Business Structures

Question 1

Sole Proprietorships

Answer 1

Not a Separate Legal Entity

1. Unlimited liability of the single owner.
2. Sole proprietorship profits or losses go on owner’s Form 1040 on a Schedule
   C. A sole proprietorship is not considered a legal entity separate from the owner.
3. No papers need be filed with the state to form (unless doing business under an assumed name).

Question 2

General partnerships

Answer 2

Association of two or more persons who agree to carry on as co-owners a business for profit.

a. Partners have unlimited personal liability for obligations of the partnership.
b. Each partner is jointly and severally (individually) liable for partnership obligations.
c. Each partner is a mutual agent of other partners and, thus, the laws of agency apply.
d. A partnership interest (right to profits) is a personal asset of each partner.

Question 3

General partnerships

Answer 3

The key difference between a joint venture and a general partnership is that a joint venture is formed for a single transaction or project or a related series of transactions or projects.

Question 4

General partnerships

Answer 4

Profits and losses flow through to the partners’ individual tax returns.

Question 5

General partnerships

Answer 5

Each partner is entitled to participate in management.

Question 6

General partnerships

Answer 6

Absent a partnership agreement detailing the rights and obligations of the partners, each partner has equal rights in management, profits, and losses.

Question 7

General partnerships

Answer 7

Partners have no right to use or possess partnership property except for partnership purposes; a partner may not assign rights in partnership property to a personal creditor and a personal creditor may not reach partnership assets to satisfy a partner’s personal debt.

Question 8

General partnerships

Answer 8

Partners can assign their interest in profits of the partnership to third parties, but the third parties can gain no management rights through such an assignment.

Question 9

General partnerships

Answer 9

New partners cannot be admitted without consent of all partners

Question 10

General partnerships

Answer 10

Dissociation is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business. A dissociated partner remains liable for partnership debts that arose before dissociation and can be liable for debts arising after absent notice to creditors.

Question 11

General partnerships

Answer 11

Dissolution involves winding up the partnership’s affairs; it is often triggered by a dissociation.

Question 12

General partnerships

Answer 12

A partnership is liquidated when it ceases to do business and the assets are distributed to the partners to pay back their capital investments.

Question 13

Limited Liability Partnership (LLP)

Answer 13

A limited liability partnership is a form of business in which partners are generally not liable for contracts of the partnership or acts of fellow partners, employees, or agents; however, like anyone else, partners are still liable for their own negligence (or the negligence of those under their direct control). Formation of an LLP requires a filing with the state in which it is operating.

Question 14

Limited Partnership (LP)

Answer 14

A Limited Partnership (LP) is a partnership in which the limited partners are similar to stockholders in a corporation (discussed later). Limited partners may sell or assign their partnership interest (consisting only of their right to receive profits) without the consent of other partners, and they are generally only liable for partnership obligations to the extent of their investment. On the other hand, they have no right to participate in management of the partnership (and in states not following the 2001 ULPA, they are liable as general partners if they do). LPs must have at least one general partner who manages the partnership and has unlimited personal legal liability. Formation of an LP requires filing with the state in which it operates.

Question 15

Limited Liability Company (LLC)

Answer 15

Can be run like a corporation or a partnership and taxed like a partnership unless otherwise specified.

1. Owners (members) of an LLC are not personally liable for the obligations of the company.
2. LLCs must file within their state in order to be formed, and members may not transfer their ownership interest without consent of other members.
3. May be managed by managers or by members.
4. Voting power is proportional to contributions unless otherwise agreed.
5. Most states divide profits and losses proportionally to contributions, but the Uniform Limited Liability Company Act divides profits and profits equally