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one who initiates and assumes the financial risk of a new business enterprise and undertakes to provide or control its management.


Sole Proprietorship

The simplest form of business organization, 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.



An agreement by two or more persons to carry on, as co-owners, a business for profit.


Pass-through Entity

A business entity that has no tax liability. The entity's 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 income and losses earned by the business. The partnership as an entity does not pay taxes on the income received by the partnership.


Articles of Partnership

A written agreement that sets forth each partner's rights and obligations with respect to the partnership.


Joint Liability

In partnership law, partners share liability for partnerships obligations and debts. thus, if a third party sues a partner on a partnership debt, the partner has the right to insist that the other partners be sued with him or her.


Joint and several liability

In partnership law, a doctrine under which a plaintiff can file a lawsuit against all of the partners together (Jointly) or one or more of the partners separately (Severally, or individually). All partners in a partnership can be held liable regardless of whether the partner participated in, knew about, or ratified the conduct that gave rise to the lawsuit.



The severance of the relationship between a partner and partnership when the partner ceases to be associated with the carrying on of the partnership business.


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 fim were wound up on that date, and offset by any damages for wrongful dissociation.



The formal disbanding of a partnership or a corporation


Winding up

the second of two stages in the termination of a partnership or corporation. Once the firm is dissolved, it continues to exist legally until the process of winding up all business affairs is complete.


Limited Liability Partnership (LLP)

A hybrid form of business organization that is used mainly by professionals who normally do business in a partnership. Like a partnership, an LLP is a pass-through entity for tax purposes, but the personal liability of the partners is limited.


Limited partnership (LP)

A partnership consisting of one or more general partners (who manage the business and are liable to the full extent of their personal assets for debts of the partnership) and one or more limited partners (who contribute only assets and are liable only up to the extent of their contributions).


General partner

In a limited liability partnership, a partner who assumes responsibility for the management of the partnership and liability for all partnership debts.


Limited partner

in a limited partnership, a partner who contributes capital to the partnership but has no right to participate in the management and operation of the business. The limited partner assumes no liability for partnership debts beyond the capital contributed.


Certificate of limited partnership

The basic document filed with a designated state official by which a limited partnership is formed.


Limited Liability Company (LLC)

A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership



a person who has a ownership interest in a limited liability company.


Articles of organization

the document filed with a designated state official by which a limited liability company is formed.


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. States statutes typically give the members wide latitude in deciding for themselves the rules that will govern their organization.



Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright in the selling of goods or services.



one receiving a license to use another's (the franchisor's) trademark, trade name, or copyright in the sale of goods and services.



One licensing another (the franchisee) to use the owner's trademark, trade name, or copyright in selling of goods or services.


Starting a new business-legal issues

After World War II, Preston Tucker announced plans to build the "car of the future." this car was later known as the "Tucker Torpedo."


Factors to consider in picking appropriate form of business organization

-Ease of creation
-management control
-liability of owners
-Tax considerations
-need for capital to operate the business
-transfer of ownership interests


General Partnerships

An agreement by two or more person to carry on, as-owners, a business for profit.


General partnerships: general partner

Each co-owner is called a general partner


General Partnership: Taxation

Partnerships don't pay taxes- not taxable entity ("the single-taxation of partnerships"- and are easy to form) ("pass-through entity: for tax purposes.)


Partnership Law

Partnership law is based on principles of both common law and statutory (Uniform Partnership Act).


Section 754 Election

The $754 election should be considered in any operatin agreement on LLC


Section 754 Election for closely-held LLCs

For closely-held LLS, the ability to elect Section 754 is important for increased depreciation and amortization of newly admitted member.


Section 754 Election For larger LLCs,

For larger LLCs, the adjustments to LLC assets required by the election may make the election too administratively burdensome to deal with.


Section 754 notes

Note that even though S-Corporations do not benefit from the 754 election, shareholders will get the same benefit when disposing of shares.


The Forms of business organization

-Sole proprietorships
-Limited Liability Companies ("LLC")


Types of partnerships

-Limited Liability


General Partnership Defined

A written partnership agreement is not required for a general partnership. Can be formed by oral or written agreement or "implied by conduct."


General Partnerships liability

Partnerships can be held personally liable for the partnership actions and debts- joint and several liability (this is based on the principles of agency law.)


General partnerships unless otherwise agreed

Unless otherwise agreed, partners jointly own business, share profits and losses equally and have the equal right to manage the business.



An S-corporation is a normal state law corporation with a special small business corporation tax election and which meets the restrictive tests for such election


S-Corporation Eligibility requirements

-No more than 100 shareholders;
-shareholders must be individuals (or certain trusts/estates);
-Shareholders may not be non-resident aliens
-Only one-class of stock.


S-Corporation Not subject to double taxation

-Pass-through" tax treatment
-Income and losses pass through to the shareholders in proportion to ownership even if no corporate distribution.


Subchapter K Taxation Advantages

-Unlike Subchapter S, no single class of stock requirement
-Tax-free liquidation
-Pass-through of losses.


Pass-through of losses

limited by passive loss rules and at-risk rules.


Limited Partnership

Have both general (active) and limited ("passive investors") partners; only general partners manage and are personally liable for the debts of the partnership- must have at least one of each. the limited partnership- must have at least one of each. The limited partner contributes funds, but it is not involved with the day-to-day management of the business and "is not personally liable for partnership debts beyond the amount of his or her investment.


Limited partnerships continues

Continues to be a "pass-through entity" for tax purposes.


Limited partnership formation

Formation of limited partnerships require a filed certificate of limited partnership with secretary of state.


Sole proprietorship

an unincorporated business owned by a single person


Sole proprietorship popularity

The most common form of business organization (2/3rds of all american business).


Individual liability

Responsible for control and management of the business


Limited ability to attract capital

capital must come from the owner's own resources or is borrowed.


Sole proprietorship profits and loses

profits and losses from the business are taxed personally to the sole proprietor.


Joint Liability

Each partner in a partnership is jointly liable for the partnership's obligations. Joint liability means that a third party must sue all of the partners as a group, but each partner can be held liable for the full amount.


Joint and several liability

Means that a third party may sue all of the partners together (jointly) or one or more of the partners separately (severally) at his or her option. All of the partners in a partnership can be held liable regardless of whether the partner participated in, knew about, or ratified the conduct that gave rise to the lawsuit.


Limited Liability partnerships

in a limited liability partnership (LLLP) the general partner is not personally liable for the debts of the partnership.


Limited liability partnerships taxation

is a "pass-through" entity for tax purposes.


Limited liability Partnerships usage

Frequently used by professionals- attorneys and accountants- to form a business.


Sole proprietorships advantages

-sole proprietor owns the entire business and receives all of the profits
-Easier and less costly to start compared to other forms of business organization
-Allows for more flexibility for the business owner
-pays only personal income tax


Sole proprietorships Disadvantages

-Sole proprietor alone "bears the burden of any losses or liabilities incurred by the business enterprise" (unlimited legal liability)
-limited ability to raise capital
-lack of continuity in the business upon the death or incapacity of the owner.