Business Law Quiz 7
Sole Proprietorship
A business structure in which the owner is the business. Anyone who does business without creating a business organization has a sole proprietorship
Limited Liability Partnerships
A hybrid form of organization designed for professionals, such as accountants and lawyers, who often do business in a partnership. It limits the liability of the partners to some extent while still permitting the pass-through of tax liability. Partners remain liable for their own wrongful acts, including negligence, but for the liability of those they supervise.
Limited Liability Company
A hybrid organization that combines the personal liability protections of a corporation with the tax benefits of a partnership.
Advantages of a Partnership
A partnership can sue or be sued in its own name A partnership can own property in its own name A partnership files an informational tax return, but the partners receive the profits and pay any taxes on their personal returns. The partners can agree on who will manage the partnership but in the absence of an agreement, the majority of partners rules except in significant cases, such as the termination of the business, addition of a new partner, amending the terms of the agreement or other major decision. Assuming that the partnership agrees, business decisions can be taken fairly rapidly. Partnerships do not generally terminate on the death of a partner unless the agreement says so. The partnership can use its assets and those of its partnerships to obtain credit.
Three Elements to be Considered a Partnership
A sharing of profits or losses Joint ownership of the assets An equal right to be involved in the management of the business
Franchise
An arrangement in which the owner of intellectual property - such as trademark, trade name or copyright - agrees to allow others to use it in the selling of goods or services.
Partnership
An organization formed by an agreement, written or implied, between two or more people to carry on a business for profit.
Disadvantages of a Franchise
Franchises can be expensive. Franchises often set conditions for: Location Quality control of goods and services sold Price Payments for advertising and supplies furnished by the franchisor Requirements to purchase certain goods and supplies from the franchisor Sales quotas Franchises can be terminated by the franchisor, although normally they are terminated for failure to meet contract requirements and an opportunity to meet contract requirements must be provided. Termination ends the business.
Limited Partnership
In a limited partnership, there is at least one general partner plus one or more limited partners. The general partner(s) assumes management responsibility for the partnership and the limited partners merely provide investment funds. The general partner(s) have full liability as well as full control over the business. The liability of the limited partners is limited to the amount that they have invested.
Three Main Types of Limited Liability Organizations
Limited Liability Companies Limited Liability Partnerships Limited Partnership
Three Groups of Business Organizations
Small Business Organizations Limited Liability Organizations Corporations
Three Main Types of Small Business Organziations
Sole Proprietorships Partnerships Franchises
Disadvantages of an LLC
State statutes are not uniform, and different results can occur in different states for LLC that operate in different states - although the states are supposed to honor the laws of the state in which the LLC was organized. There is also paperwork that has to be filed and processes to be complied with - see Polk v Polk on the previous slide.
Advantages of a Franchise
The franchisee can operate as an independent business but has the advantages of a regional or national organization. Congress has passed laws that protect franchisees in certain industries, such as automobile dealerships and service stations. These laws prohibit unreasonable demands from the franchisor (for example, to set unrealistically high sales quotas) and limit the conditions under which a franchise can be terminated. Congress also passed a law requiring mandatory information to be given to prospective franchisees - including the range of goods and services to be provided and the value and expected profitability of the franchise. Some states also have protective laws for franchisees. Some prohibit the termination of a franchise without good cause.
Advantages of an LLC
The liability of a member is generally limited to any wrongful acts or omission of the member, not the acts or omissions of the other members. Exception: If the owner(s) of an LLC treat it as personal property (co-mingling funds, failure to follow state required formation and management processes, under-capitalizing it, failure to maintain separate accounts and record, and failure to hold regular shareholder and director meetings), the Court can 'pierce the veil' and hold the owner liable for all debts. Flexibility in taxation: An LLC can elect to be taxed either a partnership (in which all profits are divided and taxes on the personal accounts of the owners) or as a corporation (lower tax rate but the profits are taxed to the LLC and then any distributed profits are taxed again by the owner). Foreigners can be owners and participate in the management - could be good for foreign investment. Jurisdiction in federal court is determined both by the home of the LLC and the homes of the owners. State Courts normally adjudicate the issues.
Disadvantages of Sole Proprietorship
The owner is personally liable for any debts or liabilities of the business. Any lawsuit against the business can lead to unlimited personal liability of the owner. The owner can obtain insurance, but would be liable for any amounts over the insurance. The sole proprietorship does not automatically transfer in case of death of the owner - it is automatically dissolved. The assets of the business may travel to the owner's heirs, but not the business itself. The owner is limited to his own credit with regard to obtaining loans.
Disadvantages of a Partnership
The partners are personally liable for any debts of the partnership. Incoming partners are personally liable for any debts incurred while they were partners, but not before - although if they made a payment to become a partner, that payment can be taken for pre-existing debts because it becomes part of the property of the partnership.
Dissociation
The separation of a partner from the partnership. Partners can leave a partnership voluntarily or through death, a bankruptcy or court order - the rest of the partners then must consider whether to continue to operate as a partnership.
Advantages of a Sole Proprietorship
The sole proprietor receives all the profits, and files taxes on them with his or her personal income tax forms. It is the easiest to form because no business organization forms must be filed with the government - although there may be licensing and other requirements. It is the easiest to transfer or close-down. It can be sold or taken apart at the decision of the owner.
Dissolution
The termination of a partnership. The partners can also voluntarily or through death, bankruptcy or court order be forced to dissolve the partnership.
Disadvantages of a Corporation
There are more regulatory restrictions - such as stock disclosure requirements There are more organizational paperwork requirements, so it is more expensive to operate Double taxation - corporations are taxed separately and then any income to the shareholders is taxed again on their returns.
Advantages of a Corporation
Unlimited commercial life - does not dissolve with ownership changes Greater flexibility with raising money through sale of stock Ease of transferring ownership shares Most liability is assumed by the corporation, other than for certain wrongful acts by the Board of Directors or Corporate Officers. Shareholders have little risk of liability.
Corportation
a legal entity created and recognized by state law, with an identity separate from its owner(s) and with many of the powers and privileges of a US citizen
Board of Directors
members elected by the shareholders, make policy decisions and hire corporate officers
Corporate Officers
responsible officials for management, such as the CEO, Treasurer, Personnel Director, etc