BUSA2106 Lecture 10Outline of Last Lecture I. PreemptionII. Due processIII. Equal protectionIV. PrivacyOutline of Current Lecture I. Sole ProprietorshipsII. General PartnershipsIII. Limited Partnerships Current Lecture Business formation: You are an entrepreneur who wants to form a business. What factors would you consider in choosing the type of business entity to form? Business entity forms• Sole proprietorship• General partnership• Limited partnership (LP)• Limited liability company (LLC)• Corporation Comparing business entities: useful charts on pages 430-431 and 465 Sole Proprietorship• Formation: No specific legal process except for licensing, zoning, etc.• Termination: No specific legal process; ends at the decision or death of owner• Liability: Owner bears all liability;• Taxes: Personal incomePersonal Liability of Sole Proprietors• Sole proprietor bears the entire risk of loss of the business– Owner will lose entire capital contribution if the business fails• Sole proprietor has unlimited personal liability– Creditors may recover claims against the business from the sole proprietor’s personal assets Sole Proprietorships: Pros and Cons Advantages• Easy to form (no filing requirements)• Owner is the business; no separate legal entity• Flexibility: owner has complete control • Owner has right to all profits• Subject to less regulation than other business forms• Personal income tax Disadvantages• Unlimited personal liability for business debts & obligations• Duration limited by proprietor’s interest or death• May be hard to raise capital• Limited resources, expertise General Partnership• Voluntary association of two or more persons to carry on as co-owners a business for profit– Contract to go into business together – Share profits and losses– Equal right to manage partnership business• Separate legal entity from the partners themselves– Sue/ be sued– Own property Formation• Formed by agreement of the parties– No specific legal process except for licensing, zoning, etc.– Can be oral or written partnership agreement contract• Uniform Partnership Acts– Implied  partnership by estoppel  Termination• Partnership dissociation: breaking off of one or more partners• The dissociated partner – is normally entitled to have his interest purchased by the partnership (depends on partnership agreement)– terminates his authority to act for the partnership and can no longer participate in running the business Dissolution and winding up • Ending the entire partnership • Two steps1. Dissolution:– By agreement: limited term, death or bankruptcy– A court dissolves the partnership if can only run at a loss Winding Up: Collecting, liquidating and distributing the partnership’s assets • Priorities in distributing assets1. Debts (creditors) are paid first 2. Then capital contributions are returned to partners3. Any remaining money is distributed as profits to the partners, depending on partnership agreement  Liability• Exhaust partnership funds first• Then go after personal funds: – Partners have unlimited personal liability for the debts of the partnership• Most states: joint and several liability – Plaintiff v. Partnership – Plaintiff v. Partner A and Partner C• Later: Plaintiff v. Partner B• Or: Partner A and Partner C v. Partner B Taxes• The partnership files an “information return” that reports the partnership’s profits and losses and how they are allocated to individual partners• These profits and losses “pass through” the entity and are taxed on the partners’ individual returns General Partnerships: Pros and Cons Advantages• Partners contribute capital, property and/or expertise• Partners share work and accountability• Entity not taxed• Flexible allocation of profits and losses Disadvantages• Partners personally liable for all debts• Potential for conflict among partners• More difficult to dissolve than sole proprietorship Limited Partnership (LP)• A type of partnership that has two types of partners– General partners–Limited partners: Separate legal entity from the partners themselves Formation• Requirements:1. Certificate of limited partnership filed with the state2. Disclosure of names of general and limited partners Termination• Generally same as general partnership:– Dissociation– Dissolution and winding up• Controlled by terms of partnership agreement• In absence of agreement:– GP can withdraw at any time– LPs have to give 6 months’ notice Liability• General partners: unlimited personal liability to LP’s creditors• Limited partners: liability is limited to partner’s own capital contribution (can only lose investment)• Unless– Formation is defective– Company name includes limited partner’s name– Limited partner participates in management– Limited partner co-signs a personal guarantee (loan) What can a LP do?• Be an agent, employee or contractor of the LP or a general partner• Serve as a consultant or advisor to a general partner re the LP• Act as a surety for the LP• Approve or disapprove an amendment to the LP agreement• Vote on certain partnership