Choosing Your Form of Business

firm name (LP):

-A limited partner's name cannot appear in the firm name -Under the RULPA, the words limited partnership must appear without abbreviation in the firm name

A partnership has distinguishing characteristics:

-A partnership is a voluntary, consensual relationship -A partnership involves partners' contributions of capital, services, or a combination of these -The partners are associated as co-owners to transact the business of the firm for profit -primary disadvantage: if something happens, both partners are liable

Characteristics of LLCs

-Combines the tax advantage of a partnership with the limited liability feature of the corporate form of business organization -Owners and managers aren't personally liable for the debts and obligations of the entity, provided that these individuals fulfill their common law duty to disclose that they are acting as agents for the limited liability company -Pays no federal taxes on its income as an entity -Instead, income flows through to the members based on their proportionate interest in the company

Franchiser cons

-Give up control -Usually required to use franchiser's supplies -Usually required to follow franchiser's methods and rules -Risk to reputation by giving up day-to-day control -You're associated with a bad reputation

Double taxation

-Income of the entity is taxed at the entity level AND -Distributions (profits, dividends, etc) to partners, members, shareholders, are subject to individual income tax

Formation of an LLC

-LLCs require a formal filing of articles of organization with the Secretary of State -Must include LLC in their name -LLC is a legal entity with authority to conduct business in its own name

management and control of the firm (LP):

-Limited partners have a right to a share of the profits and a return of capital upon dissolution; they also have limited liability -Limited partners lose the limitation of liability if they participate in the control of the business

right to sue (LP):

-Limited partners may sue their partnership's general partner to protect the limited partners' interest -In general, partners owe each other a fiduciary duty; statutes in some states allow general partners to limit or eliminate a fiduciary duty to limited partners in the partnership agreement

Management of an LLC

-Management of an LLC is vested in its members, who may delegate authority to managers -An operating agreement sets forth the specific management authority of members and managers --Recommended that it be in writing

LLC management

-Member-managed - may be managed by all of the members -Managing member-managed - may be managed by appointed managing members -Managing members have fiduciary duties (similar to officers of a corporation)

Dissolution of an LLC

-Most LLC statutes provide that an LLC will dissolved by the consent of the members or upon the death, retirement, resignation, expulsion, or bankruptcy of a member -Statutes also provide that the business of the LLC may be continued with the consent of all the remaining members

"Pass-through entity"/disregarded entity

-No income tax at the entity level -The partners, members, shareholders, as applicable, are subject to individual income tax

Franchiser pros

-Revenue without expertise -Brand recognition and goodwill without building the brand -Established

Partnership agreements:

-Typically written to cover numerous, complex issues -No requirement that they be in writing; yet should be to reduce or avoid disputes and litigation -The partnership agreement (also known as the articles of partnership or the articles of copartnership) governs the partnership during its existence and may contain provisions relating to dissolution

capital contributions (LP):

-Under the ULPA, a limited partner contributes either cash or property but not services -Under the RULPA, a limited partner may contribute services

LLPS characteristics

-Usually used for professionals in business together - lawyers, doctors, therapists -Some states don't allow, or limited to certain kinds of businesses (typically personal services) -Note: liability insurance may be required by law, or may be preferred by partners (this helps with liability for malpractice, etc)

LLC ownership

-relationship created voluntarily as owner(s) or a business for profit --Owners are called members --Can be single-member or multi-member

Who should a business consult with on which type of entity to form? (AKA who are your two bffs?)

Accountant and Lawyer

LLC (Limited Liability Company)

Before LLCs, a business owner had to choose between the limited liability offered by the corporate form and the tax advantages of a partnership -LLC offers limited liability and avoids the double taxation of corporations -LLCs are now the nation's most popular form of business entity

Limited Partnership managment and liability

Management: -General partner has exclusive management rights -Limited partners have no management rights (exceptions for limited major decisions such as sale or financing of partnership property) Liability -General partner has unlimited personal liability --Personal assets

What is ULPA & RULPA?

