Business law essay questions
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lawchapter31.pptStarting a Business: LLCs and Other Options
- An unincorporated business owned by one person
- Advantages
Can run a business without taking any formal steps to create an organization
Not required to register with the government
Not required to file a separate tax return
- Disadvantages
Owner responsible for all of the business’s debts
Owner of a sole proprietorship has limited options for financing the business
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- Limited liability
Protects managers and investors from personal liability for the debts of the corporation and the actions of others
- Transferability of interests
Provide flexibility for enterprises small and large
- Duration
Perpetual existence: Can continue without their founders
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- Logistics
Corporations involve a lot of expense and effort to create and operate
- Taxes
Because corporations are taxable entities, they must pay taxes and file returns
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Shareholders of S Corps have:
The limited liability of a corporation
The tax status of a partnership
- Restrictions faced are:
There can only be one class of stock
There can be no more than 100 shareholders
Shareholders cannot be partnerships or other corporations
Shareholders must be U.S. citizens or residents
Shareholders must agree that company should be an S corporation
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- A company whose stock is not publicly traded
- Common provisions of close corporations:
Protection of minority shareholders
Transfer restrictions
Flexibility
Dispute resolution
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- An LLC offers the limited liability of a corporation and the tax status of a partnership
Limited liability: Members are not personally liable for the debts of the company
Tax status: Income flows through the company to the individual members, avoiding double taxation of a corporation
Formation: To organize an LLC, charter and operating agreement is necessary
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- Flexibility : Can have members that are corporations, partnerships, or nonresident aliens
- Transferability of interests: Members must obtain the unanimous permission of the remaining members before transferring ownership rights
- Duration: LLC can continue in operation even after a member withdraws
- Going Public: Loses its favorable tax status and is taxed as a corporation, not a partnership
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- Changing Forms: Not considered a sale and does not have the same adverse tax impact
- Piercing the LLC veil: If corporate shareholders do not comply with the technicalities of the law:
May be held personally liable for the debts of the corporation
- Legal Uncertainty: New form of organization and the issues of law are not clear
Lawsuits are expensive in both time and money
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- Choices: LLC v. Corporation
Tax status of an LLC is a major advantage over a corporation
Reasons for venture capitalists to prefer C Corporations
Arcane tax issues
C corporations are easier to merge, sell, or take public
Corporations can issue stock options
General legal uncertainty involving LLCs
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- Hybrids are called:
Flexible-purpose organizations
Benefit corporations
Low-profit limited liability companies
Community interest companies
- Such businesses focus on the interests of:
Stakeholders
Community
Environment
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Partnership: An unincorporated association of two or more co-owners who carry who operate a business for profit
- Each co-owner is a general partner
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- Taxes: Profits flow through the owners
- Liability: Partner is personally liable for the debts of the enterprise
Whether or not she caused them
- Management rights
Partners share both profits and losses equally
Each partner has an equal right to manage the business
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Management duties: Have a fiduciary duty
Partners are liable to the partnership for gross negligence
Partners cannot compete with the partnership
Partner may not take an opportunity away from the partnership unless the other partners consent
If a partner engages in conflict of interest:
He must turn over to the partnership any profits he earned from that activity
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Transfer of Ownership
Firm cannot sell shares
Partner has the right to transfer the value of partnership interest:
Not the interest itself
- Formation: Easy to form
If two or more people do business together, sharing management, profits and losses:
They have a partnership and subject to all rules of partnership law
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Partnership by estoppel exists if:
Participants tell other people that they are partners, or allow other people to say that they are partners
Third party relies on this assertion
Third party suffers harm
- Termination
Dissociation: When a partner quits a partnership
Partnership can either:
Buy out the departing partner(s) and continue in business
Wind up the business and terminate the partnership
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Partners are not liable for debts of the partnership
- An LLP is not a taxable entity and it has the right to choose its duration
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Structure
Limited partnerships must have at least:
One limited partner and one general partner
- Liability
Limited partners are not personally liable:
General partners are liable
Limited liability limited partnership:
General partner is not personally liable for the debts of the partnership
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Taxes
Limited partnerships are not taxable entities
- Formation
General partners must file a certificate of limited partnership with their Secretary of State
- Management
General partners have the right to manage a limited partnership
Limited partners have few management rights
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Transfer of Ownership
Limited partners have the right to transfer the value of their partnership interest
Can sell the interest itself if agreement permits
- Duration
Limited partnerships have perpetual existence
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Most professionals are allowed to incorporate
- Provide more liability protection than a partnership
- Corporation may be liable for an individual member’s mistakes, but the innocent professionals are not at risk
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- Limitations
All shareholders of the corporation must be members of the same profession
Required legal technicalities for forming and maintaining a professional corporation are:
Expensive and time-consuming
Tax issues can be complicated
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Partnership for a limited purpose
- Each organization retains its own identity
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Are not actually a separate form of business
They can take almost any one of the ones discussed already
- Franchising is a compromise between employment and starting your own business
- Franchisees have freedom to make many choices, but are limited in other ways
- Can be very costly to acquire
- Franchisors must comply with the Federal Trade Commission’s rule
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
- Franchisor must deliver to a potential purchaser a Franchise Disclosure Document (FDD)
Purpose is to ensure that the franchisor discloses all relevant facts
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
