Exam 7
What is the best opportunity for a sole proprietorship to obtain additional business capital?
- Investment of own savings - taking out loans - advances from commercial banks // borrowing from finance companies. + proprietor receives ALL of the profits and only files for PERSONAL INCOME TAXES on the business's profits. **Sole proprietors are allowed to establish retirement accounts that are tax-exempt until the funds are withdrawn!
What is a limited liability partnership (LLP)?
A hybrid form of business designed mostly for professionals who normally do business as partners in a partnership. - advantage: allows partnership to continue as a pass-through entity for tax purposes but limits the personal liability of the partners. ... - many states have LLP statutes. Big firms and family-run businesses have to give annual reports to the state to remain qualified. - generally only liable for their own malpractice-- unless an individual was supervising the person who committed wrongful act. --> however, if they do business in another state, that state's rule could differ!
What is a family limited liability partnership (FLLP)?
A limited liability partnership in which the partners are related to each other. - most significant use: agriculture. family-owned farms. - advantages are generally the same as LLPs with certain additional advantages.
With respect to management decisions, must a majority of the partners agree?
A majority vote controls decisions on ordinary matters connected with partnership business, unless otherwise specified in their agreement. - however, any MAJOR decision that changes state of business must have a UNANIMOUS vote.
When A sells a sole proprietorship to B, is this a transfer of the ownership of the business?
A sole proprietorship cannot be transferred to another party. However, it may able to have its assets transferred to a new owner. The new business owner must have his own separate legal business structure in order to receive the assets.
What is a limited liability limited partnership (LLLP)?
A type of limited partnership; differs from LP because a the liability of all partners is limited to the amount of their investments in the firm.
To avoid double taxation, how would a LLC elect to be taxed?
An LLC that wants to distribute profits to its members almost always prefers to be taxed as a partnership to avoid the "double taxation" that is characteristic of the corporate entity.
What is a franchise?
An arrangement in which the owner of intellectual property licenses others to use it in the selling of goods or services.
What would cause a limited partner in a LP to lose her limited liability?
Bankruptcy (if it causes the bankruptcy of the firm), retirement, death, or mental incompetence of a general partner will cause the dissociation of that partner and the dissolution of the limited partnership unless the other members agree to continue in the firm.
What is the result of a partner's assignment of his interest in the partnership to another business without the consent of the other partners?
Breach of "Duty of Loyalty."
In the event of a LP's dissolution, could a buy-sell agreement avoid a dispute about how its assets should be valued and distributed and whether the business should be sold?
Buy-sell agreements can help the partners avoid disputes. - but they don't eliminate all potential for litigation.
Is a partnership terminated when the partners decide to dissolve it and one of the partners collects and distributes the assets?
Dissolution = termination of partnership + commencement of the winding up process. After dissolution, the partnership continues to "wind up" - collecting and distributing assets, discharging liabilities (paying debts), and accounting to each partner for value of their interest in partnership.
In the absence of an agreement otherwise, how will the profits of a LP be shared?
Each partner is entitled to an equal share of the partnership profits and losses.
Is a single partner in a partnership entitled to information on a complete basis?
Each partner is entitled to the proportion of business profits and losses that is specified in the partnership agreement.
Can a foreign investor become a member of a LLC in the U.S.?
Foreign investors are allowed to become LLC members, so organizing as an LLC can enable a business to attract investors from other countries.
If A is a foreign LLC in Indiana, will that state apply the law of the state where the firm was formed?
Generally, most states apply to a foreign LLC (an LLC formed in another state) the law of the state where the LLC was formed. - difficulties arise when a state has to interpret another state's laws.
What would cause the franchisor, the franchisee, and an employee of the franchisee to be liable for tortious act in a given situation?
If a franchisor exercises too much control over the operation of its franchisees, they could be held liable under the doctrine of Respondeat Superior. - Ex: Franchisor can't set the prices at which the franchisee will resell the goods; they can suggest retail prices but cannot mandate them.
If a LLC is member-managed, will all decisions with respect to its business be made by majority unless the members have agreed otherwise?
In a member-managed LLC, all of the members participate in management, and decisions are made by majority vote.
If A dissociates from a partnership, does this end her right to participate in the partnership's business?
It terminates the partner's actual authority to act for the partnership and to participate running its business. - dissociation normally entitles the partner to have his/her interest purchased by the partnership.
Do state limited liability company statutes vary from state to state?
LLCs are creatures of statute and thus must follow state statutory requirements.
To what extent is a limited partner in a LP liable for the LP's debts when the LP cannot pay them?
LPs are entitled to a return of their contributions, so long as they're not involved in management. *The general partner(s) or Management in an LP is personally liable.
If a limited partner in a LP acts and behaves as if he were a general partner, to what extent is he liable for the LP's obligations?
LPs require that the general partner have unlimited liability. They are responsible for 100% of management control but also are on the hook for any debts or mishandling of business dealings.
What kind of access do limited partners in a limited partnership (LP) have to the firm's books and information regarding partnership business?
Limited partners have a right of access to the partnership's books and information regarding the partnership business. - w/ the exception of management, LPs have the same rights as general partners.
What must LLC members refrain from for it to become a manager-managed firm?
