Chapter 6 PG 206-220Sole ProprietorshipOldest and simplest form of a business.Is simply someone beginning to do business and typically do not require a government license or permit unless a fictitious name is being used.The proprietor owns all of the property and is responsible for the control, liabilities, and management of the business.The owner is the business.DisadvantagesLimited alternatives for raising capital.Owner is liable for all business debts.Owner is taxed personally, not the business.Operational and record keeping formalities of the business are owners choice.PartnershipA partnership is defined as an association of two or more persons to carry on a business as co-owners for a profit.The partners in a partnership are specifically called general partners.A partner can be a person, another partnership, a corporation, etc.A partnership is a separate legal entity and can be sued.Forming an agreement can be as simple as an oral agreement or an implied agreement.Typically partnerships have a formal written agreement that includesBasics such as the name of the partnership, dates, etc.Finances as to who contributes what and when. Also how the allocation of ownership shares will work out.Management deals with the voting rights of partners, and different committees.Dissolution are the procedures to be followed if the partnership is terminated, rights of the partners to leave, if a partner dies, and other problems.UPA (Uniform Partnership Act) governs the relationship of a partnership in absence of a specific agreement.Partners owe a fiduciary duty to each other, which means each partner must act in good faith for the benefit of the partnership.Unless specified, each partner has equal control in the partnership despite the amount of interest invested.The dissolution of a partnership occurs when an event takes place that precludes the partners from engaging in any new business.The winding up of partnership affairs involves completing any unfinished business and then collecting and distributing the partnerships assets.Limited PartnershipA limited partnership is a business organization made up of two or more persons who have entered into an agreement to carry on a business venture for profit. However a limited partnerships differs because not all partners in a limited partnership have the right to participate in the management of the enterprise and not all are liable for partnership debts.Uniform Limited Partnership Act dictates creating a LP.To create a LP, partners must file a certificate of limited partnership with the appropriate state official, often the secretary of state.The Act requires that certificates have…Name of businessType of character of businessEtc.The name of an LP must include the initial LP.A LP has at least one general partner and at least limited partner.Limited partners are investors who may not participate in managing the business.Limited partners are active within the partnership but are not liable for the debts or torts of the LP.Terminating a LP is the same as terminating a general partnership.CorporationsA corporation is an artificial person, or legal entity, created under state law.State governments have issued corporate charters to selected business.These charters gave special privileges and were competitive.Each state has a different procedure for instituting a corporation.This application to become incorporated is called “articles of incorporation”If the state approves an application it issues a “certificate of incorporation”Bylaws are the rules that regulate and govern the internal operations of the corporation.Corporations are separate legal entities. It is a “person” and has rights like a person.Close corporations are one whose shares are held by shareholder or a small group of shareholders.Public corporations are ones who stock is open to the public.Most corporations are privately held.A corporation consists of the board of directors, the shareholders, and the managers.There is an important legal separation of ownership from control.Shareholders own a corporation, can inspect books within reason, and can sell/give stock away within reason.Shareholders don’t actively run the company but choose who do.Shareholder meetings must have a quorum, which means half the shares must be present.Many shareholders give third parties a proxy (a written authorization to vote on their behalf).The initial board of directors is specified in the articles of incorporation or chosen by the incorporation at the first corporate meeting.Directors serve for the time allotted in the articles and can be removed with cause, which is typically a breach of duty of conduct.The board is typically the principal of a corporation, it sets corporate policy and decides corporate business.The business judgment rule makes directors and managers immune from liability when problems result from honest mistakes in judgment.Directors are subject to a fiduciary duty of loyalty.The corporations board of directors hire managers to run the business.Terminating a corporation involves first dissolution and then winding up.When a termination is voluntary, the board of directors are responsible for winding up the affairs of the corporation.There are professional partnerships for groups such as doctors.Limited Liability CompaniesA disadvantage of a corporation is double taxation while an advantage is limited liability.A limited liability company is a business organization that is treated like a corporation for liability purposes but like a partnership for federal tax purposes.A “articles of organization” must be filled to create a LLC.Most LLC statutes state that no member or manager will be personally liable for debts of an LLC.An LLC is usually formed with two or more members having equal status.The members have membership interest in the company, which somewhat like owning stock in a corporation or being a limited partner in a limited partnership.Typically less than 30 members.Members sign an operating agreement which provides rules about the operation of the company and the relationship of the members. Establishes the companies method of management, allocation of profits and losses among members, and other crucial information.The LLC agreement may give each member an equal voice and typically provides that members may hire a manager may hire a manger to run the LLC.An LLC is not allowed “perpetual” life.If someone leaves the LLC, it can continue if all the other