The Uniform Limited Partnership Act (ULPA) was approved by the National Conference of Commissioners on Uniform State Law in 1916. It was revised in 1976 as the Revised Uniform Limited Partnership Act (RULPA) and was amended in 1985.

Close corporation

limited, close number of investors

C Corporation

lots of investors

LLC taxation

no double taxation

Disadvantages of Sole Proprietorship

owner is subject to unlimited personal liability for the debts of the business and can't limit this risk, investment capital is limited by the resources of the sole proprietor, the authority to make contracts terminates on the death of the owner & the business is subject to disintegration

Advantages of Sole Proprietorship

owner not required to expend resources on organizational fees, controls all decisions and receives all profits, net earnings are only taxed as personal income (not subject to corporate income taxes)

General partner

partner who co-owns a business for profit and has a right to take part in the management of the business and has unlimited liability; general partners publicly and actively engage in the transaction of firm business. -Personally liable for the firm's debts

Limited partner

partner who neither takes part in the management of the partnership nor appears to the public to be a general partner (an investor)

General partners

partners who publicly and actively engage in the transaction of firm business -A partner is not an employee of the partnership even when doing work that would ordinarily be done by an employee. -Courts use the clackamas test to determine whether partners are employees for purposes of antidiscrimination laws

Partnership

pooling of capital resources and the business or professional talents or two or more individuals (partners) with the goal of making a profit

Corporation advantages

the shareholder's risk of loss from the business is limited to the amount of capital invested in the business or paid for shares. This factor makes the corporate form of business organization attractive to investors. A corporation is not affected by the death of any of its shareholders or the transfer of their shares.

LLP Disadvantages

unlimited personal liability of each partner, the uncertain duration of the business because the partnership is dissolved by the death of one partner

What can a sole proprietor do to try to mitigate the risk of unlimited liability?

INSURANCE

LLC liability

No personal liability except in VERY rare circumstances (e.g. fraud, illegal conduct)

Sole Proprietorship

Ownership - only one owner (limitations on raising capital) Management - complete decision-making control Unlimited personal liability Only taxed once Business dies with you Not a lot of filing work

LLP (Limited Liability Partnership)

Ownership - relationship created voluntarily by two or more people as owners of a business for profit --No general partner --At least two limited partners Management --Equal management rights among limited partners Liability --No personal liability for limited partners except own wrongful acts

General partnership

Ownership: relationship created by two or more people as owners of a business for profit management -Equal management rights (unless the agreement says otherwise) -In the absence of an agreement otherwise, majority rules -Partner duties - loyalty and good faith -Partner rights - inspection of books and share of profits Liability: -unlimited personal liability

Franchise

Relationship formed between franchiser and a franchise -Franchiser provides intellectual property or significant assets -Franchise operates business day-to-day/pays fee to franchiser (percentage of profits)

dissolution (LP):

The RULPA allows a person dissociated as a limited partner to have access to information it had as a limited partner

sole or individual proprietorship

a form of business ownership in which one individual owns the business and is personally responsible for its debts -commonly used in retail stores, service businesses, and agriculture

Limited liability partnership (LLP)

a partnership in which at least one partner has a liability limited to the loss of the capital contribution made to the partnership -Businesses may operate under the form of organization called limited liability company (LLC), which allows tax treatment as a partnership with limited liability for the owners

Limited partnership

a partnership that can be formed by one or more general partners and one or more limited partners -Certain members contribute capital but have limited liability for firm debts; the most they can lose is their investment

B corporation (benefit corporation)

a percentage of your profits go to a charity (ex: REI)

LLP Advantages

allows individuals to pool resources and then initiate and conduct their business without the requirement of a formal organizational structure

Corporation

artificial being created by government grant and treated as a natural person for many purposes

Characteristics of limited partnerships

capital contributions, firm name, management and control of the firm, right to sue, dissolution

Unincorporated association

combination of two or more persons for the furtherance of a common nonprofit purpose.

Corporation disadvantages

corporations are required to pay corporate income taxes and shareholders are required to pay personal income taxes on the amount received from a distribution of profits from the corporation (double taxation). Incorporation involves the expenditure of funds for organizational expenses.