Chapter 20- Starting a Business: LLCs and Other Options

D/B/A (Doing business as) example:

"the tree man" in Miami registered in the Miami-dade courthouse. Could be good but to be DBA in fort Lauderdale you would have to also register there (if you want to expand). Every state also has different rules.

*Perpetual Existence:* Sole Proprietorship: Corporation: Close Corporation: S Corporation: Limited Liability Company: General Partnership: Limited Liability Partnership: Professional Corporation: Joint Venture: Franchise:

*Sole Proprietorship:* NO *Corporation:* YES *Close Corporation:* YES *S Corporation:* YES *Limited Liability Company:* varies by state, but generally YES *General Partnership:* Depends on the partnership agreement *Limited Liability Partnership:* depends on the partnership agreement *Professional Corporation:* YES, as long as it has shareholders *Joint Venture:* NO *Franchise:* All these issues depend on the form of organization chosen by participants

*Seperate Taxable Entity:* Sole Proprietorship: Corporation: Close Corporation: S Corporation: Limited Liability Company: General Partnership: Limited Liability Partnership: Professional Corporation: Joint Venture: Franchise:

*Sole Proprietorship:* NO *Corporation:* YES *Close Corporation:* S Corporation: Yes for C corp, no for S corp *Limited Liability Company:* NO *General Partnership:* NO *Limited Liability Partnership:* NO *Professional Corporation:* YES *Joint Venture:* NO *Franchise:* All these issues depend on the form of organization chosen by participants

*Transferable Interests (Easily Bought and Sold):* Sole Proprietorship: Corporation: Close Corporation: S Corporation: Limited Liability Company: General Partnership: Limited Liability Partnership: Professional Corporation: Joint Venture: Franchise:

*Sole Proprietorship:* NO, can only sell entire business *Corporation:* YES *Close Corporation:* Transfer restrictions *S Corporation:* Transfer restrictions *Limited Liability Company:* YES, if the operating agreement permits *General Partnership:* NO *Limited Liability Partnership:* NO *Professional Corporation:* Shareholders must all be members of the same profession *Joint Venture:* NO *Franchise:* All these issues depend on the form of organization chosen by participants

*Ease of Formation:* Sole Proprietorship: Corporation: Close Corporation: S Corporation: Limited Liability Company: General Partnership: Limited Liability Partnership: Professional Corporation: Joint Venture: Franchise:

*Sole Proprietorship:* VERY EASY *Corporation:* DIFFICULT *Close Corporation:* DIFFICULT *S Corporation:* DIFFICULT *Limited Liability Company:* Chater is easy, but should have thoughtful operating agreement *General Partnership:* EASY *Limited Liability Partnership:* DIFFICULT *Professional Corporation:* DIFFICULT *Joint Venture:* EASY *Franchise:* All these issues depend on the form of organization chosen by participants

*Personal Liability for Owners:* Sole Proprietorship: Corporation: Close Corporation: S Corporation: Limited Liability Company: General Partnership: Limited Liability Partnership: Professional Corporation: Joint Venture: Franchise:

*Sole Proprietorship:* YES *Corporation:* NO *Close Corporation:* NO *S Corporation:* NO *Limited Liability Company:* NO *General Partnership:* YES *Limited Liability Partnership:* NO *Professional Corporation:* NO *Joint Venture:* YES *Franchise:* All these issues depend on the form of organization chosen by participants

*Other Features:* Sole Proprietorship: Corporation: Close Corporation: S Corporation: Limited Liability Company: General Partnership: Limited Liability Partnership: Professional Corporation: Joint Venture: Franchise:

*Sole Proprietorship:* n/a *Corporation:* n/a *Close Corporation:* protection of minority shareholders. No boar of directors required *S Corporation:* only 100 shareholders. Only one class of stock. All shareholders must agree to S status and must be citizens or legal; residents oft the United States. Partnerships and corporations cannot be shareholders *Limited Liability Company:* Becomes a taxable entity if it goes public *General Partnership:* n/a *Limited Liability Partnership:* n/a *Professional Corporation:* Complex tax issues *Joint Venture:* Partnership for a limited purpose *Franchise:* established business. Name recognition. Management assistance. Loss of control. Fees may be high.

disadvantages of a franchise

*control:* franchisees sometimes complain that the franchisor control is too tight- tips on cooking fired might be appreciated, but rules on how to sweep the floors are not. *Cost:* -initial purchase -annual fee -supplies -joint advertising -system standards

advantage of a franchise

*owning a business:* a franchisee gets to be his own boss and he acquires an est. business with all the kinks worked out. free to choose which franchise to buy, where to locate it, and how to staff it. *support:* the franchiser helps the business get up and running quickly, offers ongoing training and support, and invests money in keeping the brand relevant and successful.

