Chapter 37 Introduction to Forms of Business and Formation of Partnerships

Disadvantages of corporations

-Greater formality required for formation and operation -Double taxation -Complexity of structure

What are the advantages of a sole proprietorship

-No formalities -Taxes flow to the owner -Owner takes all profit and control

Disadvantages of a partnership

-Partners bear all risk of loss jointly and severally -Different levels of liability to partners depending on subform -May be created as a general partnership by default (unintentionally)

Advantages of a partnership

-Relatively easy to create -Has a legal entity but individual taxation -Partners control the business -Flexible structure -Partners take all gain

Advantages to corporations

-Shareholders enjoy limited liability for corporate obligations -Perpetual existence -Ability to raise large amounts of capital

Corporation

A corporation is owned by shareholders who elect a board of directors to manage the business, thus..... ownership & management of a corporation may be separate Legal and tax paying entity for federal income tax purposes Exception: Subchapter S corporations

Partnership

A partnership has two or more owners or partners and takes several forms: -General -Limited (LP) -Limited liability (LLP) -Limited liability limited (LLLP) -Professional

Who owns an LLC?

An LLC is owned by members, who may manage themselves or retain a manager to run the business ~Members have limited liability for the obligations of the LLC

Why does all income/loss in a partnership have to be reported on an individual partner's federal income tax return (whether or not distributed or allocated to the partners)?

Because it is a legal entity but not a federal tax-paying entity

Limited Liability Company

Combines the non-tax advantages of corporations with favorable tax treatment of partnerships

T/F Partnership capital belongs to the individual partners in equal shares

False

What does the formation of an LLP require?

Formation of an LLP requires: -Filing a form with the secretary of state -Paying annual fees -Using proper terminology

Sole proprietorship

Has only one owner and is an extension of its owner *Has the right to make all the management decisions of the business

The Revised Uniform Partnership Act (RUPA)

Model partnership statute

Can sole proprietorships sue and be sued?

No because it isn't a legal entity so creditors/claimants sue the owner

What is the disadvantage of sole proprietorship?

Owner bears all risk of loss

What is presumed to be separate property even if used for partnership purposes?

Property acquired in a partner's name without an instrument indicating transfer of title to the partnership

Who has limited liability for the obligations of the corporation?

Shareholders

Which form of business is not a legal entity?

Sole proprietorship

T/F A partner's ownership interest in a partnership is not freely transferable.

True

T/F Partnership is an "association of two or more persons to carry on as co-owners a business for profit."

True

T/F The Revised Uniform Partnership Act (RUPA) is a model partnership statute

True

Partnership capital

When a partnership or limited liability partnership is formed, partners contribute cash or other property to the partnership *Belongs to the partnership as an ENTITY

The partnership interest includes a partner's: a) Management and other rights participation b) Share of profits and losses and right to receive partnership distributions c) Ownership interest in partnership capital d) both A and B e) none of the above

d) both A and B