BLAW Business Organization

Jerry and Jenny are partners in a real estate investment group. Jerry invests $500,000 of his own money to acquire properties. Jenny handles the real estate transactions. Jenny makes some bad deals and now the group owes $800,000 in delinquent mortgage payments. Jerry can be held personally liable for:

Up to $500,000

The second step in ending a partnership is known as:

Winding up

What does it meant to "pierce the corporate veil"?

"Piercing the corporate veil" refers to a situation in which courts put aside limited liability and hold a corporation's shareholders or directors personally liable for the corporation's actions or debts. Veil piercing is most common in close corporations.

Limited Partnership

is a business partnership where at least one owner is a general partner and at least one owner is a limited partner. The general partners make everyday business decisions and are personally liable for business debts. However, the limited partners simply invest in the business and have little control over business operations.

Profit for Sole proprietorship

Profits of this business are taxed to the owner personally, a tax return in the business's name is not required so long as records of income and expenses are kept

How can partners protect themselves if one dies

Purchase life insurance on the partner with the proceeds to be used to buy back the interests of a deceased partner from her estate, and thus, the partnership need not cease to exist

Difference between an S corporation and other types

S corporations don't pay federal income tax as a business. C Corporation is double taxed (business and personal-shareholders)

The owners of a corporation are called:

Shareholders

The main difference between a C Corp and an S Corp is:

Tax status of the corporation

Once all steps to ending a partnership are complete the partnership is considered to be void, or:

Terminated

How is Limited Liability Tax handled?

The IRS doesn't treat the company as a separate tax entity. Instead, the profits flow through or pass through directly to the members. The business profits become the members' income. The members then file their own tax returns and pay income tax on their individual income.

Hannah, Liz, and Stacey started a limited liability company, an online jewelry business that really took off. In its first year, The Triple Bedazzle company brought in $60,000 in profits. Since the three women had previously decided to split the profits equally, they each made an income of $20,000. How will The Triple Bedazzle company's income tax be handled on its $60,000 profit?

The Triple Bedazzle company will not have to pay income tax on its $60,000 profit since Hannah, Liz, and Stacey will each pay income taxes on their $20,000 shares.

A corporation's shareholders are responsible for appointing:

The board of directors

Which of the following attributes is common to all types of business partnerships?

The business isn't separately taxed

Catherine and Carl have a car washing business. They are general partners. When washing Collin's car, Carl accidentally causes severe water damage to the car's interior. Catherine wasn't there when it happened, and isn't in charge of washing the cars. Who can be held liable for the damage to Collin's car?

The business, Carl and Catherine

Why is it important "pierce the corporate veil"?

The concept of the corporate veil is important to the concept of limited liability. In general, if the corporation or LLC is considered completely separate from the individuals who own and manage the business, those owners/managers cannot be held responsible for the company's actions.

Hannah, Liz, and Stacey started an online jewelry business called The Triple Bedazzle company. Although they felt they did their research, the business did not take off due to intense competition from more experienced online jewelry boutiques. The three women felt they had no choice but to close the shop. At the time of the closing, they owed their creditors $25,000 for which they were being sued. How much money can the creditors seek in payment from either The Triple Bedazzle, the three women, or both?

The creditors can only seek payment in the amount of $25,000 from The Triple Bedazzle company itself and cannot go after the three women personally.

Fiduciary duty of loyalty

The duty of loyalty stands for the principle that directors and officers of a corporation in making all decisions in their capacities as corporate fiduciaries, must act without personal economic conflict.

Jerry and Jenny are partners in a real estate investment group. Jerry invests $500,000 of his own money to acquire properties. Jenny handles the real estate transactions. Jenny makes some bad deals and now the group owes $800,000 in delinquent mortgage payments. Jenny can be held personally liable for:

The full $800,000

Jerry and Jenny are partners in a real estate investment group. Jerry invests $500,000 of his own money to acquire properties. Jenny is in charge of making the real estate transactions. However, Jerry makes a transaction on behalf of the group. Jerry's transaction is a bad deal and results in the group owing $800,000. Jerry can be held personally liable for:

The full $800,000, since Jerry loses his limited liability

What is one of the characteristics of an S corporation?

There cannot be more than 100 shareholders.

How do you avoid piercing the corporate veil?

To prevent creditors from piercing the corporate veil, the corporation must maintain a separate bank account, file separate tax returns, and use corporate assets only for corporate purposes. The corporation should not be used as a lender for its Officers, Directors or Shareholders.

Difference between partnerships and sole proprietorship vs S Corporation

Unlike partnerships and sole proprietorships that require the owners to be liable for the expenses and payables of the business, the owners of S corporations aren't personally liable if the company cannot cover its expenses. This benefit is similar to one of the many types of protection that a C corporation offers.

Patty is the CEO of Party Portraits, Inc. This means Patty is:

An officer

First step after Incorporation

First formal organization meeting, where elect a board of directors, enact the corporation's by laws, and issue corporation's stock

Jerry and Jenny are partners in a real estate investment group. Jerry invests $500,000 of his own money to acquire properties. Jenny handles the real estate transactions. Jenny is a:

General partner

What is one significant difference between an S corporation and a partnership?

In a partnership, owners are personally liable for the debts of the business.

Dissolution of the partnership

Occurs when an event takes place that precludes the partners from engaging in any new business

Who is liable for business' obligations, losses and liabilities in general partnership?

