1 Final Exam Law Notes Chapter 9 Business Organizations Considerations to open up a business 1 Creation a Set up steps b Costs 2 Continuity a How is it tied to the owner b Stability c How does it dissolve a Egos of owners b How to break dead lock c Equal or different control 3 Control 4 Liability 5 Taxation a Is liability personal or just that of business a How is business taxed b How is money distributed to owner taxed c Single tax or double tax Types of Entities tax on them a Advantages 1 Sole Proprietor Ship one person one owner owner keeps all profits and pays personal income b Disadvantages i Owner is in complete control receives all profits ii Flexibility iii Ease of creation maintenance i Owner is personally liable for all torts contracts ii Lacks continuity after death iii Difficult to raise financing c Creation it is the least expensive and easiest kind of business to create i May need a license or permit d Need to file a fictitious name registration if you want to open a business in a name other than your own e Can t use a fictitious name that is misleading f Liability you can reduce the risk by keeping all of your personal assets in joint names with a spouse and by buying liability insurance g Tax Implications separate tax return is not filed for the business i The business income goes on a schedule C on your tax returns h Termination terminates whenever the owner stops doing business No forms have to 2 Partnership when two or more people operate a business as co owners they have created a be filed with the government partnership 2 a They will share in the profits and losses equally unless there is an agreement to the b Usually there is an equal rights to management unless otherwise agreed to c Partnership can include other forms of entities like a corporation company can join a contrary partnership d Can be written oral or by implication i Does not need to written e Cost is minimal f Articles of Partnership g Partners owe a duty of loyalty to each other and are considered trustees in their h i j dealings They cannot gain an advantage on the partnership affairs Liability each partner has unlimited liability for the debts of the business Joint and Several means that the creditor can go after one person for the debts Tax Implications a partnership is not a taxable entity The profits and losses go on each person s tax return i Partners show the profits and losses on a Schedule K 1 k Termination a partnership terminates on the happening of certain events i Anytime one partner leaves that partnership terminates ii Partner who leaves business must give notice to third parties who have dealt with the business in order to be relieved of future business debts l Termination two step process i Dissolution when a partner leaves the partnership partner ceases to be associated with the venture ii Winding Up involves the collecting of the assets and distribution of the assets m Buy Sell Agreement you spell out what happens when a partner leaves n Advantages i Easy to create and maintain ii iii Partners share profits and losses equally Informal o Disadvantages i Partners are personally liable for all torts contracts ii Dissolved upon death iii Difficult to raise financing 3 Limited Partnership consists of one or more general partners and one or more limited partners a Form of business used to raise revenue since the liability of the limited partners is limited to the person s investment as long as they have no say in the operation of the business b Must file a certificate of limited partnership with the state which certificate must state that the business is a limited partnership c Management business must be run by the general partners without the active d participation of the limited partners Liability the limited partner is restricted to the investment but the general partners have unlimited liability e Dissolved the same way as general partnership However the death of a limited partner does not dissolve the business 4 LLP Limited Liability Partnership a A hybrid between a partnership and a corporation It is used by professionals like lawyers and doctors to avoid personal liability 3 b Partners are not personally liable for the malpractice claims against the other partners doesn t apply to the debts of the business only malpractice 5 Family Limited Liability Partnership partners are all related to each other a The owner can transfer all the assets to the partnership the owner supervises the business as the general partner and the family members are limited partners This takes the assets out of the person s estate 6 Corporation a Creation separate entity created by state charter b Corporate Charter corporations birth certificate represents as a separate entity c Owners get stock in the corporation d Owners liability is usually limited to the value of the stock e Disadvantages i Expensive to create because of the legal fees and costs ii Must create Articles of Incorporation 1 Name Purpose Duration Capital Structure Internal Organization Registered Office iii The state must issue a Charter Continuity status does not change with the death or sale of stock by a shareholder f g Management i Shareholders own the business they elect the board of directors ii Directors set policy and they appoint officers iii Officers run business on a daily basis iv Business Judgment Rule board of directors must use their best judgment in making decisions for the corporation guides the conduct of the directors means that the h Liability i Owners liability is usually limited to capital contribution stock ii Owner can be liable if he or she guarantees corporate debt iii Pierce corporate veil when stockholder disregards the corporate entity ex person takes revenue for own self one for you one for me iv Owners always liable for payroll taxes of corporation v Officers may be liable for the criminal acts of the corporation i Taxation i Double Taxation and not on the corporate return 7 Subchapter S Corporation profits and losses go on the personal tax returns of the stockholders 8 9 a Corporation pays no income tax b Restrictions on Subchapter S are on pg385 386 Basically needs 100 or less stockholders Limited Liability Corporation LLC offers limited liability to its owners who are members The business does not have to hold stockholder meetings of its owners or maintain minutes like a regular corporation a The members are taxed as a sole proprietorship unless they elect to be taxed as a corporation Franchises