BUSA2106 Lecture 10 Outline of Last Lecture I Preemption II Due process III Equal protection IV Privacy Outline of Current Lecture I Sole Proprietorships II General Partnerships III 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 income Personal 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 steps 1 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 assets 1 Debts creditors are paid first 2 Then capital contributions are returned to partners 3 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 state 2 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 matters