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B-Law II Chapter 35

Sole Proprietorship
Business owned by one individual
– personally liable for all losses
– funding limited to personal capital contributions & loans
– easy to create
– proprietor has total control of management
– proprietor keeps all of profits
– NOT considered a separate legal entity (personal liability)
VOLUNTARY association between two or more persons, co-owning business FOR A PROFIT
– governed by UPA unless an express contract exists
Advantages of a Partnership
– easy to create
– income of business is personal income
– business losses can be deducted from taxes
Disadvantage of Partnerships
Partners are PERSONALLY liable for losses
– generally includes negligence/ torts committed by a partner
Types of Partnership
– General Partnership
– Limited Partnership (LP)
– Limited Liability Partnership (LLP)
– Cooperative
– Joint Venture
– Franchise
– Business Trusts
General Partnership
Partners equally divide profits and management responsibilities
– share UNLIMITED personal liability of partnership’s debts
Limited Partnership (LP)
Partnership with one general partner (GP), and at least one limited partner (partner with no part in the management of the business)
Limited Liability Partnership (LLP)
Partnership where all partners are liable ONLY to the extent of the Partnership’s assets (not personally liable)
– Governed according to state laws
A business organization of individuals joining together to gain advantage in the market
– mutually benefits all members
– can be incorporated or unincorporated
Joint Venture
Two or more persons or corporations join to create a relationship for a specific business undertaking
Franchises via contractual agreement sells goods/ services trademarked by a franchisor
Business Trust
Business organization controlled by a group of trustees who:
– operate trust
– follow written agreement
– work for the beneficiaries
*beneficiaries and trustees have LIMITED LIABILITY
Legal entity formed by selling shares of stocks to investors (shareholders), and owners of the company
– shareholders elect board of directors (BOD)
– is a separate legal entity b/c of creation via state law
Advantages of a Corporation
– profits are taxed as income to the shareholders (NOT the partners)
– easy to raise capital (issue stock)
– shareholders have LIMITED liability
Disadvantages of a Corporation
– formalities required by state for establishing and remaining corporate form
– corporate income is taxed twice (Double Taxation)
Elements specific to a Corporation
– Shareholder liability is limited to their capital contribution
– Corp. is not dissolved when shareholders die
– Corp. pays taxes on profits and shareholders pay taxes on dividends (distribution of the profits)
S Corporation (S-C)
A corporation under federal tax law, but taxed like a partnership
must follow certain regulations including:
– no more than 100 shareholders
– income is only taxed when distributed to shareholders (report income on personal income forms)
LLC Benefits
An unincorporated form of business organization
– has tax advantages and management flexibility of a partnership
– has limited liability of a corporation
Key reasons for LLC acceptance:
– profits and losses do not need to be allocated in proportion to ownership interest
– owners can be involved in management and still have LIMITED liability
Six relevant factors to choice of Organization
1. Liability (limited v. unlimited)
2. Taxation (double v. flow-through)
3. Management (centralized v. decentralized v. fixed)
4. Formalities
5. Duration (perpetual v. limited)
6. Transferability (free v. limited)
Centralized v. decentralized Management
Centralized – mgmt elected by owners

Decentralized – mgmt decisions by vote of owners

Fixed – mgmt by a named person (excludes others)

Perpetual v. Limited Duration
Perpetual – owners death/ actions do not automatically dissolve business entity

Limited – owners death/ withdrawal can dissolve business entity

Free v. Limited Transferability
Limited – Approval of other owners required to transfer full rights of ownership

Free – without previous agreement, owners may transfer full rights of ownership without approval of other owners

Applied 6 to: Sole Proprietorship
1. unlimited liability
2. flow through taxation to sole proprietor
3. Fixed management (only one owner)
4. Easiest to start up – few formalities
5. Limited duration (death/withdrawal dissolves)
6. Free transferability
Applied 6 to: General Partnerships
1. Unlimited liability (change by becoming LLP)
2. Flow-through taxation (to partners)
3. Decentralized management (unless changed by PA)
4. Easiest form of jointly-owned business
5. Limited duration
6. Limited transferability
Applied 6 to: Limited Partnership LLP
1. Unlimited liability for GP, limited liability for limited partners (can change by registering as LLLP)
2. Flow-through taxation (to partners)
3. Fixed management (GPs vote mgmt, not elected by other owners)
4. one-time registration required + partnership agreement
5. Limited duration
6. Limited transferability
Applied 6 to: Corporations
1. Limited liability (for shareholders)
2. Double taxed (unless firm qualifies as an S-Corp)
3. Centralized management (BOD elected by shareholders)
4. Requires MOST formalities (initial & annual registration + annual franchise tax reports)
5. Perpetual duration (artificial entity continues despite changes in ownership)
6. Owners have free transferability (absent an agreement) – sale of stock transfers ALL owner’s rights
Applied 6 to: Limited Liability Corporations LLC
1. Limited liability (for members)
2. Owners choose flow-through or double taxation
3. Owners choose management (fixed mgmt available)
4. One-time registration upon formation, detailed membership agreement required
5. Owners choose duration (an artificial entity which MAY continue despite owner’s interest)
6. Owners choose free or limited transferability

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