BUL 5832 Chapter 36 & 37

When choosing a business entity, entrepreneurs should consider:

-Ease of creation. -Owners'liability. -Tax considerations. -Need for Capital.

Distribution of Assets •Partnership obligations are paid in the following order:

-First, 3rd party creditors. -Second, partner loans to partnership. -Third, return of capital contributions. -Fourth, distribution of the balance, if any to partners.

Limited Partnership Difference between general and limited partners

-General Partners - who invest capital, manage the business, and are personally liable for partnership debts -Limited Partners - who invest capital but do not participate in management and are not personally liable for partnership debts beyond their capital contribution

Agency Concepts and Partnership Law:

-Partnerships are governed both by common law and by statutory laws. -Each partner is deemed to be an agent and fiduciary of the other. -There may be imputation of liability.

Rights of Partners:

In the absence of a partnership agreement (oral or written) state statutes govern the partner rights. -Management: equal, each one vote, majority wins; need unanimous consent for some actions. -Interest in the Partnership: equal profits, losses shared as profits shared. -Compensation: none. -Inspection of the Books: always and also by rep. of deceased partner. -Accounting: when other partner(s) committing fraud, embezzlement, wrongful exclusion, or anytime it is just and reasonable. •Partner cannot sell, assign or take a particular item of partnership property, nor can individual partner's creditors seize the property.

Uniform Partnership Act

In the absence of a partnership agreement, the Uniform Partnership Act, as adopted by most states, governs the partnership.

Disadvantages of a Partnership

Joint and Individual Liability. Similar to sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for their own actions, but also for the business debts and decisions made by other partners. In addition, the personal assets of all partners can be used to satisfy the partnership's debt. Disagreements Among Partners. With multiple partners, there are bound to be disagreements Partners should consult each other on all decisions, make compromises, and resolve disputes as amicably as possible •Shared Profits. Because partnerships are jointly owned, each partner must share the successes and profits of their business with the other partners. An unequal contribution of time, effort, or resources can cause discord among partners

Fiduciary duties

Partners are fiduciaries and general agents of one another and the partnership.

When Does a Partnership Exist?

UPA there is a presumption of a partnership if: -1. A sharing of profits or losses. -2. A joint ownership of the business. -3. An equal right to be involved in the management of the business. -Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.

Sole Proprietorship

• A form of business where the owner is actually the business • The business is not a separate legal entity

Limited Liability Partnerships

• Creature of state statute designed for professionals who normally do business as a partnership. • LLP allows partnership to limit personal liability of the partners but allows "pass through"tax advantages. • The LLP form of ownership is limited in most states to persons licensed to practice in the fields of public accountancy, law, or architecture.

General Partnership

•A partnership is a single business where two or more people share ownership. •Partnership is created when two or more persons agree to carry on business for profit as co-owners with equal right to manage and share profits (UPA).

Dissociation of a Partner

•Dissociation occurs when one partner ceases to be associated in the partnership business. -Allows partner to have her interest purchased by the partnership. -Terminates her voting interest in the partnership.

Operation of a General Partnership

•Each partner is liable for partnership debts if made with the scope of a partner's duty. •Each partner has a fiduciary duty to the other. •Decision Making in a General Partnership— unless stated otherwise, decisions must be unanimous on all non-routine matters

Advantages of a Partnership

•Easy and Inexpensive. Partnerships are generally an inexpensive and easily formed business structure. The majority of time spent starting a partnership often focuses on developing the partnership agreement. •Shared Financial Commitment. In a partnership, each partner is equally invested in the success of the business. Partnerships have the advantage of pooling resources to obtain capital. This could be beneficial in terms of securing credit, or by simply doubling your seed money. •Complementary Skills. A good partnership should reap the benefits of being able to utilize the strengths, resources and expertise of each partner. •Partnership Incentives for Employees. Partnerships have an employment advantage over other entities if they offer employees the opportunity to become a partner. Partnership incentives often attract highly motivated and qualified employees.

Advantages of a Sole Proprietorship

•Easy and inexpensive to form: A sole proprietorship is the simplest and least expensive business structure to establish. Costs are minimal, with legal costs limited to obtaining the necessary license or permits. •Complete control. Because you are the sole owner of the business, you have complete control over all decisions. You aren't required to consult with anyone else when you need to make decisions or want to make changes. •Easy tax preparation. Your business is not taxed separately, so it's easy to fulfill the tax reporting requirements for a sole proprietorship. The tax rates are also the lowest of the business structures.

Limited Partnerships

•Entity that limits the liability of some of its owners (the limited partners). •Creature of state statute. Filing a certificate with the Secretary of State is required. •Agreement between at least one general partner and one limited partner to carry on a business for profit •Limited partner has no right to manage. •Liability is limited to amount of investment. •Attractive to investors.

Partners in the partnership are responsible for several additional taxes, including:

•Income Tax •Self-Employment Tax (FUTA FICA)

Joint Property Ownership and Partnership Status

•Joint ownership of property—or the sharing of profits from the property-- does not, by itself, create a presumption of a partnership. -However the sharing of profits and losses usually does.

Filing information for partnerships:

•Partners are not employees and should not be issued a Form W-2

Partnership as an Entity

•Partnerships are recognized as separate legal entities -To own partnership property. -To convey partnership property. -To sue and be sued. -To have judgments collected against it's assets, and individual partners'assets.

Liability in an LLP

•Recall that partnership law makes all partners jointly and severally liable for another partner's tort, including personal assets. •The LLP allows professionals to avoid personal liability for the malpractice of other partners.

Partnership Formation

•The Partnership Agreement can be written or oral, unless under Statute of Frauds •Duration of Partnership. -Partnership for a Term. -Partnership at Will. •Capacity. Partners must have legal capacity. •Corporations. UPA permits corporations to be a partner

Personal Liability of Sole Proprietors

•The sole proprietor bears the risk of loss of the business •The owner will lose his or her entire capital contribution if the business fails •The sole proprietor has unlimited personal liability •Creditors may recover claims against the business from the sole proprietor's personal assets

Creation of a Sole Proprietorship

•There are no formalities •No federal or state government approval is required •Some local governments require all businesses (including sole proprietorships) to obtain a license to do business within the city •A sole proprietorship can operate under the name of the sole proprietor or a trade name

Disadvantages of a Sole Proprietorship

•Unlimited personal liability. Because there is no legal separation between you and your business, you can be held personally liable for the debts and obligations of the business. This risk extends to any liabilities incurred as a result of employee actions. •Hard to raise money. Sole proprietors often face challenges when trying to raise money. Because you can't sell stock in the business, investors won't often invest. Banks are also hesitant to lend to a sole proprietorship because of a perceived lack of credibility when it comes to repayment if the business fails •Heavy burden. The flipside of complete control is the burden and pressure it can impose. You alone are ultimately responsible for the successes and failures of your business. •The sole proprietor is legally responsible for the business's contracts and the torts committed by the proprietor and his or her employees in the course of employment