Duty of loyalty

-duty of utmost loyalty. -duty not to compete with partnership, turn over any profit to partnership, and avoid conflicts of interest ex. the people who invested in teacher products who accepted the china from the other side (friends sort-of) who were the ones they were investing in. They had the duty to tell their boss because it could look like a conflict of interest.

Duty of Good Faith and Fair dealings

-duty to deal with eachother and the partnership in a fair way -duty to partnership and corporate america ex. the guy who wanted to personally buy the lot his partnership was thinking about buying and he then told them about it. They turned it down, so it was ok that he bought it, but had they not turned it down he would have breached his conreact of good faith and fair dealings

Franchising is a popular method of starting a business that is a compromise between...

... employment and starting your own business

Termination of Partnership Business: three steps

1. Dissolution: decision to end the business 2. winding up: all debts of partnership are paid and the remaining proceeds go to the partners 3. termination: the end; happens when winding up is complete

a court may pierce a LLC veil if:

1. Fail to observe formalities: members must treat the LLC like a seperate organization 2. Commingle assets: this reap is the most dangerous. an LLC and its members must keep its assets seperate. if courts cant tell who owns what, the courts will most likely grant creditors to the assets of both the LLC and its owners 3. failiure to provide adequate capital: in extreem cases, if LLC is established without enough capital to run its business, then a court may look to its members's assetes. An LLC had capital of only baout 20,000 but borrowed millions of dollars. the ratio looked wrong 4. commit fraud: courts are unwilling to protect fraudsters who try to use and LLC as a shield against liability.

Disadvantages of a sole proprietorship:

1. Liability: the owner, Linda in this case, is responsible for all the debts. if ExSciTe cannot pay its suppliers or if a student is injured by an exploding cabbage, Linda is personally liable. She may have to sell her house to pay the debt 2. Limited Capital: the owner of sole proprietorship has limited options for financing. debt is her only source of working capital because she has no stocks or memberships to sell.

3 fiduciary duties

1. duty of care 2. duty of loyalty 3. duty of good faith and fair dealings

Partnership disadvantages

1. each person is liable personally 2. funding may be difficult (can't sell shares) 3. Management may be difficult 4. transferrability is limited

advantages of a sole proprietorship

1. ease of formation: no formal steps are necessary. Once Linda starts a business, she automatically has a sole proprietorship. 2. taxes: flow-through tax entity, which means, although Linda must pay PERSONAL income tax on any profit she earns, the BUSINESS itself does not pay income taxes.

To form an LLP, the partners must file what?

1. filed certificate of limited partnership 2. annual reports

LLC is popular because it has:

1. limited liability 2. favorable tax status 3. duration 4. management 5. flexibility

disadvantages of an s corp

1. there can only be one class of stocks 2. there can be no more then 100 shareholders 3. shareholders cannot be partnerships or other corps 4. shareholders must e us citizens or residents

partnership advantages

1. they dont pay taxes 2. they are easy to form

Limited Liability Partnership

Partners in an LLP are not personally liable for debts of the partnership (whether arising or from contract tort) Limited to "investment" and liability

general partnership: unless otherwise agreed, partners share ______________, ____________ and _____________ equally.

Profits losses management

close corporation definition

a corporation with a small number of shareholders whose stock is not publicly traded and whose shareholders play an active role in management- it is entitled to special treatment under state law

piercing the corporate veil

a court holds members of an LLC personally liable for the debts of the organization

franchise disclosure document

a disclosure document that a franchiser must deliver to a potential purchaser

tort liability

a partnership is liable for intentional and neglegent torts or a partner in the ordinary course of business or when the partner is acting with actual athourity

Limitations of PC

all shareholders of the corp must be members of the same profession the required legal technicalities for forming a pc are expensive and time consuming tax issues can be complicated.

flow-through tax entity

an organization that does not pay income tax on its profits but passes them through to its owners who pay the tax at their individual rates.

Flow through tax entity

an organization that does not pay income tax on its profits but passes them through to its owners who pay the taxes on their individual rates.

