BUL5832 Business Formations

What type of tax entity is a partnership? How are taxes paid?

"Flow-through" The entity does not pay taxes on its income. Instead, the owners of the entity pay tax on their "distributive share" of the entity's taxable income

Four elements of a joint venture

(1) a contract to engage in a common undertaking; (2) a contribution of money, property, time, or skill; (3) an interest in, and mutual right to control, venture property; and (4) an agreement to share profits.

What mus key provisions in any joint venture include?

(1) clearly defined business objectives; (2) the degree of participation and the management roles of each joint venturer in the business; (3) contribution of capital and ownership rights to property; (4) division of the profits and losses; (5) a dispute mechanism to avoid management impasses that may produce deadlock or litigation; (6) termination/liquidation of the JV and the buy-out provisions; (7) confidentiality; and (8) indemnification.

What are the elements necessary for the presumption of a partnership?

-1. A sharing of profits or losses. -2. A joint ownership of the business. -3. An equal right to be involved in the management of the business. -Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.

Taxation of the LLC

-1997 IRS rules provide that any unincorporated business (including LLC's) will automatically be taxed as a partnership unless otherwise indicated on the tax return. -LLC's allow foreign investors to own LLC interests.

What rights do corporations receive under the US Constitution?

-Access to court systems. -Constitutional guarantees of free speech, due process, and freedom from unreasonable search and seizures.

What should happen at the first organizational meeting to adopt bylaws in a new corporation?

-After the corporation is "chartered"(created) it can do business. -At meeting, shareholders should approve the bylaws, elect directors, hire officers and ratify pre-incorporation contracts and activities.

Jurisdictional requirements of the LLC

-An LLC is a legal entity separate from its owners. -For federal diversity jurisdiction, the LLC may be treated differently than a corporation. Citizenship of an LLC is the citizenship of its members, which may live in multiple jurisdictions.

"S" Corporations Tax

-Avoids federal tax under IRS code "Subchapter S". -Avoids federal "double taxation" of regular corporations at the corporate level. -Only dividends are taxed to the shareholders as personal income.

Promotional activities

-Before corporation is formed, promoters are the persons who take the preliminary steps of organizing the venture and attracting investors via subscription agreements. -Promoter's Liability: Promoter is personally liable for pre-incorporation contracts on behalf of the corporation, unless 3rd party agrees to hold future corporation liable.

Corporate earnings and taxation

-Corporate profits can either be kept as retained earnings or passed on to the shareholders as dividends. -Corporate Taxation: corporate taxes can be taxes twice, first to the corporation, then to the shareholders via dividends. -Double taxation

Tort and criminal acts liability

-Corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior. -Corporation can be liable for criminal acts, but only fined. Responsible officers may go to prison.

Characteristics of Corporations

-Corporations can have one or more shareholders. -Owners can be natural persons or other businesses. -Corporation substitutes itself for shareholders.

LLC dissolution

-Dissociated member has no right to force the LLC to dissolve. -Remaining members can choose to continue or dissolve. -Operating agreement 'trigger' events will cause dissolution. -Members who did not wrongfully dissociate may participate in the winding up process.

Elements of Duty of Care

-Duty to Make Informed Decisions. Directors are expected to be fully informed on corporate matters. -BJR -Duty to Exercise Reasonable Supervision. Directors are expected to supervise officers when delegated work. -Dissenting Directors: rarely held individually liable to the corporation.

What should entrepreneurs consider when choosing a business entity?

-Ease of creation -Owner's liability -Tax considerations -Need for Capital

Advantages of a partnership

-Easy and Inexpensive -Shared financial commitment -Complementary skills -Partnership incentives for employees

What are advantages of a sole proprietorship?

-Easy and inexpensive to form -Complete control -Easy tax preparation (Business is not taxed separately)

What is a limited partnership?

-Entity that limits the liability of some of its owners (limited partners) -Agreement between at least one general partner and one limited partner to carry on a business for profit

When a partnership dissolves, in what order are obligations paid?

-First, 3rd party creditors. -Second, partner loans to partnership. -Third, return of capital contributions. -Fourth, distribution of the balance, if any to partners.

Characteristics of a joint venture

-Generally involves coming together for a temporary amount of time -Both legal entities kept separately -JV members can specify duration. If not, then JV terminates when purpose is accomplished.

Corporate personnel

-Have responsibility for overall governance of company rests with board of directors (elected by shareholders). -Board of directors makes policy decisions and hires officers to run corporation (management)on a daily basis.

