REG 15 - Business Structures Flashcards
General Partnership
An association between two or more persons to operate a business as co-owners for profit. Important characteristics are:
- It is informally created
- ALL Partners have Unlimited Liability for contracts & debts
- NOT taxed as an entity but,
- Treated as pass-through entity (1065)
- Due 4/15, 5 month extension
- Treated as pass-through entity (1065)
- Under RUPA, P/S are separate legal entities
- May sue or be sued
- May own property in P/S name
- Partners are Agents of the P/S
- Limited Duration
What are the 3 Basic Partner Rights?
(PPP)
The partners are agents of the partnership. In such arrangement, the partners have three basic rights:
-
Profits (Interest) - each partner has a right to an equal share of the profits & surpluses generated by the business
- This right personal & IS transferable/assignable
-
Property - each partner has the right to use partnership property for partnership purpose.
- This right is NOT transferable/assignable
-
Participation (Mgmt) - each partner has the right to participate in the mgmt of the business including the right to inspect the books, make contracts, & vote.
- This right is NOT transferable/assignable
Formation of a General Partnership (3)
The formation of a partnership is informally created since the partners have unlimited liability. The establishment can result from an agreement that is:
-
Written - This is req’d when the Statute of Fraud applies.
- Sale of Goods >$500
- Real Estate sales
- Over 1 yr to perform contract
- Suretyship (co-signment of debt)
- Statements in consideration of marriage
- Oral - Is acceptible if Statute of Frauds doesn’t apply
- Implied - This applies when two or more are sharing profits from a venture
What are the two types of Authority?
TESTED
(Actual & Apparent)
Actual Authority - P/S intends to give the partner power to contract or get job/tasks done.
- Express - P/S explicitly states the partner has authority.
- Implied - P/S gives authority that is reasonable & necessary to get job/task done.
Apparent Authority - P/S creates impression that the partner has authority. (HEAVILY TESTED)
- The ability to bind the partnership & partners without the actual authority to do so due to the impression.
- Authority that a Good faith 3rd party reasonably assume the partner has due to the impression. (TESTED)
A Partner of a P/S generally does NOT have the Authority to?
(AGAST)
The actual authority of a partner is based on agreement from P/S, but a partner has the apparent authority to make virtually any contract that involves the business of the P/S, with the exception of the following: (Generally requires unanimous decision)
- Admitting a new partner (req’d by ALL partners)
- Guaranteeing the debts of a thrid party (Suretyship)
- Admitting or submitting legal claim in court
- Sale or Pledge of P/S property (can’t sell Goodwill of P/S)
- Third parties are notified of a limit to the partner’s actual authority. (3rd party is aware that the Partner has no Authority)
Partnership Liability
Contracts/Debts vs. Torts
Partners have joint & several liability on the contracts & debts (voluntary) made by the partnership with third parties. If P/S breaches a contract, the 3rd party must attempt to recover damages out of the P/S assets first, then may acces the personal assets of the partners.
Partners are jointly & severally liablie on the torts (involuntary/negligence) commited by any of the partners within the scope of the partnership. If a tort (wrongful act) is commited, the 3rd parties may attempt to recover P/S & personal assets of the partners in any order.
Retiring partner may be liable for debts created later until what kind of proper notice are given?
(Actual or Constructive)
A retiree may continue to be held liable for debts created after reitrement if proper notice of retirement isn’t given. There are two types of notices:
- Actual Notice - 3rd parties are directly informed (letter, calls)
- Constructive Notice - 3rd parties are informed indirectly via publications, trade periodicals
Dissolution of a General Partnership(4)
Dissolution is the result of the change in the relation of the partners when a partner ceases to be associated with the carrying of the business. The P/S does NOT terminate on dissolution, but continues until the winding up of the P/S is complete. Examples leading to dissolution:
- Change of partners
- P/S agreement specifying the length of a P/S
- A court decree, which will likely be granted if partner becomes insane or incapacitated
- A violation of the P/S agreement
Correct! Under the Revised Uniform Partnership Act (RUPA), a partner’s withdrawal, death or bankruptcy does not automatically cause dissolution of the partnership; partners who own a majority of the partnership may choose to continue the general partnership within ninety days of a partner’s withdrawal, death or bankruptcy. Furthermore, any partner has the power to withdraw from a partnership even if they had agreed not to, but is liable for breach of such a contract. A withdrawal that reduces the number of partners to one does automatically cause dissolution, since a partnership cannot consist of just one person. There is no indication, however, that Wind’s withdrawal reduced the number of partners to
Winding Up
(Dissolution)
When a P/S is terminated, there is a winding up of the P/S’s affairs. Winding up means that the remaining partners may elect to wind up & terminate the P/S or not wind up & continue the business.
The process of dissolving a partnership or corporation by collecting all assets and outstanding income, satisfying all the creditors claims, and distributing whatever remains (the net assets).
Upon Termination of the P/S, partners are entitled to receive pmts on claims in what order? (4)
- Creditors
- Loans made by the Partner to the P/S
- Capital Contributions
- Partner’s share of profits
P/S Distribution Order (3)
Distributions to Partners will be made in the following order:
- Amounts owed to Partners for loans to the P/S
- Partner’s capital accounts
- Amounts owed to the Partners for profits
Limited Partnership (LP)
In order to be formed, a Limited Partnership requires at least one general partner & one limited partner.
- General partner is responsible for management/operations & has unlimited liability.
- Limited partner is a passive investor w/ limited authority (not Agents) & liability, that in most cases, is limited to the amount invested.
-
Formation is formal by filing a Certificate of LP with the Secretary of State which includes:
- Names & signatures of General partners
- Names & address of its Agents
- Names & address of the Limited Partnership (entity)
- The latest date on which the LP is expected to terminate
LLC
- Formal Creation
- Articles of Organization
- Operating Agreement - is not a formally required document but its existence can help prevent and resolve disputes among the owners.
- 1 Person
- Limited Liability for Contracts/Debts
- Unlimited Liability for Malpractice/Negligence
- Agents or Members (called either)
- Typically Taxed as a Partnership (P/S issues a K-1) or
- May be taxed like a C Corp if only 1 Partner (1120)
NOTE: Correct! A limited liability company’s operating agreement is not a formally required document but its existence can help prevent and resolve disputes among the owners.
LLP
- Formal (Articles)
- Partnership Agreement & Application for LLP
- 2+ People
- Unlimited Liability for Contracts/Debts
- Limited Liability for Malpractice/Negligence
- Agents
-
Taxed as a Partnership (P/S issues a K-1)
- Form 1065, due 4/15, 5 month extention
C Corporations
An entity separate from its owners, governed by the laws established under the Model Business Corporation Act (MBCA) & providing owners with limited liability. Notable characteristics:
- Limited Liability for shareholders
- Independent Life - death of a shareholder doesnt dissolve the business
- Ease of Transfer - changes of ownership is by sale of shares
-
Taxation - a taxable entity, files 1120
- Due on 3/15 with 6 month extension
- Centralized Management - controlled by board of directors
