Chapter 12

Question 1

Principal Forms of Business Entities

Answer 1

a. Sole Proprietorship
b. General Partnership (Partnership)
c. Limited Liability Partnership (LLP)
d. Limited Liability Company (LLC)
e. S Corporation
f. C Corporation

Question 2

Individual doing business.

Answer 2

Sole Proprietorship

Question 3

Advantages of Sole Proprietorship:

Answer 3

i. Owner maintains total control of operations.
ii. Taxed at individual tax rates (IRS Form 1040).
iii. Easy set up.

Question 4

Disadvantages of Sole Proprietorship:

Answer 4

i. No liability protection – personal liable for business debts.
ii. Owner must come up with all capital to run the business.
iii. Only one owner – no investors.

Question 5

Association of 2 or more persons (“partners”) carrying on as co-owners of a business for profit.

Answer 5

Partnership

Question 6

“Persons” Definition in a Partnership:

Answer 6

An individual, partnership, corporation, or some other type of business entity.

Question 7

Advantages of a Partnership:

Answer 7

i. Easy to start (no state registration required)
ii. No corporate formalities (e.g., no minutes, bylaws, etc.)
iii. Partners divide profits and losses equally
iv. Can deduct business expenses on personal income tax return

Question 8

Disadvantages of a Partnership:

Answer 8

i. Each owner is personally liable for business debts
ii. Partner can be personally liable for other partner’s negligent behavior (joint and several liability)
iii. May be difficult to get a loan or raise outside capital since a GP is an unregistered business entity

Question 9

State adoption of the Revised Uniform Partnership Act (RUPA)

Answer 9

GP Governance

Question 10

If 2 or more parties agree that the legal relationship between them is to operate a business for profit, a GP is formed even if there is nothing in writing & even if they don’t actually call their business a “partnership”.

Answer 10

Formation

Question 11

Partners share equal control unless otherwise specified in a partnership agreement. All partners have equal access to books and records.

Answer 11

Control

Question 12

A partnership has one or more limited partners, and one or more general partners.

Answer 12

Limited Partner

Question 13

Investor only (brings cash, property).

1. Takes no part in management or control of LP
2. Not personally liable beyond their capital contribution

Answer 13

Limited Partner

Question 14

Manages the LP, and is personally liable for firm debts

Answer 14

General Partner

Question 15

Advantages of Limited Liability Partnership (LLP)

Answer 15

i. Easier to raise money since Limited Partners serve as investors, only, without any personal liability.
ii. General partners get capital through limited partners, but retain full control over business operations.
iii. Limited partners can leave any time without dissolving the partnership.

Question 16

Disadvantages of Limited Liability Partnership (LLP)

Answer 16

i. General partner(s) are personally liable for the business’ debts and liabilities
ii. Requires state registration (paperwork)
iii. If a limited partner takes an active role in business affairs, they can become personally liable along with the general partners.

Question 17

True or False: Partnership where all partners are protected from personal liability (emerged in 1990s).

Answer 17

True

Question 18

Requires at least 2 partners; simple filing requirements with Secretary of State.

Answer 18

Personal Liability Formation

Question 19

No partner is liable for another partner’s tortious behavior.

Answer 19

Limitation on Liability

Question 20

Personal Liability

Answer 20

i. Formation: Requires at least 2 partners; simple filing requirements with Secretary of State.
ii. All partners can participate in the management of the business.
iii. Limitation on Liability: No partner is liable for another partner’s tortious behavior.

Question 21

Types of Corporations:

Answer 21

(1) Subchapter C Corporation

(2) Subchapter S Corporation

Question 22

Corporation that is a separate, independent taxable entity from its owners.

Answer 22

Subchapter C Corporation

Question 23

Who is involved in a Subchapter C Corporation:

Answer 23

a. Shareholders (investors/ owners),
b. Board of directors (make all the big decisions)
c. Officers (maintain daily control of the business activities)

Question 24

Subchapter C Corporations are _____ companies.

Answer 24

Publicly Traded

Question 25

Advantages of Subchapter C Corporations:

Answer 25

a. Shareholders are not personally liable for business’ debts and liabilities.
b. Corporation is eligible for greater tax deductions than other types of entities.
c. Can raise capital through the issuance of more stock.

Question 26

Disadvantages of Subchapter C Corporations:

Answer 26

a. Double taxation at both corporate and shareholder levels.
b. Expensive setup [file Articles of Incorporation); very formal annual maintenance requirements.
c. Owners (Shareholders) can’t personally deduct business losses.

Question 27

Separate legal entity from its shareholders (like a C corp), but treated as a pass through entity [i.e., no double taxation] for tax purposes (like a partnership)

Answer 27

Subchapter S Corporation

Question 28

Advantages of a Subchapter S Corporation:

Answer 28

a. Shareholders have no personal liability for business’ debts and liabilities
b. No double taxation – Taxes are only due at the shareholder level on S Corp’s earnings

Question 29

Disadvantages of a Subchapter S Corporation:

Answer 29

a. Pricey start up fees (file Articles of Incorporation); must maintain corporate formalities (like creating bylaws, holding board and shareholder meetings, etc.).
b. Restrictions:
i. No more than 100 shareholders
ii. No foreign shareholders
iii. All SHs must be individuals (not business entities)

Question 30

a. Treated like a corporation for liability purposes but like a partnership (pass-through) for tax purposes.

Answer 30

Limited Liability Company (LLC)

Question 31

File Articles of Organization with state.

Answer 31

Formation of a Limited Liability Company

Question 32

Advantages of LLC:

Answer 32

i. Any number of members (owners) allowed (even just one!)

ii. Members can be individuals, corporations, partnerships, or other LLCs.

Question 33

Disadvantages of LLC:

Answer 33

i. More expensive to create than a sole proprietorship or GP

Question 34

Method of doing business – not an actual business form itself.

Answer 34

Franchise

Question 35

Characteristics of a Franchise:

Answer 35

a. Often set up as an S Corporation or LLC
b. Arrangement where owner of a trademark, trade name or copyright licenses others to use such trademark, trade name, or copyright.

Question 36

Advantages of a Franchise:

Answer 36

i. Ready-made business plan
ii. Easier to secure financing
iii. Less risky than independent businesses

Question 37

Disadvantages of a Franchise:

Answer 37

i. High startup costs
ii. Franchisee is completely tied to the Franchise Agreement
iii. Fate of your business isn’t entirely in your control

Question 38

Generally, corporate franchisor is not liable to the 3rd person dealing with or affected by the franchise holder unless shown to exercise actual control over franchise holder.

Answer 38

Vicarious Liability:

Question 39

Franchise Example

Answer 39

Burger King Worldwide (BKW) was found not vicariously liable for a slip-and-fall lawsuit at one of its franchised restaurants even though the franchise manual specified that sidewalks and parking lots should be cleared of ice and snow. Because it wasn’t so detailed as to direct the manner in which it should be cleared, leaving that up to the discretion of the restaurant, BKW was not held responsible.

Question 40

Franchise Example

Answer 40

Domino’s Pizza was found to be vicariously liable for a car accident caused by one of its franchisee’s drivers because the court said the pizzeria’s franchise manual was a “veritable bible for overseeing a Domino’s operation” that left nothing to chance. It was deemed responsible for the accident and is why Domino’s no longer guarantees that its pizzas will be delivered in 30 minutes or less.