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Law Chapter 10

Sole Proprietorship
The simplest form of business organization, in which the owner is the business. The owner reports business income on his or her personal income tax return and is legally responsible for all debts and obligations incurred by the business.
Advantages of Sole Proprietorship
• Receipt of all profits!
• Less cost at start up
• Flexible (ex: no partner)
• Freedom of decision-making (ex: no partner)
• Easy tax filing
• Pay only personal income tax
• Easy retirement plans (tax-exempt)
Disadvantages of Sole Proprietorship
Disadvantages
• Assumes all risk of losses and liabilities
• Unlimited liability
• Raising capital
• Death planning (business dies with owner)
General Partnership
An agreement by two or more persons to carry on, as co-owners, a business for profit.
Advantages of General Partnership
• No tax at the entity level, so the firm itself does not pay federal income tax (must file informational return)
• Considered a pass-through entity for taxes.
• Individual partners report their share of profits or losses on their individual returns
• Dissociation: The severance of the relationship between a partner and a partnership when the partner ceases to be associated with the carrying on of the business partnership business. May have power to disassociate but not the right.
Disadvantages of General Partnership
• Unlimited liability for the acts of partners (if the business can’t pay its debts the owner’s personal assets are at risk)
• Sharing profits
• Sharing decisions
Limited Partnership
A partnership consisting of one or more general partners and one or more limited partners who contribute only assets and are liable only up to the amount contributed by them.
Quick Limited Partnership facts
• A limited partnership is a creature of statue, because it does not come into existence until a certificate of limited partnership is filed.
• General partners manage and take risks for management
•Limited partner’s liability is limited to their investment. Seen as a sort of investment vehicle.
Limited liability partnership
A hybrid form of business organization that is used mainly by professionals who normally do business in a partnership. Like a partnership, an LLP is a pass-through entity for tax purposes, but the personal liability of the partners is limited.
Limited liability partnership advantages
• Tax treatment
• Allows limited liability for the malpractice of other partners.
• Allows some limited liability for debts of the partnership.
Corporations
A legal entity formed into compliance with statutory requirements. The entity is distinct from its shareholder-owners.
Corporation facts
• Considered a creature of Statue.
• Separate legal entity.
• Owned by shareholders who are only personally liable for their investment.
• Board of directors, elected by shareholders, manages the business.
• Any distributed corporate income gets taxed twice; some small corporations are able to avoid this double taxation by electing to be treated as an S corporation.
• S Corporation: A business that has met certain requirements for special tax privileges. They’re not taxed at the corporate level, similar to a partnership. Instead the shareholders pay personal taxes on their respective profits.
Limited liability companies
A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership.
LLC Facts
• To form an LLC, articles of organization must be filled with a state agency, usually the secretary of state’s office.
• Business’s name must include “LLC”
• Owners are called members, some states require at least 2 others do not.
LLC Advantage/Disadvantages
Advantages
• Liability of members is limited to their investment
• Can choose to be taxed as a partnership or corporation.
• Members of an LLC can decide how to operate by forming an operating agreement, an agreement in which members set forth details of how the business will be managed and operated. State statutes typically give the members wide latitude in deciding for themselves the rules that will govern their organization.
• Operating agreement allows for flexibility in management, profit sharing, transfers of membership interests, dissolution upon death or departure of member.
Disadvantages
• LLC statues are not yet uniform through out states.
Franchise
Definition: Any arrangement in which the owner of a trademark, trade name, or copy right in the selling of goods or services.
Franchisee: One receiving a license to use another’s trademark, trade name, or copyright to sell goods or services.
Franchisor: One licensing another to use the owner’s trademark, trade name, or copyright.
Franchise facts
• Types of franchises: Distributorship (cars), Chain-style business operation (fast food), Manufacturing or processing plant operation (bottling company).
• Laws both federal and state address bad faith termination of franchise by franchisor, failure to disclose important facts to potential franchisee, deceptive trade practices.
•Franchise contract dictates, payment, location, premises, and the quality control.
• Much of the litigation arises from the termination of franchises.
Factors for determining type of organization:
a. Ease of creation
b. Dissociation/termination issues
c. Liability of Owners
d. Tax considerations
e. Need for capital.
The Nature of the Corporation
Articles of corporation: The document filed when a company is incorporated.

Bylaws: As soon as the corporation is formed an organizational meeting is held to determine bylaws, a set of governing rules adopted by a corporation or other association.

Corporate Personnel:
• Board of Directors: Management of corporation
• Corporate Officers: Employees who run the daily business operations of the corporation
• Shareholders: Part owners

Classifications of Corporations
• Domestic corporation: In a given state, a corporation that does business in, and is organized under the law of, that state.
• Foreign corporation: In a given state, a corporation that does business in the state without being incorporated therein.
• Alien corporation: A designation in the United States for a corporation formed in another country but doing business in the United States.

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