Chapter 17 - Business Organizations PDF

Chapter 17- Business Organizations Entrepreneur- one who initiates and assumes the financial risks of a new business enterprise and undertakes to provide or control in managements In selecting an organizational form the entrepreneurs will consider a number of factors 1.​ Ease of creation 2....

Chapter 17- Business Organizations Entrepreneur- one who initiates and assumes the financial risks of a new business enterprise and undertakes to provide or control in managements In selecting an organizational form the entrepreneurs will consider a number of factors 1.​ Ease of creation 2.​ The liability of the owners 3.​ Tax considerations 4.​ The ability to raise capital Sole proprietorship- the simplest form of business, 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 -​ More than ⅔ of US businesses; 99% of sole proprietorships have revenues of less than 1 million Advantages: -​ The proprietor owns the entire business and has a right to receive all the profits -​ Is the easiest and least costly to start Flexibility- allows for the most flexibility– sole proprietor can make all decisions Taxes- sole proprietor pays only personal income taxes on the businesses profits. Disadvantages: -​ The proprietor alone bears the burden of any losses or liabilities incurred by the business Partnerships- arises from an agreement, express or implied, between two or more persons to carry on a business for profit. Partners are co-owners of a business and have a joint control over its operations and the right to share in its profits -​ When two or more personas agree to do business as partners they enter into a special relationship with one another. Essential elements: 1.​ Sharing of profits and losses 2.​ A joint ownership of the business 3.​ An equal right to be involved in the management of the business Entity versus aggregate theory of partnerships: -​ A partnership was treated only as an aggregate of individuals and never as a separate legal entity. Today a majority of the states follow the UPA and treat a partnership as an entity for most purposes Tax treatment of partnerships: -​ Pass through entity- a business entity that has no tax liability. The entity income is passed through to the owners and the owners pay taxes on the income -​ Information return- a tax return submitted by a partnership that only reports the businesses income and losses. The partnership entity does not pay taxes on the income Partnership Formation: -​ An agreement to form a partnership can be oral, written, or implied by contract, some however must be in writing to be legally enforceable under the statute of frauds -​ Articles of partnership- a written agreement that sets forth each partner’s rights and obligations with respect to partnership Duration of partnership- a partnership that is specifically limited in duration is called partnership for term Partnership by estoppel- a partnership imposed by a court when non partners have held themselves out to be partners or have allowed themselves to held out as partners and other have detrimentally relied on their misrepresentations -​ When a partnership by estoppel is deemed the non partner is regarded as an agent whose acts are binding on the partnership Rights of partners - relates to: management, interest in the partnership, compensation, inspection of books, accounting, and property. -​ Management rights- all partners have equal rights in managing the partnership -​ Interest in partnership - each partner is entitled to the proportion of business profits and losses that are designated in the partnership agreement. -​ Compensation- devoting time, skill, and energy to partnership business is a partners duty and generally is not a compensable service -​ Inspection of books- partnership books and records must be kept at the firm's principal business office and be accessible to all partners -​ Accounting of partnership assets or profits- an accounting of partnership assets or profits is required to determine the value of each partners share in the partnership -​ Property rights- property acquired by a partnership is the property of the partnership and not of the partners individually Duties and Liabilities of Partners: -​ Each partner is a general agent of the partnership in carryout the usual business of the firm Authority of partners- the UPA affirms general principles of agency law that pertains to a partners authority to bind a partnership in contract Liability of partners -​ Joint liability - in partnership law the partners shared liability for partnership obligations and debts. A third party must sue all of the partners as a group but each partner can be held for the full amount -​ Join and several liability- a doctrine under which a plaintiff can file a lawsuit against all of the partners or one or more of the partners separately Partner dissociation and termination: 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 partnership business Under UPA 601 a partner can be dissociated from a partnership in any of the following ways: 1.​ By the partners voluntarily giving notice of an “express will to withdraw” 2.​ By the occurrence of an event agreed to in the partnership agreement  3.​ By a unanimous vote of the other partners under certain circumstances, such as when a partner transfers substantially all of her or his interest in the partnership or when it becomes unlawful to carry on partnership business with that partner. 4.​ By order of a court or arbitrator if the partner has engaged in wrongful conduct that affects the partnership business, breached the partnership agreement or violated a duty owed to the partnership or to the other partners, or engaged in conduct that makes it “not reasonably practicable to carry on the business in partnership with the partner” [UPA 601(5)]. 5.