rights to share in the profits of the partnership, unless partnership agreements states otherwise
Partners share losses in the same manner as they share profits, unless agreed to otherwise
Partner has no specific rights to receive distributions from the partnership other than as they agree
Partner’s are to devote themselves to partnership business full-time, unless agreed to otherwise
– Don’t get any re numeration for services other than their share of profit of business
– Exception: a surviving partner is entitled to reasonable compensation winding up the partnership affairs.
General Partnership – Termination: Dissociation
Dissociation = 1 or more partner leaves partnership
– Does not necessarily dissolve partnership
– Partner who wrongfully dissociates is liable for damages caused by dissociation
– At will partnership = partner can quit at any time
Dissociated partner’s apparent authority to bind the partnership will continue until 3rd parties given notice of the dissociation
Dissociated partners remain liable for debts incurred by the partnership prior to dissociation unless released by creditor or novation
Dissociated partner may be liable for debts incurred up to 2 years after the date of dissociation if the other party to the transaction reasonably believed when entering the transaction that the dissociated partner was still partner and did not have notice of the dissociation
Incoming partner is not liable for debts incurred prior to him becoming partner, but incoming partner’s contribution can be used to settle prior debt
General Partnership – Termination: Dissolution
Dissolution = partnership is dissolved and business will be wound up
A partnership will be bound by a partner’s act after dissolution is the act is appropriate for winding up the partnership
Partnership is bound by partner’s post-dissolution act if 3rd party not notified of dissolution
Partnership continues to exist after dissolution until is business is wound up, at which time partnership is terminated
The following people can wind up a partnership
– All partners except a partner who has wrongfully caused a dissociation
– Surviving partner if partnership dissolved by death of a partner
– Last surviving partner’s executor if partnership not wound up when the last partner dies
General Partners – Termination: Distribution of Assets
- Reduce assets to cash
- Pay creditors including partners that are creditors
- Balance handed over to partners
Joint Venture
Association of persons or entities with the intent of engaging in a single business venture for profit
Same legal requirements, consequences, advantages, disadvantages as general partnership
General partnership vs. joint venture
– joint venture: single transaction or project, or related series of transactions of projects
– general partnership: ongoing open-ended association
Limited Liability Partnership (LLP)
Flow through of profits and losses to partners
Formation: must file with state
Liability of LLP partners:
– Not personally liable for acts of fellow partners, employees, agents
– Liable for negligence and negligence of those under direct control
– Not personally liable for debts and contractual obligations of the LLP
– Liable only to the extent of the capital contributions and for their own and their subordinates’s negligence
Limited Partnership (LP)
Limited partnership = 1+ general partner plus 1+ limited partners
–.Need at least one general partner
Must file with state
– Name of business must include “limited partnership” or “Ltd.”
New partner can be added only with consent of all partners
Allocation of profits and losses according to partnership agreement
– If no agreement, profits and losses in proportion to contributions
Death of a limited partner does not cause dissolution
Limited Partnership (LP) – General Partners
Personal liability for all partnership debt
Responsible for management
Can also be a limited partner at the same time
Can be a secured or unsecured creditor of partnership
Limited Partnership (LP) - Limited Partners
Liability is limited to his investment
No right to take part in management
Not an agent of business – cannot bind business in contract
No fiduciary duty to partnership
Uniform Limited Partnership Act of 1976 = Limited partners are liable as general partners if they participate in management
Uniform Limited Partnership Act of 2001 = limited partners not liable as general partners if they participate in management
1/2 of states follow 1976 rule, 1/2 of states follow 2001 rule
Limited partner can assign his interest in the partnership
– Assignee has limited partner’s right to profits
– Assignor ceases being limited partner upon assignment of all limited partnership interest
Limited Liability Company (LLC)
Entity distinct from members
Profits and losses flow-through the LLC to owner
Limited liability
Formation – File with states
Can have 1-person LLC
Limited liability Company (LLC) – Operation
All members have rights to participate in management
Members participating in management are agents of the LLC,
Members owe fiduciary duty to LLC
Voting rights proportional to contribution
Profits and losses allocated according to contribution
– Uniform Limited Liability Company Act states divides profits and losses equally
LLC members don’t have right to any particular distribution
LLC member can not transfer ALL of his interest in LLC without consent of all the other members
LLC Members can’t assign rights to manage LLC
Corporations – Nature
A corporation is a separate legal entity distinct from its owners and managers
– separate entity status may sometimes be ignored to reach assets of shareholders or managers (piercing the corporate veil).
Only the corporation is liable for corporate obligations
– Shareholders, directors, officers not personally liable for contracts made by corporation
– Shareholders, directors, officers not personally liable for torts unless they participated
Corporation generally has perpetual life
Corporations – C corporations
C corporations tax as entity distinct from owners
Shareholders not taxed on C corporation’s profit until distributed as dividends
Double taxation
Corporations – S Corporations
S Corporation taxed like partnership: Flow-through to owners
– No double taxation
Restrictions on S corporation
– No more than 100 stockholders
– Shareholders must be individuals, estates, or certain trust not C corporation
– Corporation must be domestic corporation
– Only one class of stock
– No foreign shareholders
Corporations – Formation: Articles of Incorporation
Formation: File articles of incorporation with state
Articles of incorporation filed with the states
– Name of Corporation
– Name an address of Corporation’s registered agent
– Name and addresses of each of the incorporators
– Number of shares authorized to be issued
– One or more classes of shares must have unlimited voting rights
– Corporations can choose to include a statement of its business purpose and articles.
