BUL3310 EXAM 3 STUDY GUIDE Forms of Business Organizations o SOLE PROPRIETORSHIP Most risk Advantages For companies seeking limited liability and permits pass through earnings and losses Meaning only taxed once at the personal income level Easiest and most inexpensive to create o Don t need formal documentation o Might have to file a DBA Certificate of Doing Business if the owner does not use his or her name in the title of the business 100 of ownership and profits stay with the owner Income is only taxed once at the owner s personal income tax rate Disadvantages Owner has unlimited liability for all claims against the business o All debts must be paid from the owner s assets Home Bank account Sources of funding Loans o Venture funding o Individual funding Governments Help o Small business administration Transferability of interest Business can be sold property inventory and good will Owner will usually sign a non compete agreement o PARTNERSHIP Two or more people agree to share the assets liabilities and profits of a business Can include corporations and natural persons Voluntary formation draw up articles of partnership to describe rights o In the absence of a partnership agreement Uniform Partnership Act UPA controls the partnership Involuntary formation by implication o Sharing of profits o Constitutes prima facie evidence that partnership exists meaning if it acts like a partnership then it is a partnership o Exceptions rent wages annuity to widow or estate payment for goodwill o Partnership by Estoppel Ostensible Partner results when someone allows the inference to be made that he she is a partner Ex Allowing name to be used on loan Partnership requires a DBA when the last names of partners are not used in naming the business Professionals such as lawyers doctors and accountants frequently employ this legal structure Partners have specific property rights Each partner owns and has use of the property acquired by the partnership Each partner has the rights to share in the profits and losses Each partner is mutual principal and agent of the others Advantages Have same advantages as sole proprietorships with regards to income expenses and taxes Shared risk of doing business Partners receive pass through earnings and losses taxed at their personal tax rates Disadvantages Partners are personally liable for all business debts and obligations Individual partners can bind the partnership contractually o Each partner is liable for the obligations that any other partner incurs in the course of doing business known as the doctrine of ostensible authority Partnership dissolution results when one partner is no longer associated with the partnership Ex Retirement Death Can Just Be a Change in Structure or Can Proceed to Termination Dissolution Methods o By agreement o By operation of law Death of a partner bankruptcy of partnership or partner o Court order Termination o Assets are liquidated o Distribute in this order outside creditors partners advances loans capital contributions profits Partners can be sued individually for the full amount of partnership debt Partnership assets reachable by partnership creditors Personal assets reachable by partnership creditors when partnership assets are exhausted Partnership Agreement Based on the Uniform Partnership Act wise to draw a partnership agreement that spells out o Business responsibilities o Profit sharing o Transfer of interest Partner s interest is personal property Can be pledged to creditors and transferred Admission of New Partner Requires Unanimous Transferee does not become a partner Consent Transferring Partner is Not Relieved of Liability Some Partnership Agreements Require Partners to Offer it First to Remaining Partners A written document will mitigate eventual disagreements and provide for an orderly dissolution should irreconcilable differences arise Minimum Requirements o Names of the partners o Name of the partnership o Nature of the partnership s business o The time frame of operation o Amount of each partner s capital contribution o Managerial powers of partners o Rights and duties of partners o Accounting procedures for partnership books and records o Methods for sharing profits and losses o Salaries if any of the partners o Causes and methods of dissolution o Distribution of property if the partnership is terminated o Binding contract between the partners to govern the following issues Who is entitled to purchase a departing partner s share of the business What events can trigger a buyout What price will be paid for the partner s interest o Prevents legal battles with the departing partner or with Buy sell agreement the estate of the deceased partner Key person life insurance o A policy on the life of the principal members of the partnership usually the senior partners o Upon the death of the partner the insurance proceeds can be used to keep the business going or to buy out the deceased partner s interest under a buy sell agreement Types of Partnerships General all the partners assume unlimited personal liability and responsibility for management of the business Limited the general partners have unlimited liability and they seek investors who liability is limited to their monetary investment o Limited partners have no say in the management of the business Can do the following and still retain limited liability status Can be an employee Can consult with and advise the general partner Can act as a surety guarantor for the limited partnership Can vote on amendments dissolution sale of property and debt assumptions o Goal is to have lots of limited partners o Governed by Uniform Limited Partnership Act ULPA o Must file certificate of Limited Partnership and meet statutory requirements o Limited Partners Get Direct Tax Benefits With Limited Liability o Consent of limited partners required for Admitting a new general partner Admitting a new limited partner can give authority in the agreement Extraordinary transactions selling assets o Limited partners have right to inspect books and records o Transfer of Interest Allowed but may have significant restrictions to prevent liability under federal securities law The more easily an interest can be transferred the more likely the IRS is to label it a corporation Transfer of a limited partner s interest does not dissolve the partnership o Dissolution Expiration of time period in agreement or event as provided in agreement Unanimous written consent of all partners By court order
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