Chapter 14: Small Business Organizations

The rights of partners in a partnership

- management: all partners have equal rights in managing the partnership - interest in the partnership: Each partner is entitled to the proportion of business profits and losses that is designated in the partnership agreement - compensation: Devoting time, skill, and energy to partnership business is a partner's duty and generally is not a compensable service - inspection of books: Partnership books and records must be kept at the firm's principal business office and be accessible to all partners - accounting: An accounting of partnership assets or profits is required to determine the value of each partner's share in the partnership. - property: Property acquired by a partnership is the property of the partnership and not of the partners individually

limited liability company (LLC)

A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership. limited liability exists only so long as the limited partner does not participate in management To form an LLC, articles of organization must be filed with a central state agency—usually the secretary of state's office. Typically, the articles are required to set forth such information as the name of the business, its principal address, the name and address of a registered agent, the names of the owners, and information on how the LLC will be managed. Some well-known companies, including Chrysler, Subway, and Dish Network, are limited liability companies. Under the federal jurisdiction statute, a corporation is deemed to be a citizen of the state where it is incorporated and maintains its principal place of business. Advantages: - Limited Liability: the liability of members is limited to the amount of their investments -Taxation: An LLC that has two or more members can choose to be taxed either as a partnership or as a corporation. a corporate entity must pay income taxes on its profits, and the shareholders pay personal income taxes on profits distributed as dividends. An LLC that wants to distribute profits to its members may prefer to be taxed as a partnership to avoid the "double taxation" that is characteristic of the corporate entity. Unless an LLC indicates that it wishes to be taxed as a corporation, the IRS automatically taxes it as a partnership. This means that the LLC as an entity pays no taxes. foreign investors can participate in an LLC, the LLC form of business is attractive as a way to encourage investment. Disadvantages: - The main disadvantage of the LLC is that state LLC statutes are not uniform. - businesses that operate in more than one state may not receive consistent treatment in these states. - most states apply to a foreign LLC (an LLC formed in another state) the law of the state where the LLC was formed.

limited partnership (LP)

A partnership consisting of one or more general partners (who manage the business and are liable to the full extent of their personal assets for debts of the partnership) and one or more limited partners (who contribute only assets and are liable only up to the extent of their contributions). An LP consists of at least one general partner and one or more limited partners. In a limited partnership, a general partner's voluntary dissociation from the firm normally will lead to dissolution unless all partners agree to continue the business. the bankruptcy, retirement, death, or mental incompetence of a general partner will cause the dissociation of that partner and the dissolution of the limited partnership unless the other members agree to continue the firm

partnership for a term

A partnership that is specifically limited in duration

members

A person who has an ownership interest in a limited liability company.

information return

A tax return submitted by a partnership that only reports the income and losses earned by the business. The partnership as an entity does not pay taxes on the income received by the partnership. A partner's profit from the partnership (whether distributed or not) is taxed as individual income to the individual partner.

articles of partnership

A written agreement that sets forth each partner's rights and obligations with respect to the partnership. Some partnership agreements, however, must be in writing to be legally enforceable under the Statute of Frauds The agreement usually specifies the name and location of the business, the duration of the partnership, the purpose of the business, each partner's share of the profits, how the partnership will be managed, and how assets will be distributed on dissolution, among other things. One significant disadvantage associated with a traditional partnership is that partners are personally liable for the debts of the partnership.

sole proprietorship

Advantages: The simplest form of business, in which the owner is the business. The owner reports business income on his or her personal income tax return and is legally responsible for all debts and obligations incurred by the business. receive all of the profits (because he or she assumes all of the risk) does not need to file any documents with the government to start a sole proprietorship (though a state business license may be required to operate certain businesses) A sole proprietor pays only personal income taxes (including self-employment tax, which consists of Social Security and Medicare taxes) on the business's profits Disadvantages: the proprietor alone bears the burden of any losses or liabilities incurred by the business enterprise the sole proprietor has unlimited liability, or legal responsibility Creditors can go after the owner's personal assets to satisfy any business debts. The sole proprietorship also has the disadvantage of lacking continuity on the death of the proprietor. When the owner dies, so does the business—it is automatically dissolved.