Some states require a purpose clause
– If a corporation has a narrow purpose and acts outside it, it is said to be acting “Ultra Vires”. – Director or officer who authorizes act may be liable to corporation for damages caused
Bylaws = rules for running corporation
– Not part of articles of incorporation and are not required to be filed with the state
Corporations – Piercing the Corporate Veil
Piercing the Corporate Veil = holding shareholders, officers, or directors of a corporation who were active in management or operation of business personally liable because the privilege of conducting business in corporate form is being abused
Reasons corporate veil pierced
– Shareholders commingle personal funds with corporate funds
– Corporation was inadequately capitalized at time of formation
– Committing fraud on existing creditors
Corporate Veil will not be pierced for:
– Incorporating as S corporation
– Incorporating as a partnership
– Bankruptcy of a corporation that was adequately capitalized at the outset.
Corporations – Financing
Debt securities = Bonds
Corporation as borrowed funds from an outside investor and promises to repay them
Equity Securities
– Shares
– Stock warrants
– Options to purchase shares granted by corporation
– Stock Options
– Option to purchase shares granted by others
Corporation must issue stock – If only one class of stock, it is called common stock – Can choose to issue several classes or series of stock with varying rights
If par value, Corporation can not issue stock at less than par value.
Board can decide to issue uncertified shares if article or bylaws don’t prevent it
Unless prohibited by articles, board can issue stock at any price it considers appropriate
– As long as board values property received in good faith, its determination of value is conclusive
Corporations – Shareholders’ Voting Rights
Elect or remove directors
Approve fundamental changes to the corporation
– Dissolution
– Amending articles of incorporation
– Mergers, consolidations, and compulsory share exchanges
– Sale of substantially all of the corporate assets.
Inspect books and records (5 days written notice stating a proper purpose)
Preemptive rights
– Right of first refusal when corporation proposes to issue additional shares of stock
Dissenting Shareholder Appraisal Rights
– When shareholder dissatisfied with fundamental corporation changes can ask corporation to pay them fair value of shares rather than remain shareholders.
Derivative actions
– Corporation has legal cause of action against someone but refuses to bring action, shareholders have right to bring shareholder derivative action, against directors or outsiders, to enforce corporation’s rights
– Recovery goes to corporation, not shareholder who brought action
Generally, one share = once vote
Some classes may be denied the right to vote, or may be granted a voting preference
Cumulating voting for directors
Shareholders don’t have right to a distribution until and unless declared by board of directors.
Preferred Shareholders must be paid first non preferred shareholders
Corporations – Directors
Duties
– Elect, remove, and supervise officers
– Adopt, amend, and repeal bylaws
– Fix management compensation
– Initiate fundamental changes to the corporation’s structure
– Sole discretion to declare distribution to shareholders
– Shareholders have no power to compel a distribution
– Have fiduciary duty to corporation
Business judgment rule – directors liable to corporation only fo negligent acts or omissions
Duty of loyalty
Right to Rely on info provided
Can be indemnified lawsuit brought against them in their corporate capacity
Can not be indemnified against shareholder derivative suit
Corporations – Officers
Agents (employees) of the corporation
Conduct its day to day operations and
Can bind the corporation to contracts made on its behalf.
Selected by the directors
Serve at the discretion of board – Can be removed with or without cause
Not elected by shareholders
Officers have fiduciary duty to corporation
Protected by business judgment rule
Can be indemnified
Officers can serve as director
Officer not required to be shareholder, but can be
Corporations – Fundamental Changes
Require corporate shareholder approval
– Dissolution
– Amendments to the articles of incorporation
– Merger’s consolidation, and compulsory share exchanges
– Sales of substantially all of the corporation’s assets outside the regular course of business.
Corporations – Mergers, Consolidations, and Share exchange
Merger = 1 or more corporation joins with another corporation
– 1 corporation survives merger, and continues in existence, other corporations cease to exist
Consolidation = 1 or more corporation joins together to form new corporation
– New corporation emerges; old corporations all cease to exist
– New corporation liable for debts of old corporations
Share exchanges = 1 corporation acquires all of the outstanding shares of one or more classes of stock of another corporation
– No new corporation; all corporations continue to exist
Share exchange: only the corporation whose shares are being acquired goes through fundamental changes procedure
Merger of subsidiary - parent corporation owning 90%+ of subsidiary can merge subsidiary into parent without approval of subsidiary’s shareholders, parent’s shareholders, or subsidiary board.
Corporations – Fending off Unwanted Takeover Attempts
Persuade shareholders to reject offer
Sue person or company attempting takeover for misrepresentation or omission and obtain injunction against takeover
Merge with white knight (company that wants to merge)
Make self-tender (offer to acquire stock form own shareholders)
Pay greenmail (pay person/company to abandon takeover attempt)
Lock up crown jewels (give third party option to buy company’s best assets)
Scorched earth policy (sell off assets or load up on debt)
Apply Shark Repellant (amend articles of incorporation or bylaws to make takeover more difficult)
Corporations – Termination
Dissolution = fundamental change
– Needs director and shareholder approval
May also be pursuant to court order
After dissolution, corporation exists until liquidation process complete.
Corporations – Tax Year
Can choose between calendar year or fiscal year
For tax purposes, fiscal year must be approved by IRS
