Chapter 26 Forms of Business Organization

1. take title to and transfer property in its own name 2. be regarded as a principal, for which each partner may act as agent, making contracts in the firm's name 3. use its own assets as security for loans and to pay its creditors before any individual partner's assets may be seized

A partnership has the power to

SP: Poor GP: Moderate Corp: Excellent

Ability to attract professional managers

General partnership

All the partners exercise managerial control over the firm. Each one acting alone can bind it in contracts and perform other functions with full legal authority.

Statute of Frauds

Although best in an explicit written form, the partnership agreement need not be in writing unless required by the

SP: Death or as proprietor determines GP: Death, bankruptcy, or withdrawal of any partner Corp: Can be perpetual

Duration

Winding-up period

During the ___, all partnership business in process at the time of dissolution is concluded, creditors of the business are satisfied if possible, and each partner's share is accounted for and distributed

SP: Just do it GP: Moderately difficult Corp: Assistance of legal counsel recommended

Ease of Formation

Secret partner

Is known to the public as a partner yet participates in management

Dormant partner

Is neither known to the public as a partner not active in management

Illegality

Last thing that dissolves partnership

Termination

Legal existence of the partnership

SP: Owner is the business; not a separate entity GP: a separate entity in many states Corp: Separate entity from owners

Legal status

SP: Unlimited liability GP: Unlimited liability Corp: Liability limited to amount of investment

Liability of owners

SP: Owner makes all decisions GP: Partners have equal say in management unless otherwise specified in agreement Corp: Directors (elected by shareholders) set policy and appoint officers who run the company

Management

Sole Proprietorship

Of the three principal forms, the simplest, most flexible, and easiest to start is the ___ which is a form of business in which one person owns all the assets and has full personal liability for all the debt.

General or limited

Partnerships are either ___ or ___

Nominal partners

Persons determined by a court to be ___ also may find themselves liable for the partnership debts. ___ hold themselves out as partners, or let others do so, but are not truly partners. LIABLE AS PARTNERS

SP: none GP: agreement of the parties Corp: Obtain a charter from the state; organizational fees

Requirements for organizing

True

T or F As a consequence of the corporation's being held to be a separate and distinct legal entity or artificial person, investors in a corporation only run the risk of losing what they have invested in it, not all their personal wealth. The corporation, but not the investors, may be hit with a large lawsuit.

True

T or F if a sole proprietor is sued for breach of contract or for a tort the proprietor or her or his employees commit, the proprietor's own home, car, and belongings as well as all of his or her business property may be seized to pay the damages awarded by courts.

SP: Terminates upon owner's decision or death GP: Terminates by agreement of partners or upon a partner's death, withdrawal, bankruptcy Corp: By shareholder agreement or running of time period set in charter, by action of law, or by consolidation or merger

Termination

1. being an independent contractor for, or an agent or employee of, the limited partnership 2. consulting with or advising a general partner 3. attending a meeting of the general partners 4. proposing, approving, or disapproving (by vote or otherwise) the dissolution, change in the nature of the business, admission or removal of a general or limited partner, or amendment to the partnership agreement.

Under RULPA's standards, a limited partner does not participate in the managerial control of the business solely by doing such things as

Special partnership

Undertake a unique venture in the same area of business as the general partnership.

Careful management, along with adequate liability insurance, can limit these risks and make them acceptable to a small-business person.

What can limit the risk of a sole proprietorship?

Partnership at will

a partner normally may withdraw at any time without liability to associates. However, the withdrawing partner could be liable for resulting losses if the sudden withdrawal was unreasonable.

Limited partner

a type of owner in a partnership who invests money in the business but who does not contribute to the actual running of the business and whose liability is limited to the amount invested. exposure to liability cannot exceed the amount of capital the partner has invested in the business as long as the partner does not participate in the managerial control of the business. In return for their capital investment, share in the profits and losses of the partnership.

Coorporation

also may injure people, commit crimes, and be punished accordingly

Trading partnership

buys and sells goods and services commercially

Corporation

can acquire the financial strength and managerial expertise to attempt (and profit from) larger projects than other forms of business organization.

Corporation

can have perpetual life as a result

Joint venture

death of a participant does not cause dissolution of the

Partnership

each partner remains fully responsible for the firm's liabilities.

Partnership

ends if a partner withdraws, dies, or goes bankrupt

Corporation

free transferability of ownership

Uniform Limited Partnership Act (ULPA)

governs limited partnerships and was adopted with few amendments in almost all the states

Corporation

has an existence distinct or separate from the real persons who organize, own, and run it.

General partner

has full personal liability for debts of the firm

Sole Proprietorship

has relatively unlimited control over the business and keeps all the profits.

Liability

having a partner also greatly increases a businessperson's exposure to potential ___ from that partner's actions.

Corporation

is a legal entity or artificial person that is created by or under the authority of the laws of a state.

Partnership

is an association (unincorporated group acting together) of two or more persons to carry on, as co-owners, a business for profit.

Sole proprietorship

no significant legal requirements for organizing or conducting most ___

Joint venture

occurs when two or more persons or firms combine their resources and skills to do a specific project

Non-trading partnership

provides professional and noncommercial assistance, such as legal, medical, or accounting advice.

Dissolution

refers to the change in the relationship of the partners due to the action of one or more of them in ceasing to be involved in operating the business. also can occur by operation of the law, or court decree.

Statute of Frauds

requires a writing signed by the party against whom enforcement is sought to make the contract binding if it cannot be performed within one year from the date it is made. Therefore, if two persons agree at the time they form their partnership that it is to last longer than one year, their agreement must be in writing and signed by both persons to be enforceable by both.

Uniform Partnership Act (UPA)

the law that governs partnerships in most states, the general partners share all profits equally. also allows the partners to agree among themselves to different shares of either or both of the profits and losses.

sole proprietorships, partnerships, corporations

three principal forms of business organization

winding-up period

Dissolution is normally followed by a ___, which concludes with the actual termination or ending of the partnership.

Yes

Does a partner need to be carefully selected?

Yes

Does death dissolve a partnership?

Bankruptcy

Financial death that dissolves a partnership

Limited partnership

Is a partnership consisting of at least one general partner with full personal liability and at least one limited partner

Corporation

Makes or loses money instead of the person

silent partnership

May be known to the public as a partner but takes no active part in management

True

T or F Because of the special status granted it by law, and unlike a general partnership, a limited partnership can be created only by proper execution, recording, and publication of a certificate that identifies the partners and states basic facts about their agreement.

True

T or F If the parties do not agree on a specific length of time for their partnership to continue, their agreement need not be in writing. This is because the partnership could be ended at any time during its first year by a partner's death, bankruptcy, or withdrawal.

True

T or F Regardless of the potential life of the partnership, the time, resources, and detail involved still make it highly desirable to put every partnership agreement in writing, preferably with the assistance of a lawyer.

Dissolution, winding-up, legal termination

Termination of partnership phases

General Partnership

The most common type of partnership

partnership agreement

The strong fences of a partnership are the terms and conditions that the partners agree on to guide them in managing the partnership. These terms and conditions comprise the

partner should be socially compatible, financially responsible, ethically and morally trustworthy, professionally competent, physically fit, and willing to work hard.

Things you should look for in a partner?

Entity

Under the UPA, a partnership, in some respects, is legally treated as an

Sole proprietorship

is by far the form of business organization used most often in the United States

Partnership

it combines the capital, labor, skill, and knowledge of two or more persons.

ULPA

very clear on restricting limited partners from participation in management