Business Organizations Overview

Business Organizations

• Entrepreneur: A person who starts and manages a new business, taking on financial risk.

• Organizational Form Selection: Entrepreneurs consider ease of creation, owner liability, tax implications, and capital raising ability.

Sole Proprietorship

• Definition: Simplest form; owner = business. Income reported on personal tax returns. Full legal responsibility for business debts.

• Prevalence: Over two-thirds of US businesses; most have < $1 million revenue.

• Advantages: Full profits, easiest & least costly to start, flexible decision-making, personal income taxes on profits only.

• Disadvantages: Sole owner bears all losses and liabilities.

Partnerships

• Definition: Agreement between two or more people to run a business for profit. Partners are co-owners with joint control.

• Essential Elements: Shared profits/losses, joint ownership, equal management rights.

• Entity vs. Aggregate Theory: Historically, viewed as a collection of individuals; now, most states treat as a separate entity.

• Tax Treatment: Pass-through entity—no tax on the partnership; income/losses passed to owners. Information return reports income/losses.

Partnership Formation

• Agreement: Can be oral, written, or implied. Some require written agreements (e.g., Statute of Frauds).

• Articles of Partnership: Written agreement outlining partner rights/obligations.

• Partnership for Term: Partnership with a pre-determined duration.

• Partnership by Estoppel: Court-imposed partnership when non-partners act like partners and others rely on this.

Rights of Partners

• Management: All partners have equal rights.

• Interest in the Partnership: Profits/losses shared proportionally per agreement.

• Compensation: Time and skills are duties, generally not directly compensable.

• Inspection of Books: Access to books/records maintained at the business location.

• Accounting: Partner shares verified through an accounting of assets/profits.

• Property Rights: Partnership property belongs to the partnership, not individual partners.

Duties and Liabilities of Partners

• Agency: Each partner is a general agent of the partnership for usual business transactions.

• Authority: UPA affirms principles of agency law, defining partner's contractual power to bind partnerships.

• Joint Liability: Partners are collectively liable for partnership debts; plaintiff sues all at once.

• Joint and Several Liability: Plaintiff can sue one or all partners if liable for a debt.

Partner Dissociation and Termination

• Dissociation: Severing the partnership relationship. Methods:

• Voluntary notice

• Event specified in the partnership agreement

• Unanimous vote of other partners (e.g., illegal or impractical to carry on business)

• Court order (wrongful conduct or incapacity)

• Bankruptcy/death

• Effects of Dissociation: Buy-out price, altering liability to third parties.

• Dissolution: Formal break-up of partnership/corporation.

• Winding Up: Collecting/liquidating assets, paying liabilities, then distributing remaining assets.

Limited Liability Partnerships (LLPs)

• Definition: Hybrid structure; allows pass-through taxation while limiting personal liability.
• Formation: Must comply with state statutes (often similar to UPA provisions).
• Liability: Partners shielded from malpractice of other partners (except own wrongful acts).

Limited Partnerships (LPs)

• Definition: General partners (manage, unlimited liability) and limited partners (invest, no management, limited liability).

• LP Formation: Partners must follow state requirements; file a certificate of limited partnership.

• Liability: General partners are personally liable; limited partners' liability is limited to their investment.

Limited Liability Companies (LLCs)

• Definition: Hybrid offering limited liability and partnership-like tax advantages.
• Formation: File articles of organization with state.
• Members: Owners of the LLC.
• Liability: Personal liability is limited to investments; LLC itself can be liable for losses.
• Taxation: Elect to be taxed as a partnership or corporation.
• Management: Member-managed (members manage) or manager-managed (designated managers manage).
• Operating Agreement: Details of management and operations.
• Dissociation/Dissolution: Losses of management rights like partnerships.

Franchises

• Definition: Arrangement licensing trademarks/copyright for goods/services.

• Types: Distributor, chain business operations, manufacturing/processing plant.

• Laws: Governed by franchise contracts and federal/state laws.

• Federal Regulations: FTC franchise rule dictates disclosures for informed decisions.

• Contract: Governs franchisor/franchisee relationship, including payment, premises, location, and termination.

This quiz covers the fundamentals of business organizations, including definitions and characteristics of sole proprietorships and partnerships. It examines the advantages and disadvantages of these structures, as well as key considerations for entrepreneurs when selecting an organizational form. Test your knowledge on the essentials of starting and managing a business!