The business can be held liable and general partners can be held personally liable for a business' obligations, losses and liabilities.

Partnership

They are not treated as independent entity. The individuals as partners may sue or be sued and collect judgments in its own name.

How is profit split with general partnership?

They share in the business proceeds. Unless there is a partnership agreement specifically splitting the profits otherwise, the profits are divided equally between all general partners regardless of contributions or effort.

A partnership requires:

Two or more people

What is tax advantage of Limited Liability companies

1. Pass-through business profits like a partnership 2. Fully exempted from personal liability from business debts and obligations.

Jack and Jill form a partnership. Jack becomes disabled and is no longer able to participate in the partnership. He decides to sell his portion of the business. Their partnership agreement says that Jack must first offer to sell to Jill. This arrangement is known as:

A buy/sell agreement

The shareholders of Party Portraits, Inc. appointed Paco to the board of directors. This means Paco is:

A director

Which of the following does NOT typically begin the process of ending a partnership?

A partner requests a partnership draw

Paul owns stock in Party Portraits, Inc. This means Paul is:

A shareholder

What is an S corporation?

A type of business entity that the IRS recognizes as a legitimate form of business

A partnership agreement is:

A written agreement between the partners that details partnership operations

Winding up of partnership

Affairs involves completing any unfinished business and then collecting and distributing partnership assets

What is one tax advantage of an S corporation?

An S corporation does not have to pay federal income taxes as a business.

Andrew, Allen, Alex and Abby are general partners. They own and run an Antelope farm. Andrew put up most of the money to establish the farm, while Abby spends the most time running the farm. There's no partnership agreement on how profits will be shared. How will the farm's profits be split?

Andrew, Allen, Alex and Abby will each receive 25% of the profits

In order to create a corporation, a company must file a charter with the state. These papers are called:

Articles of incorporation

Which of the following is NOT considered to be an advantage of a general partnership?

Business profits are shared between partners

A corporation must develop a set of rules by which the company is organized and operated. These rules are called:

Bylaws

The first step in ending a partnership is known as:

Dissolution

Which of the following is NOT typically a process included in properly ending a partnership?

Forming a new business structure

Which feature of a limited liability company is most like that of a corporation?

Full limited personal liability

A corporation's board of directors is responsible for appointing:

Officers

Example of dissolution

The withdrawal, bankruptcy or death

Partnerships are a popular type of business because:

There are no formal requirements for formation, There are no legal requirements for formation, They are inexpensive to form.

Which of the following is FALSE regarding S corporations?

There can be multiple classes of stock.

Sole Proprietorships

an unincorporated business owned and run by only one person.

Partnerships

an unincorporated, for-profit business established and run by two or more individuals. The individuals are known as 'partners' and serve as co-owners of the business.

What is meant by "corporate formalities"

formal actions that must be performed by a Corporation's director, officers, or shareholders in order to maintain the protection afforded by the formation of the Corporation.

Limited liability companies allow their member to have what liability

full exemption from personal liability for business debts and obligations. This means that the company can only be held responsible up to the amount of the company's assets much like a business bankruptcy.

How is S Corporation taxation handled?

offers shareholders pass-through taxation.

What is S corporation ?

one of the types of business entities that the Internal Revenue Service recognizes as a legitimate form of a business, and it can vary in size from a couple of owners to as many as 100 owners or shareholders.

Jack and Jill form a partnership in order to build a well. The partnership agreement defines the term of the partnership as six months or until the well is complete, whichever comes first. The well is complete after just four months. Jack and Jill go their separate ways. This is known as:

Dissolution

Double Taxation

C Corps must pay taxes on their profits, and shareholders must pay income taxes on the money they receive from the corporation. T

State issues Corporation after application

Certificate of incorporation

Dissolution can happen in the following ways

Change in the composition of the partners or dissolution of the old one

The managers, or trustees, of a corporation are called:

Directors

Directors

Have fiduciary duty of loyalty to shareholders

Corporations

Is an artificial person or legal entity, created under state law

One difference in Limited Partners and LLC members

LLC members can fully participate in everyday business operations while still enjoying limited liability.

What is the corporations liability for shareholder

Limited Liability - This means that they generally can't be held individually liable for the corporation's responsibilities, such as business debts, taxes, liabilities and other obligations.

Disadvantages of Sole proprietorship

Limited alternatives exist for raising capital and the owner is personally liable for all business debts

Jerry and Jenny are partners in a real estate investment group. Jerry invests $500,000 of his own money to acquire properties. Jenny handles the real estate transactions. Jerry is a:

Limited partner

Corporations

Many businesses are structured as corporations, or C Corps. This is a business structure where the business is a separate entity from the individuals that run the business.

why are they Corporate formalities important?

Observing this protects yourself from personal liability for your corporation's debts and obligations, treat the business as a business and not as a sole proprietorship or a "mom and pop" business: Keep your personal finances and property separate from the corporation's finances and property

A limited liability company is a hybrid of which two business structures?

Partnership and corporation

Which feature of a limited liability company is most like that of a partnership?

Pass-through taxation

Limited Liability Companies

is a newer business structure that allows the pass-through taxation of a partnership with the limited liability of a corporation. LLCs are recognized in all states and governed by individual state laws. As with a partnership, the LLC's business profits aren't separately taxed because the IRS doesn't treat the company as a separate tax entity. Instead, the business profits pass-through directly to the members. The profits become the members' income, and they then pay individual income tax on those profits.

Easiest to terminate

partnership