​ By the partner’s declaring bankruptcy, assigning his or her interest in the partnership for the benefit of creditors, or becoming physically or mentally incapacitated, or by the partner’s death. Note that although the bankruptcy or death of a partner represents that partner’s “dissociation” from the partnership, it is not an automatic ground for the partnership’s dissolution (dissolution will be discussed shortly). Effects of dissociation -​ Some of the rights of the dissociated partner requires that the partnership purchases his or her interest and alters the liability of both parties to third parties Buyout price- the amount payable to a partner on his or her dissociation from a partnership based on the amount distributable to that partner if the firm were wound up on that date and offset by an damages for wrongful dissociation Termination: Dissolution- formal disbanding of a partnership or a corporation Winding up - second of two stages of a termination of partnership in which firms assets are collected, liquidated, and distributed, and liabilities are discharged Limited liability partnerships - a hybrid form of business organization that is used mainly by professionals who normally do business in a partnership (such as attorneys and accountants) -​ Major advantage: allows a partnership to continue as a pass-through entity for tax purposes but limits the personal liability of the partners Formation of an LLP- must be formed and operated in compliance with state statutes which often include provisions of the UPA. Liability in a LLP- allows professionals to avoid personal liabilities for the malpractice of other partners. Of course a partner is still responsible for their own wrongful acts Limited Partnerships - a partnership consisting of one or more general partners and one or more limited partner General partner- in a limited partnership a partner who assumes responsibility for the management of the partnership and liability for all partnership debts Limited partners- in a limited partnership a partner who contributed capital to the partnership but has no right to participate in the management and operations of the business. The limited partner assumes no liability for partnership debts beyond capital contributed Formation of LP: -​ Partners must follow statutory requirements, not only must a limited partnership have at least one general partner and one limited partner bu must sign certificate of limited partnership Certificate of limited partnership- a document filed with designated state official to form a limited partnership Liabilities of partners in an LP: GP- are personally liable to the partnership’s creditors; they have unlimited liability Limited partners- are only liable only up to their contributions Dissociation- caused by general partners, unless the partnership agreement specifies otherwise. -​ Caused by a general partners voluntary dissociation from the firm, bankruptcy Limited liability companies- a hybrid form of business enterprise that offers the limited liability and the tax advantages of a partnership -​ Formation- to form an LLC an articles of organization must me filed with a central state agent -​ Articles of organization- a document filed with a designated state official to form a limited liability company Owner of LLC are called members- a person who has an ownership interest in a limited liability company This jurisdiction a corporation is deemed to be citizen of the state where it is incorporated and maintains its principal place of business Limited Liability of LLC members -​ Limited to the amount of their investment. Although LLC as an entity can be held liable for any loss or injury caused by wrongful or omissions of its members the members themselves generally are not personally liable Flexibility of Taxation- -​ If it has two or more members can choose to be taxed either as a partnership or as a corporation Management of an LLC- two options for managing an LLC -​ member -managed LLC all of the members participate in management and decisions are made by majority vote -​ Manager-manages LLC the members designate a group of persons to manage the firm Operating agreement- in a limited liability company an agreement in which the members set forth the details of how the business will be managed and operated Dissociation and Dissolution of an LLC- Recall that in a partnership dissociation occurs when a partners cease to be associated in the carrying on of the business. -​ Effects- when a member dissociates from an LLC he or she loses the right to participate in management and the right to act as an agent for the LLC Franchise - any arrangement in which the owners of a trademark, trade name or copyright license another to use that trademark, trade name, or copyright in the selling of goods or services Franchisee- one receiving a license to use another’s trademark, trade name, or copyright, in the sale of goods and services Franchisor- one licensing another to use the owners trademark, trade name, or copyright in the selling of goods and services Types of franchises: -​ Distributorships- arises when a manufacturer licenses a dealer to sell its product. -​ Chain-style business operations- a franchise operates under a franchisor’s trade name and is identified as a member of a select group of dealers that engage in a franchisor's business -​ Manufacturing or processing-plant arrangements- the franchisor transmits to the franchisee the essential ingredients or formulas to make a particular product Laws governing franchising- because a franchise relationship is primarily a contractual relationship it is governed by contract law Federal regulation of franchising: -​ The federal government regulates franchising through laws that apply to specific industries and through the franchise rule created by the federal trade commission Industry specific standards- congress has enacted laws that protect franchisees in certain industries from unreasonable demand and bad faith terminations. The franchise rule- the FTC’s franchisors to disclose certain material facts that a prospective franchisee needs to make an informed decision concerning the purchase of a franchise Franchise contract- the franchise relationship is defined by a contract between the franchisor and the franchisee. -​ Payment for the franchise- the franchisee ordinarily pays an initial fee for the franchise license. This fee is separate from the various products that the franchisee purchases from or through the franchisor -​ Business Premises- the franchise agreement may specify whether the premises for the business must be leased or purchased outright -​ Location of the franchise and territorial rights- typically the franchisor will determine the territory to be served Termination of the franchise- the duration of the franchise is a matter to be determined between the parties. Contract usually specifies time. Laws are put in place to protect both franchisor and franchisee