What taxes are partners in a partnership responsible for?

-Income tax -Self-Employment Tax (FUTA FICA)

LLC's operating agreement

-Is analogous to corporation's bylaws. -Operating agreements may be oral and contain provisions relating to management, dividends, meetings, transfer of membership interests, and other significant issues. -Generally, if the operating agreement is silent, courts will apply partnership principles. -Like a partnership agreement, but with limited liability

How is a joint venture different than a partnership?

-JV members have less implied and apparent authority than partners. -Death of JV member does not terminate JV. -A JV is limited in time and scope, whereas a partnership is an ongoing business.

Disadvantages of a partnership

-Joint and individual liability -Disagreements among partners -Shared profits

Why are LLPs used?

-LLPs allow partnership to limit personal liability of the partners but allows "pass through" tax advantages -Designed for professionals who normally do business as a partnership -The LLP allows professionals to avoid personal liability for the malpractice of other partners.

Which forms of business entities are creatures of state statute?

-Limited Partnership -Limited Liability Partnership -Limited Liability Company -Corporation

Rights of partners in a partnership

-Management: equal, each one vote, majority wins; need unanimous consent for some actions. -Interest in the Partnership: equal profits, losses shared as profits shared. -Compensation: none. -Inspection of the Books: always and also by rep. of deceased partner. -Accounting: when other partner(s) committing fraud, embezzlement, wrongful exclusion, or anytime it is just and reasonable. -Partner cannot sell, assign or take a particular item of partnership property, nor can individual partner's creditors seize the property.

Advantages of the LLC

-Member liability is limited to amount of investment. -Can be treated as a "pass through"entity for tax purposes. -Profits can be distributed to members without the double taxation of a corporation. Members pay personal income tax on received dividends.

Limited Liability of Shareholders

-One of the key advantages of corporations is the limited liability of owners (shareholders). -In certain situations, the corporate "veil"of limited liability can be pierced, holding the shareholders personally liable.

Agency concepts and partnership law

-Partnerships are governed both by common law and by statutory laws. -Each partner is deemed to be an agent and fiduciary of the other. -There may be imputation of liability.

What are the different durations a partnership can have?

-Partnerships for a term -Partnership at will

Incorporation Procedures

-Select State of Incorporation. -Secure the Corporate Name. -Prepare the Articles of Incorporation: which deals with shares, the registered agent and office, incorporators, duration and purpose, and internal organization. -File the Articles with State

What are the different options for business formations?

-Sole proprietorship -General partnership -Limited Partnership -Limited Liability Partnership -Limited Liability Company -Corporation

Disadvantages of the LLC

-State statutes are not uniform. -Necessary to review the LLC acts in states where the LLC's business will be conducted to ensure that those states recognize foreign LLCs

In what ways are partnerships recognized as separate legal entities?

-To own partnership property. -To convey partnership property. -To sue and be sued. -To have judgments collected against it's assets, and individual partners' assets.

What are disadvantages of a sole proprietorship?

-Unlimited personal liability (respondent superior) -Hard to raise money -Heavy burden -Legally responsible for business' contracts and torts committed by proprietor & employees -Owner is personally liable for all losses or liabilities incurred

When is a limited partner in a limited partnership liable?

-When they engage in management functions -An LP will be liable to a 3rd party if the 3rd party believes, based on conduct, that the LP is a general partner.

What is a sole proprietorship?

A form of business where the owner is actually the business Business is not a separate legal entity

What is a general partnership? When

A single business where two or more people share ownership Created when two or more persons agree to carry on business for profit as co-owners with equal right to manage and share profits (UPA) 1. 2 or more people 2. Carry on business FOR PROFIT

Member-managed LLC

All of the members participate in management, like a partnership.

How do sole proprietors report taxes?

Because you and your business are one and the same, the business itself is not taxed separately-the sole proprietorship income is your income. You report income and/or losses and expenses with a Schedule C and the standard Form 1040. The "bottom-line amount" from Schedule C transfers to your personal tax return. It's your responsibility to withhold and pay all income taxes, including self-employment and estimated taxes

Joint venture agreemets

Commonly referred to as a "JV", are typically formed either by individuals, business entities, corporations or partnerships. The contributions to the joint ventures are either in the form of money [capital], services, or physical asset(s), i.e. equipment or intellectual property [software, patents], etc., or a combination of all.

