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 OrganizationA 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 SummarySole 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 partnershipLimited liability partnershipLimited liability companyCorporation (Ch. 19)—legal entity that is required to file a formation document with the state of incorporation.4Sec. 1: Sole ProprietorshipsA 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 ProprietorshipsNo 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 ProprietorshipA 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 ProprietorshipsIncome 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 ProprietorshipsAdvantagesOwner is in complete control and is entitled to all profits generated by the businessEase of creation and maintenanceFlexibility, convenience of operationsSingle level of taxation.DisadvantagesUnlimited 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: PartnershipsA 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 LawFormation 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 LawUPA 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 ExistenceIf 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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