Partnership

an unincorporated association of two or more co-owners who operate a business for profit

sole proprietorship

an unincorporated business owned by one person easy and inexpensive to create and operate doing business as (DBA) if you're sured, you have sole liability

Uniform Franchise Offering Circular (UFOC)- Regulated by Federal Trade Comission (FTC) -Circular must include the following information

any litgation against the company whether company has filed bankrupsy in the last 10 years all fees owed for franchise estimate of required initial investment what goods must be purchased by franchiser the number of franchises in operation how many franchises have gone out of business in the last 3 years

Partnership by Estoppel

applies if: participants tell other people that they are partners (even though they are not), or allow other people to say, without contradiction, that they are partners (doctor example) a third party relies on this assertion the third party suffers harm *(doctor example)*

Corporate stock can be...

bought and sold, making investments easy to get

Who are joint ventures popular with?

companies manufacturing in other countries developers

close corporations

corp whose stock is not publicly traded on a stock exchange.

a limited liability partnership offers the liabiity of a ______________ and the tax status of a _________________________.

corporation flow-through organization

duty of care

duty owed by partners to manage the partnership affairs without: -gross negligence, -reckless conduct, -intentional misconduct, or -knowing violation of law

personal liability

each partner is personally liable for the debts of the partnership *whole partnership is liable if one person decides to commit fraud*

unless agreed otherwise, partners have an ___________________ on matters of partnership business

equal vote

large partnerships are often managed by a _____________________or ____________________________.

few designated managing partners an executive committee

What is the difference between a general partner and a limited partner in a limited liability partnership?

general (active management) limited (money-only)

What happens to the JV once the purpose is finished?

it goes away

JV: popular with companies ____________________________________.

manufacturing in other companies

partnerships have joint and severable liability. What does this mean?

means that s creditor can sue the partnership and the parties together, or in seperate lawsuits, or in combination.

Professional Corporations

mostly a legacy form of organization- few businesses would now elect to be a PC, but there are still many in existence because in the past, they were the only option available to professionals (such as lawyers and doctors) other then a general partnership.

Partnership by Estoppel

non-partners are held out to be partners and, therefore, are personally liable as if they were partners

_____________- do not qualify as a joint venture.

nonprofit enterprises

Is JV a legal entity? What is up with tax liability?

not a legal entity all tax liability is shared among the participants in the JV. they also share liability that arises out of the JV activity

Franchise

not actually a seperate form of business -they can be almost any of the others (LLC, DBA, LP)

LLC

offers the limited liability of a corporation and the tax status of a partnership, WITHOUT the disadvantages of an S corporation

general partner

one of the owners of a general partnership. Co-owner

who is personally liable in a limited partnership?

only the general partners.

each partner has equal rights in management of the partnership unless

otherwise agreed upon

Circumstances that require dissolution

partner widthdraws from a partnership at will all partners agree to dissolve the term expires or the partnership achieves its goal partners agree in advance on events that will cause dissociation partnership business becomes illegal (could be the infected fruit that got quarantined) A court determines that the partnership cannot function successfully

Managing Partners or members of the executive committee

partners who have primary management responsibility for a partnership

Joint venture

partnership for a limited purpose

if two people do business together, sharing management, profits, and losses, they have a...

partnership whether they know it or not, and are subject to all the rules of partnership.

corporations offer ____________ - usually the managers' and investors personal property is not at risk.

protecction

common provisions of closed corporations

protection of minority chareholders transfer restrictions flexibility

s corporations

shareholders= best of ALL worlds. they have the limited liability of a corp and the tax status of a partnership

the biggest disadvantage of an LLC is:

state laws vary and organization forms are not standardized

Liability for PC

the corp may be liable for an individual member's mistakes, but the innocent professionals are not at risk.

where are earnings reported for a sole proprietorship?

the owners personal tax return

Partners can be held personally liable for what?

the partnership actions and debts

social enterprises

these organizations pledge to behave in a socially responsible manner even as they pursue profits

corporations involve a lot of __________ and ________ to create and operate

time effort

General Partnership & example or partnership by estoppel

usually not great multi-state partnerships undocumented are done by conduct ex. two doctors who shared an office space were not partners. One of the doctors was supposed to deliver a woman's baby, but the baby was not due for a few more weeks and the doctor was going out of town. He told the lady not to worry and that his "partner" would take care of it. She had complications and went into labor early and the baby was messed up. She sued their partnership and even though it was undocumented, she won because it ws done by conduct.

dissociation

when a partner leaves a partnership