Foreign corporation

Corp from X state doing business in Z state

IRS Requirements for an "S" Corporation

Corporation is domestic, fewer than 75 shareholders, only one class of stock, no shareholder can be a non-resident alien.

What is the main difference under the law between a person and a corporation?

Corporations enjoy perpetual existence

How is an LLP created?

Creature of state statute

How is a limited partnership created?

Creature of state statute Filing a certificate with the Secretary of State

Domestic corporation

Does business in its state of incorporation

What duties do directors and officers owe the corporation?

Duty of care Duty of loyalty

If articles are silent in an LLC, what do statues provide?

Either each member has one vote or votes are made based on percentage of ownership

True or false? Co-ownership forms a partnership.

False. Joint ownership of property—or the sharing of profits from the property-- does not, by itself, create a presumption of a partnership. -However the sharing of profits and losses usually does.

What duties do partners have to one another?

Fiduciary duties Partners are fiduciaries and general agents of one another and the partnership.

Alien corporation

Formed in another country doing business in the US

Garden City Boxing Club, Inc. v. Dominguez

GCBC owned rights to air fights with commercials, but cable guy hooked restaurant up with cheaper cable by listing it as a residential building. Cable guy was employee of Dominguez, who was sued for lost ad revenue

What is an example of liability for partnership debts?

If one person leaves the partnership, they are still liable to pay rent on a lease

Can a sole proprietorship operate under a different name than their own? Is so, how?

If you choose to operate under a name different than your own, you will most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for "doing business as"). You must choose an original name; it cannot already be claimed by another business.

Business judgement rule

Immunizes a director or officer from liability from bad decisions. -Court will not require directors or officers to manage "in hindsight." -As long as decision was reasonable, informed, made in good faith and in the best interests of the corporation, BJR will apply.

When are joint ventures most common?

In international transactions when US companies wish to expand overseas -Popular with foreign investors where countries don't want company leaving no revenue in country

What is increasingly becoming the most popular entity of choice for businesses?

LLC

Manager-managed LLC

Members are elected to manage the LLC.

What are owners called in an LLC

Owners are called "members" (not shareholders) and their ownership is called an "interest" (not shares)

Partnership Buy-Sell Agreements

Partners agree in advance that, in the event of the death of one of the partners or some other event, how remaining partners will buy-out the deceased partners'interest.

How is tax information filed for partnerships?

Partners are not employees and should not be issued a Form W-2

What does the winding up process entail for an LLC?

Pay bills, creditors, etc. and distribute remaining assets among members

Who can form a partnership?

People with legal capacity Corporations

Process of Incorporation

Preliminary and Promotional activities Legal process of incorporation

What liabilities does a promoter face?

Promoter is personally liable for pre-incorporation contracts on behalf of the corporation, unless 3rd party agrees to hold future corporation liable.

Formation of the LLC

Requires filing articles of organization with central state authority: -Name of Business. -Principal Address. -Name and Address of Registered Agent. -Names of the Owners. -Business name must include LLC or Limited Liability Company.

How is a joint venture like a partnership?

Resembles a partnership and is taxed like a partnership with equal rights of management

Respondeat superior

Says corporation is liable for the torts committed by its agents or officers within the course and scope of their employment

How are profits shared in a joint venture?

Share profits and losses equally

Closely held corporation

Shares held by few shareholders -More informal management, similar to a partnership -Restriction on transfer of sale and transfer of shares

What is respondent superior?

Sole proprietor is the "superior" and liable for employees (unless they only hire independent contractors)

What is the most common form of business organization in the United States? How much do they make on average?

Sole proprietorship 99% of those in the US earn less than $1 million per year

Advantages of joint ventures

Speed Access Sharing of resources Leveraging of underutilized resources The JV may be an easier first-step to franchising, as McDonald's and other fast foods, found out in China in the early difficult stage of development.

Elements of Duty of Loyalty

Subordination of personal interests to the welfare of the corporation. -No competition with Corporation. -No "corporate opportunity." -No conflict of interests. -No insider trading.

Professional Corporations

The PC form does not allow professionals to be free from personal liability from the result of his or her professional actions, but it does allow other shareholders or directors to be protected from the actions of another.

If partners fail to create a partnership agreement, how are disputes settled?

The Uniform Partnership Act governs the partnership

How are partnership taxes paid?

