Chapter 31 Starting a Business

Question 1

Business Organization Steps

Answer 1

Step1 Determine What Laws Apply?
Step 2 Entity Structure
Step 3 Name
Step 4 Taxes/ Employees
Step 5 Permits / License
Step 6 Partnership / Operating Agreement

Question 2

Step 1 Determine What Laws Apply

Answer 2

Constitutional
Statutes
Common Law
Administrative Law
Equity

Question 3

Step 2 Business Entity Structure

Answer 3

Sole Proprietorship. Limited Liability Partnership.
Partnership. C Corp. S Corp.
Limited Part. Professional Corp.
Limited Liability. Joint Venture.
Corporation. Business Trust.
Cooperative.

Question 4

Step 3 Name

Question 5

Disadvantages of Corporation

Answer 5

Logistics: Corporations Require Substantial expense and effort to create and operate
Taxes: A corporation is a taxable entity

Question 6

Special Types of Corporations:

Answer 6

C Corp: a corp that provides limited liability to its owners, but is a taxable entity
S corp: A corp that provides limited liability to its owners and the tax statues of a flow-through entity
Close Corp: A corp with a small number of shareholders whose stock is not publicly traded and whose shareholders play an active role in management. It is entitles to special treatment under some state laws

Question 7

Limited Liability Companies

Answer 7

An LLC offers the limited liability of a corp and the tax status of a flow-through enitity
Formation:
-The only document to form an LLC is a certificate of organization.
-If more than one member an LLC should also have an operating agreement that sets out the rights and obligations of the members and managers.

Question 8

Limited Liability Example

Answer 8

A bar sells alcohol and a group of people drive off the highway and die. Is the bar liable? Yes, they have limited liability because they could have seen the level of drunkenness.

Question 9

Limited Liability Companies

Answer 9

Flexibility: Unlike S corp, LLCs can have members that are corp, partnerships, or non-resident aliens
Transferability of Interests: As a general rule, existing members of an LLC cannot transfer their ownership rights, or admit a new member, without unanimous agreement of other members.

i.e. limits on who can join your company
i.e.

Question 10

Limited Liability Companies

Answer 10

Duration:
Most state laws provide the LLC has a perpetual existence
Going Public:
Once an LLC goes public, it loses its favorable tax status and is taxed as a corporation
Changing Forms:
Some firms that are now corporations might prefer to be LLCs, but the IRS considers this change to be a taxable sale of corporate assets; few corporations have changed to LLCs

i.e. need unlimited duration a research website perfect for looking these things up in pdf form. Missouri Secretary of State.
i.e.

Question 11

Limited Liability Companies; Piercing the corporate Veil

Answer 11

Piercing the Corporate Veil

Failure to observe corporate formalities
Commingling assets
Failure to provide adequate capital
Fraud
-DONT use the companies’ money as your own personal piggy-bank.
-Document if you take out or put in money
.

Question 12

Limited Liability Companies

Answer 12

LLC versus Corporation
Although once an LLC is established it is simpler to operate, it is not right for everyone
If done properly, an LLC may be more expensive to set up than a corporation (operating agreements can be very complex)
Venture capitalists may prefer to invest in C corporations

Question 13

Social Enterprises

Answer 13

These organizations pledge to behave in a socially responsible manner even as they pursue profits
Their focus is on the triple bottom line: “people, planet, and profits.”
Business that have become social enterprises include Etsy, Method Products, Patagonia, Warby Parker, Eileen Fisher, Ben & Jerry’s, Bombas, Athleta, and Danone

i.e Owner of Patagonia given ownership over to be used as an charity to help with global warming.
i.e. added layer basically

Question 14

General Partnership

Answer 14

Partnership: An unincorporated association of two or more co-owners who operate a business for profit
General partner: One of the owners of a general partnership
Tax Status
-Partnerships are flow-through entities
Liability
Each partner is personally liable for the debts of the enterprise whether or not she caused them

i.e. unintended partnerships happen as well. Should make things clear.
i.e.

Question 15

General Partnership

Answer 15

Formation:
A partnership is easy to form
Ideally, it should have a written agreement
Management:
-In the absence of a partnership agreement that provides otherwise, all partners in a firm have an equal right to share in management
-Ordinary business decisions by a majority vote or similar vote
-Unanimous consent needed to make fundamental changes
Power to act as an agent for partnership in partnership business
-Silent / economic partner is one who does not help manage, but still has personal, unlimited liability

Question 16

General Partnership

Answer 16

Raising Capital
The capital needs must be provided by contributions from partners or by borrowing
Partner’s Rights
Partnership agreement is controlling, if it exists.
The Missouri Uniform Partnership Act governs the rights and responsibilities of the partners, so if you don’t make an agreement, the default rules of the Act apply