franchise

Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright in the selling of goods or services. 3 types: 1. distributorships: arises when a manufacturing concern (franchisor) licenses a dealer (franchisee) to sell its product. Often, a distributorship covers an exclusive territory. An example is an automobile dealership or beer distributorship. 2. chain-style business operations: a franchise operates under a franchisor's trade name and is identified as a member of a select group of dealers that engage in the franchisor's business.The franchisee is generally required to follow standardized or prescribed methods of operation. Often, the franchisor requires that the franchisee maintain certain standards of operation. 3. manufacturing or processing-plant arrangements: the franchisor transmits to the franchisee the essential ingredients or formula to make a particular product. The franchisee then markets the product either at wholesale or at retail in accordance with the franchisor's standards. Examples of this type of franchise are Coca-Cola and other soft-drink bottling companies.

operating agreement

In a limited liability company, an agreement in which the members set forth the details of how the business will be managed and operated. Operating agreements typically contain provisions relating to management, how profits will be divided, the transfer of membership interests, whether the LLC will be dissolved on the death or departure of a member, and other important issues. an operating agreement is not required for an LLC to exist, and if there is one, it need not be in writing LLC members should protect their interests by forming a written operating agreement "member-managed" LLC: decisions are made by majority vote "manager-managed" LLC: the members designate a group of persons to manage the firm; may consist of only members, both members and nonmembers, or only nonmembers. Generally, even if a member dies or otherwise dissociates from an LLC, the other members may continue to carry on LLC business, unless the operating agreement has contrary provisions.

general partner

In a limited partnership, a partner who assumes responsibility for the management of the partnership and liability for all partnership debts. personally liable to the partnership's creditors A general partner has the power to voluntarily dissociate, or withdraw, from a limited partnership unless the partnership agreement specifies otherwise

limited partners

In a limited partnership, a partner who contributes capital to the partnership but has no right to participate in the management and operation of the business. The limited partner assumes no liability for partnership debts beyond the capital contributed. Bankruptcy of a limited partner, however, does not dissolve the partnership unless it causes the bankruptcy of the firm. Death or an assignment of the interest of a limited partner does not dissolve a limited partnership A limited partnership can be dissolved by court decree A limited partner theoretically can withdraw from the partnership by giving six months' notice unless the partnership agreement specifies a term, which most do.

entrepreneur

One who initiates and assumes the financial risks of a new business enterprise and undertakes to provide or control its management. factors to consider: - ease of creation, - the liability of the owners, - tax considerations, and - the ability to raise capital.

certificate of limited partnership

The basic document filed with a designated state official by which a limited partnership is formed. this certificate must include certain information such as the name, mailing address, and capital contribution of each general and limited partner. The certificate must be filed with the designated state official—under the RULPA, the secretary of state.

dissolution

The termination of a partnership a partner's death or bankruptcy, then the occurrence of that event will dissolve the partnership

pass-through entity

a business entity that has no tax liability because the entity's income is passed through to the owners, who pay taxes on it.

limited liability partnership (LLP)

a hybrid form of business designed mostly for professionals, such as attorneys and accountants, who normally do business as partners in a partnership. The major advantage of the LLP is that it allows a partnership to continue as a pass-through entity for tax purposes, but limits the personal liability of the partners. LLPs must be formed and operated in compliance with state statutes The LLP allows professionals to avoid personal liability for the malpractice of other partners. Although LLP statutes vary from state to state, generally each state statute limits the liability of partners in some way

Partnership

partnership can be oral, written, or implied by conduct. arises from an agreement, express or implied, between two or more persons to carry on a business for profit. Partners are co-owners of a business and have joint control over its operation and the right to share in its profits. governed both by common law concepts and by statutory law A partnership is based on a voluntary contract between two or more competent persons who agree to contribute financial capital, labor, and skill to a business with the understanding that profits and losses will be shared. 1. A sharing of profits and losses. 2. A joint ownership of the business. 3. An equal right to be involved in the management of the business. the partnership is treated as an aggregate of the individual partners rather than a separate legal entity. The partnership is a pass-through entity and not a taxpaying entity.

Winding up

the process of collecting, liquidating, and distributing the partnership assets

franchisee

the purchaser of a franchise One receiving a license to use another's (the franchisor's) trademark, trade name, or copyright in the sale of goods and services. the franchisee is economically dependent on the franchisor's integrated business system. a franchisee can operate as an independent businessperson but still obtain the advantages of a regional or national organization.

franchisor

the seller of the franchise One licensing another (the franchisee) to use the owner's trademark, trade name, or copyright in the selling of goods or services.