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KU BLAW 301 - Chapter 17 (FA14)

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Slide 1Choice of Business OrganizationBusiness Organizations SummarySec. 1: Sole ProprietorshipsSole ProprietorshipsSole ProprietorshipTaxation of Sole ProprietorshipsAdvantages and Disadvantages of Sole ProprietorshipsSec. 2: PartnershipsPartnership LawPartnership LawPartnership ExistencePartnership TaxationPartnership FormationPartnership FormationRights of PartnersUPA Default Rules (cont’d.)Duties and Liabilities of PartnersAuthority of PartnersDuties and Liabilities of PartnersLiabilities of PartnersDissociation of a PartnerPartnership TerminationPartnership Advantages and DisadvantagesSec. 3: Franchises1Chapter 17Small Business Organizations2Choice of Business OrganizationA person starting a new business should be aware of the advantages and disadvantages of alternative business forms. Considerations include: Ease and expense of formation and maintenance.Personal liability of owners for business debts.Taxation of business income.Capitalization requirements.Management and operations.Entitlement to income and assets.3Business Organizations SummarySole Proprietorship (Ch. 17)—not a separate legal entity (the owner and the business are considered to be one and the same); not required to file formation documents with the state. General partnership (Ch. 17)—unincorporated legal entity that is not required to file formation documents with the state.Unincorporated legal entities (Ch. 18)—which are required to file formation documents with the state:Limited partnershipLimited liability partnershipLimited liability companyCorporation (Ch. 19)—legal entity that is required to file a formation document with the state of incorporation.4Sec. 1: Sole ProprietorshipsA sole proprietorship is a business form where ownership and control are vested in one individual. It is an unincorporated business with no separate legal identity– the business and the owner are legally the same.The owner is called a “sole proprietor.”A person who owns a business by himself, and has not organized it as a separate legal entity, operates as a sole proprietorship. More than 2/3 of U.S. business are sole proprietorships; 99% have annual revenues of less than $1 million; and most have no employees.Sole ProprietorshipsNo formation documents have to filed with the secretary of state when a sole proprietor starts the business.Depending on the nature of the sole proprietorship’s business, state sales tax and employment tax registrations may be required by a state. Also, a business license may be required by local jurisdictions where business is located. No special “entity” laws govern sole proprietorships; however, many laws affect business operations, e.g., employment; tax; contracts, torts; professional licenses, etc.56Sole ProprietorshipA sole proprietor is personally liable for the business’s debts, and a sole proprietor’s personal assets may are subject to claims of the business’s creditors.Case 17.1: Quality Car & Truck Leasing, Inc., v. Sark (OH Ct. App. 2013) Issue: whether the transfer of a sole proprietor’s house to his son (for $1) was fraudulent with respect to an unpaid creditor who had financed the purchase of the business’s equipment.Sole proprietors are liable for damages arising from their employees’ actions that are committed within the scope their employment (i.e. related to the business’s operations).7Taxation of Sole ProprietorshipsIncome from a sole proprietorship is reported on Schedule C of the owner’s federal individual income tax return (Form 1040). The owner is liable for taxes due on the business’s income (income taxes and SS/Medicare taxes). Business losses can offset the owner’s other income, and thereby reduce the owner’s overall taxes.In 2011, 23.5 million individual tax returns reported income/loss from nonfarm sole proprietorship activity.8Advantages and Disadvantages of Sole ProprietorshipsAdvantagesOwner is in complete control and is entitled to all profits generated by the businessEase of creation and maintenanceFlexibility, convenience of operationsSingle level of taxation.DisadvantagesUnlimited personal liability: owner is personally liable for business losses and debts, business contracts, and employee torts.Difficult to raise financing.No continuity after death of owner.9Sec. 2: PartnershipsA partnership is “an association of 2 or more persons to carry on, as co-owners, a business for profit.”Partners are co-owners of the business. They have joint control over the business’s management and operations, and they have the right to share in profits.Partnerships are recognized under state law as legal entities separate from their owners (partners). Partners can be individuals, corporations, other partnerships, LLCs, trusts, etc.A partnership is a “general partnership,” unless it was organized and registered with the state as a “limited partnership,” which will be covered in Ch. 18.10Partnership LawFormation and operation of partnerships are governed by state law. The Uniform Partnership Act (“UPA”) is statutory law adopted by all states (except LA). Some common law agency law concepts (to be covered in Ch. 20) apply to partnerships:Each partner is an agent of the partnership for the purpose of conducting the partnership's business.Partners have liability for the acts of other partners that occur in the course of conducting partnership business.Each partner is in a fiduciary relationship with the partnership and the other partners.11Partnership LawUPA provides “default rules” governing a partnership’s formation and operation; these rules apply if a partnership agreement does not provide otherwise.Ex.: All partners share equally in profits and management—unless the partners have agreed otherwise.The provisions of a partnership agreement can override most default rules provided by UPA, except those governing obligations to outsiders and those establishing fiduciary obligations of the partners.12Partnership ExistenceIf there is a dispute about the ownership/formation of a business, a court may find that a partnership exists even where there is not formal partnership agreement and or where one or more parties did not intend to form a partnership.The existence of a partnership may be inferred based on established facts. Three primary factors used by


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