Manager-Managed LLC: - members designate a person or group of persons to manage the LLC, (could consist of only members, both members and non members, or only nonmembers). - must refrain from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
Are limited liability members usually shielded from the loss of their capital investment in the firm?
Members (owners) of LLCs are shielded from personal liability in most situations. --> the liability of members normally is limited to the amount of their investments.
Under most LLC statutes, how will a LLC's profits be distributed if it has no written operating agreement?
Most of the time, if the members have not specified how profits will be divided, they will be divided equally among the members.
Unless a LLC's articles of organization specify otherwise, will it most likely be assumed that the firm is member-managed?
Most of the time, unless the articles of organization specify otherwise, an LLC is assumed to be member managed.
Do most states follow the federal rules with respect to taxes imposed on LLCs?
Nearly all states follow the lead of the IRS with respect to LLCs in assessing state income taxes. Thus, the LLC automatically will be presumed to be a conduit for state tax purposes in these states, and no state corporate tax is imposed.
Is an employee of a partnership considered a partner?
No, but an employee who receives even a small partnership interest immediately becomes a partner.
Must an agreement to form a partnership to sell real property be in writing?
No, but it must be there if there's certain percentages that vary between the partners (not split equally).
What are the characteristics of a sole proprietorship? (2)
Owned and operated by one person. (The person is the business).
What is meant by a franchisor's covenant of good faith and fair dealing with a franchisee?
Parties to contract should deal with each other honestly and fairly, consistent with the reasonable expectations as expressed in the contract. - Must be proven to court when terminating. - Ex of bad faith: Franchisor allows a competing franchise to be established nearby, and the franchisee suffers significant lost profits.
What constitutes a dissociation of a partnership?
Partner ceases to be associated in the carrying on of the partnership business. They have the power to dissociate but may not always have the right.
In some states, are at least 2 persons required to form a LLC?
Some states require at least two members.
What must a business that grants franchises disclose to prospective franchisees?
The FTC's Franchise Rule requires franchisors to disclose certain material facts that prospective franchisee needs in order to make an informed decision concerning the purchase of the franchise.
For federal jurisdictional purposes, what states is a LLC most likely citizens of?
The courts have tended to regard LLC entities as citizens of every state of which their members are citizens.
Does a partner's death dissolve that partner from the business?
The death of a partner in a two-person partnership will terminate the partnership for federal tax purposes if it results in the partnership's immediately winding up its business. - winding up is the actual process of collecting, liquidating, and distributing the partnership assets.
What is entailed in a partner's duty of loyalty to the partnership?
The duty of loyalty requires a partner to account to the partnership for "any property, profit, or benefit" derived by the partner in the conduct of the partnership's business or from the use of its property. +++ Refrains from competing with the partnership business opportunity. Breached by: - self-dealing - misusing property - disclosing trade secrets - usurping a partnership business opportunity
Why are franchise deals regulated by laws and the legal system?
These laws are designed to protect prospective franchises from dishonest franchisors and to prevent franchisors from terminating franchises without good cause.
Does the franchisor or franchisee usually determine the territory to be served by the franchise?
Typically, the franchisor determines the territory to be served. - But some contracts give franchisee "exclusive/territorial rights" to a certain geographic area.
For federal income tax purposes, unless the firm indicates otherwise, how will a LLC be taxed?
Unless the LLC indicates that it wishes to be taxed as a corporation, the Internal Revenue Services (IRS) automatically taxes it as a partnership. - Meaning the LLC, as an entity, pays no taxes-- the members personally pay taxes on the profits because the profits "pass through" the LLC to its members. - ONE member cannot be taxed for partnership. Automatically taxed as a sole proprietorship unless they indicate that they wish to be taxed as corporations.
Before a franchise contract is signed, must a franchisor explain the contract's termination provisions?
Usually, the franchise agreement specifies that termination must be "for cause" and then defines the grounds for termination. - causes examples: death/disability of franchisee, insolvency of franchisee, breach of agreement, or failure to meet specified sale quotas.
Does a LLC enter into contracts as a legal entity apart from its owners?
When forming an LLC, it becomes a separate legal entity apart from its owners. Meaning the business itself can own assets, enter into contracts, and is liable for its own debts.
Is intent to act in good faith an essential element of a partnership?
Yes, they are bound by fiduciary duties, meaning they're required to act primarily in the best interests of one another.
In most states, is a partnership treated as an independent entity for the purposes of collecting judgments and having accounting performed?
Yes.
When a sole proprietor dies, will the business automatically dissolve?
Yes.
Can a LLC hold title to property because the firm is treated as if it were a legal person?
Yes. - since an LLC is a legal person, the property it owns is the property of the LLC, not of the members.
Must a franchisor have a reasonable basis for making earnings claims to prospective franchisees?
Yes. All representations made to a prospective franchisee must have a reasonable basis. - Ex: if franchisor provides projected earnings figures, the franchisor must indicate whether the figures are based on actual data or hypothetical examples.
What is a limited liability company (LLC)?
a hybrid that combines the limited liability aspects of a corporation and the tax advantages of a partnership-- used by many small businesses. - owner's private assets are not at risk if company fails. - only risk is the amount of money that was invested in the business.
dissolution v dissociation
dissolution - business is required to wind up and terminate. dissociation - particular partner discontinues to be a part of the business.