The entity does not pay taxes on its income. Instead, the owners of the entity pay tax on their "distributive share" of the entity's taxable income •A partnership must file an "annual information return" to report the income, deductions, gains and losses from the business's operations, but the business itself does not pay income tax. Instead, the business "passes through" any profits or losses to its partners. Partners include their respective share of the partnership's income or loss on their personal tax returns.

What are promoters?

The persons who take the preliminary steps of organizing the venture and attracting investors via subscription agreements.

What does the term "joint venture" refer to?

The purpose of the entity and not to a type of entity. •Therefore, a joint venture may be a corporation, a limited liability company, a partnership or other legal structure, depending on a number of considerations such as tax and tort liability

Who does the duty of loyalty apply to?

Those with fiduciary responsibilities Not employees unless the employee used the company's time or equipment

True or false? A corporation is considered a "person" by the law.

True Corporation is recognized as a legal "person" and enjoys virtually same rights and privileges under our Constitution as a natural person

When does dissociation of a partnership occur?

When one partner ceases to be associated in the business -Allow partner to have her interest purchased by the partnership -Terminates her voting interest in the partnership

What is a joint venture?

When two or more entities agree to share capital, technology, human resources, risks and rewards in a formation of a new entity under shared control for a single transaction or project.

Limited Partnership - Limited Partner

Who invests capital but do not participate in management and are not personally liable for partnership debts beyond their capital contribution

Limited Partnership - General Partner

Who invests capital, manage the business, and are personally liable for partnership debts

If partners don't have a written or oral partnership agreement, how are disputes resolved?

With the Uniform Partnership Act

Rules for naming an LLC

• (1) A limited liability company name: • (a) Must contain the words "limited liability company," the abbreviation "L.L.C.," or the designation "LLC" as the last words of the name of every limited liability company formed under the provisions of this chapter. The word "limited" may be abbreviated as "Ltd.," and the word "company" may be abbreviated as "Co." Omission of the words "limited liability company," the abbreviation "L.L.C.," or the designation "LLC" in the use of the name of the limited liability company shall render any person who knowingly participates in the omission, or knowingly acquiesces in the omission, liable for any indebtedness, damage, or liability caused by the omission

Management of an LLC

• There are two options for management, generally set forth in the articles of organization: -Member-Managed: all of the members participate in management, like a partnership. -Manager-Managed: members are elected to manage the LLC. • If the articles are silent, statutes provide either that each member has one vote or votes are made based on percentage of ownership.

What is an Limited Liability Company?

•An LLC is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership. •An LLC is a legal entity separate from its owners.

Characteristics of a limited partnership

•Consists of at least one general partner and one limited partner. •Limited partner has no right to manage. •Liability is limited to amount of investment. •Attractive to investors. •Only General Partners can manage •LP's enjoy limited liability as long as they do not engage in management functions. •An LP will be liable to a 3rd party if the 3rd party believes, based on conduct, that the LP is a general partner.

What are some rules for operation of a general partnership?

•Each partner is liable for partnership debts if made with the scope of a partner's duty. •Each partner has a fiduciary duty to the other. •Decision Making in a General Partnership— unless stated otherwise, decisions must be unanimous on all non-routine matters.

Reasons for forming a JV

•Reducing 'entry' risks by using the local partner's assets •Sony Ericsson, Japanese based Sony partnered with Swedish company Ericsson to make mobile phones. •The county's laws may not permit foreign nationals to operate alone •China and to some extent India, do not allow foreign companies to invest directly into their countries.

Characteristics of a limited liability partnership

•The LLP allows professionals to avoid personal liability for the malpractice of other partners. • The LLP form of ownership is limited in most states to persons licensed to practice in the fields of public accountancy, law, or architecture.

Characteristics of Personal liability of sole proprietors

•The sole proprietor bears the risk of loss of the business •The owner will lose his or her entire capital contribution if the business fails •The sole proprietor has unlimited personal liability •Creditors may recover claims against the business from the sole proprietor's personal assets

How is a sole proprietorship created?

•There are no formalities •No federal or state government approval is required •Some local governments require all businesses (including sole proprietorships) to obtain a license to do business within the city •A sole proprietorship can operate under the name of the sole proprietor or a trade name

LLC Dissociation characteristics

•When a member dissociates from the LLC, he loses the right to participate in the management, and the right to act as an agent. •Member also has the right to have her interest bought out by other members. •Operating agreement prevails and may preclude some member rights. •Right to leave, but can't force others to buy you out