Rules of Law/Tests to know Flashcards
What type of liability does a proprietor have in a sole proprietorship?
Unlimited personal liability
The owner is personally responsible for all debts and obligations of the business.
How is a sole proprietorship formed?
By an individual deciding to start a business with no formal legal requirements
Local business licenses or permits may be required.
What happens to a sole proprietorship upon the owner’s death?
It is terminated
Termination can also happen voluntarily.
What is a key limitation on capitalizing a sole proprietorship?
No equity can be sold
Sole proprietorships cannot issue ownership shares.
How are profits taxed in a sole proprietorship?
As personal income to the owner
Reported on Form 1040 using Schedule C.
What should business owners consider regarding liability protection?
Extent of protection from personal liability for business debts
Important when selecting a business organization.
What is a franchise?
A business model where a franchisor grants a franchisee rights to operate using the franchisor’s brand
Typically established through a franchise agreement.
What does a franchise agreement outline?
Terms and conditions of the franchise relationship
Includes rights, responsibilities, fees, operational guidelines, training, and support.
Who regulates franchises in the United States?
Federal Trade Commission (FTC) and state levels
FTC oversees franchises through the FTC Franchise Rule.
What is required by the FTC Franchise Rule?
Franchisors must provide a Franchise Disclosure Document (FDD)
Contains important information about the franchise.
Fill in the blank: Sole proprietorships typically raise capital through _______.
Personal funds, loans, or reinvested profits
What are some factors to consider when selecting a business organization?
- Liability Protection
- Taxation
- Management and Control
- Capitalization
- Regulatory Requirements
- Continuity and Transferability
What governs relations within partnerships?
Relations within partnerships are typically governed by the partnership agreement and relevant state statutes.
What is the role of the partnership agreement?
The partnership agreement outlines the terms agreed upon by the partners.
What do state statutes provide in partnerships?
State statutes provide default rules and regulations that apply if the partnership agreement is silent on certain issues.
Can partnership agreements override state statutes?
Partnership agreements can override default rules provided by state statutes, but certain mandatory rules cannot be altered by agreement.
What are default rules in partnerships?
Default rules act as ‘gap fillers’ when the partnership agreement is silent.
What are mandatory rules in partnerships?
Mandatory rules are legal requirements that must be followed and cannot be altered by agreement.
How do partners typically share profits and losses?
Partners typically share profits and losses equally, unless otherwise specified in the partnership agreement.
Who owns partnership property?
All property acquired by the partnership is owned collectively by the partners and used for business purposes.
What rights do partners have in management?
Each partner has an equal right to participate in the management and decision-making of the partnership, unless otherwise agreed.
What right do partners have regarding indemnity?
Partners have the right to be indemnified for expenses and liabilities incurred in the ordinary course of partnership business.
How do partners typically vote in decisions?
Partners generally have an equal vote in partnership decisions, with voting typically done on a per capita basis unless the agreement specifies otherwise.
What limitations may partners face?
Partners may be restricted from engaging in certain transactions that could conflict with the partnership’s interests or violate the partnership agreement.