Question 17

General Partnership

Answer 17

Big Ticket Changes
Unanimous consent of partners is needed unless otherwise stated in the partnership agreement (so no implied authority) for:
Admission of a new partner
Amending the partnership agreement
Assignment of partnership property
Making partnership a surety or guarantor
Admitting to a claim against partnership in court
Submitting partnership claim to arbitrator
Any action outside the scope of the partnership business
The capital needs must be provided by contributions from partners or by borrowing

Question 18

General Partnership

Answer 18

Partners Are Fiduciaries

To each other and the partnership.
Each must act in best interest of others
May pursue own self-interest as long as it is not competition and does not interfere with partner’s duty to partnership
Any wrongly derived profits must be held by partner for others
Must abide by partnership agreement
Liable to others partners for liability caused by going beyond actual authority

Question 19

General Partnership

Answer 19

Partners Profits and Losses
Profits and losses are shared equally unless agreement specifies otherwise
Even if contributed capital is not equal
For example, agreement may specify one partner to receive greater share of profits for doing more work, etc., while losses still shared equally

Question 20

General Partnership

Answer 20

Liability
Partner’s personal liability is unlimited
-Partners are jointly and severally liable for all debts
- -The Revised Uniform Partnership Act (RUPA) requires creditors to first attempt collection from partnership before partners unless partnership is bankrupt
-Partners may split losses or liability between themselves according to any proportion agreed upon; however, third parties can still hold each partner personally liable despite agreement
-If any partner pays more than his share, he can get reimbursed from the other partners

Question 21

General Partnership

Answer 21

Partner’s Interest
Refers to partner’s right to share in profits and return of contribution on dissolution
The partner’s interest is personal property, even if the partnership property is something else.
It does not include specific partnership property, merely right to use it for partnership purposes

Transfer of Ownership
A partner cannot sell his share of the organization without the permission of the other partners

Dissociation
When a partner leaves a partnership

Question 22

LIMITED PARTNERSHIP

Answer 22

A partnership formed by two or more persons under the laws of this state and having one or more general partners and one or more limited partners.
Limited partnerships are governed by the Uniform Limited Partnership Law
The general partners are treated the same as those in a general partnership.

Question 23

Limited Partners vs General Partners

Answer 23

Triangle*** helpful but cant copy over

Question 24

LIMITED LIABILITY PARTNERSHIP (3)

Answer 24

A limited liability partnership (LLP) offers the limited liability of a corporation and the tax status of a flow-through organization
Partners are not liable for the debts of the partnership, but are liable for their own misdeeds
An LLP has no general partners, only limited ones
To form an LLP, the partners must file a statement of qualification with the state officials
LLPs must also file annual reports

Question 25

PROFESSIONAL CORPORATION

Answer 25

PCs offer the limited liability of a regular corporation, but they have some limitations:
All shareholders of the corporation must be members of the same profession
The required legal technicalities for forming and maintaining a PC are expensive and time consuming
Tax issues are much more complicated than for an LLC or LLP

Question 26

JOINT VENTURE

Answer 26

Joint venture: A partnership for a limited purpose
It is not a legal entity, so all tax liability is shared among the participants in the venture
Similarly, these participants also share any liability that arises out of the joint venture’s activities

Question 27

FRANCHISE (1)

Answer 27

The Drawbacks of a Franchise
Control:
Franchisees sometimes complain that franchisor control is too tight
Sometimes franchisors prohibit innovation that appeals to regional tastes
Cost: Franchisees face various expenses–
Initial purchase; royalty fee; supplies;
Joint advertising; system standards

The Drawbacks of a Franchise
Control:
Franchisees sometimes complain that franchisor control is too tight
Sometimes franchisors prohibit innovation that appeals to regional tastes
Cost: Franchisees face various expenses–
Initial purchase; royalty fee; supplies;
Joint advertising; system standards

Legal Requirements
Franchise Disclosure Document (FDD): A disclosure document that a franchisor must deliver to a potential purchaser
This must be delivered at least 14 calendar days before any contract is signed or money paid
The FDD must provide information on:
The history of the franchisor and its key executives
Litigation with franchisees

The FDD must provide information on: (cont)
Bankruptcy filings by the company and its officers and directors
Costs to buy and operate a franchise
Restrictions, if any, on suppliers, products, and customers
Territory - any limitation (in either the real or virtual worlds) on where the franchisee can sell or any restrictions on other franchisees selling in the same territory

The FDD must provide information on: (cont)
A report on prior owners of stores that the franchisor has reacquired
Earnings information is not required; but if disclosed, the franchisor must reveal the basis for this information
Audited financials for the franchisor
A sample set of the contracts that a franchisee is expected to sign
The purpose of the FDD is to ensure the franchisor discloses all material facts