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Unformatted text preview: Kulper - Econ 189 Kulper 1 Introduction • Entrepreneurs wishing to start a new business must be aware of advantages and disadvantages of various business entities for their endeavor. Consider: – Ease of creation. – Owners’ liability. – Tax considerations. – Need for Capital. Kulper - Econ 189 Kulper 2 • A sole proprietorship is an • • Sole Proprietorships unincorporated business owned by one person. Sole proprietorships are easy and inexpensive to create and operate. Earnings are reported on the owner’s personal tax returns. Advantages Disadvantages Owner is in complete control & Owner is personally liable for receives all profits all torts/contracts Flexibility Ease of creation; maintenance Lacks continuity after death Difficult to raise financing 3 Kulper - Econ 189 Kulper Corporations • Corporations offer limited liability – usually the managers’ and investors’ personal property is not at risk. • Managers, employees and even stockholders are still personally liable for their own negligence and crimes. • Corporate stock can be bought and sold, making investments easy to get. • Corporations have perpetual existence; they can continue without their founders. • Corporations involve a lot of expense and effort to create and operate. • Corporations are taxable entities. (Details on Corporations in Chapter 21) Kulper - Econ 189 Kulper 4 Close Corporations • “Close corporation” and “closely held corporation” refer to a corporation whose stock is not publicly traded on a stock exchange. • Common provisions of close corporations: – Protection of Minority Shareholders – Transfer Restrictions – Flexibility – Dispute Resolution Kulper - Econ 189 Kulper 5 • Shareholders of S corps have the best of all • “S” Corporations worlds: the limited liability of a corporation and the tax status of a partnership. The disadvantages of an S corp are: There can only be one class of stocks. There can be no more than 100 shareholders. Shareholders cannot be partnerships or other corporations. – Shareholders must be U.S. citizens or residents. – All shareholders must agree that the company should be an S corporation. – – – Kulper - Econ 189 Kulper 6 Limited Liability Companies • An LLC offers the limited liability of a corporation and the tax status of a partnership, without the cumbersome requirements of an S corporation (such as annual filing, rules about classes of stock and numbers of stockholders, etc.) The disadvantages with LLCs include expensive set­up and more difficulty in obtaining capital financing. • YOU BE THE JUDGE: Ridgaway v. Silk Adult club, excessive drinking, auto accident, personal liability outside of LLC Kulper - Econ 189 Kulper 7 Limited Liability Companies • The LLC is popular because it has: – – – – – Limited Liability (like a corporation) Favorable Tax Status (like a partnership) Flexibility in classes of membership Easy Transferability of Interest Duration (no dissolution upon withdrawal of a member) • When an LLC goes public, it is taxed as a • corporation rather than like a partnership. The LLC veil may be pierced just like a corporation’s if the law is not technically upheld. (BLD Products, Ltd. V. Technical Plastics of Oregon, LLC: Sole member used LLC accounts for personal expenses, etc.; does piercing the veil apply to LLCs?) Kulper - Econ 189 Kulper 8 LLC Overview Advantages Member liability is limited to amount of investment. Can be treated as a “pass through” entity for tax purposes. Can elect to be taxed as corporation. Profits can be distributed to members without the double taxation of a corporation. Members pay personal income tax on received dividends. Kulper - Econ 189 Kulper 9 Disadvantages State statutes are not uniform. Not all states recognize LLC’s. • A partnership is an unincorporated association • • • • of two or more co­owners who carry on a business for profit. Each co­owner is a general partner. Partnerships are easy to form (sometimes it happens unintentionally!) Partnerships do not pay taxes. Disadvantages: Partners can be held personally liable for the partnership actions and debts; financing may be difficult because they cannot sell shares. Kulper - Econ 189 Kulper General Partnership 10 • Tort Liability – A partnership is liable for Liability intentional and negligent torts of a partner in the ordinary course of business or when the partner is acting with actual authority. • Personal Liability – each partner is personally liable for the debts of the partnership. • Joint and Several Liability – a creditor may sue the partners jointly as a group or separately as individuals. Kulper - Econ 189 Kulper 11 Management Rights • Each partner has equal rights in management of the partnership unless otherwise agreed. • Large partnerships are often managed by a few designated managing partners or an executive committee. • Unless agreed otherwise, partners have an equal vote on matters of partnership business. Kulper - Econ 189 Kulper 12 Management Duties • Duty of Care – duty owed by partners to manage the partnership affairs without gross negligence, reckless conduct, intentional misconduct, or knowing violation of law. • Duty of Loyalty – duty of utmost loyalty. Duty to not compete with partnership, turn over any profit to partnership, and avoid conflicts of interest. • Duty of Good Faith & Fair Dealing – duty to deal with each other and the partnership in a fair way. Kulper - Econ 189 Kulper 13 Dissociation • Dissociation occurs if a partner quits. • A partner always has the power to leave a partnership but may not have the right. • When one or more partners dissociate, the partnership can either buy out the departing partner(s) and continue in business or wind up the business and terminate the partnership. Kulper - Econ 189 Kulper 14 • Ending a partnership business involves three steps: – Dissolution ­­decision to end business; can be voluntary or automatic. – Winding Up ­­ During the winding up process, all debts of the partnership are paid, and the remaining proceeds are distributed to the partners. – Termination ­­ the end; happens when winding up is complete. Kulper - Econ 189 Kulper 15 Termination of the Partnership Business Circumstances that Require Dissolution • Partner withdraws from a partnership at will. • Partner is dissociated and half the other partners vote • • • to wind up business. All partners agree to dissolve. The term expires or partnership achieves its goal. Partners agree in advance on events that will cause dissociation. • Partnership business becomes illegal. • A court determines that the partnership cannot function successfully. Kulper - Econ 189 Kulper 16 General Partnership Overview Advantages Easy to create and maintain Flexible, informal Disadvantages Partners are personally liable for all torts/contracts Dissolved upon death Partners share profits and Difficult to raise financing losses equally unless agreed otherwise Kulper - Econ 189 Kulper 17 Limited Liability Partnerships (LLPs) • Partners in an LLP are not personally liable for debts of the partnership (whether arising from contract or tort). (Apcar v. Gaus: Failed to renew LLP registration; personal liability for payments due under lease) Kulper - Econ 189 Kulper 18 (Limited Partnerships & Limited Liability Limited Partnerships) Limited Partnerships • Have general (active management) and limited • • • (money­only) partners. In a limited partnership, only the general partners are personally liable. Formation of limited partnerships require a filed certificate of limited partnership. Usually, limited partnerships continue even if partners leave the partnership. Kulper - Econ 189 Kulper 19 • Organization of professionals (such as Professional Corporation doctors, lawyers, accountants, etc.); all members must be of the same profession. • Professional corporations provide more liability coverage than a general partnership. – When one member commits malpractice, the corporation’s assets are at risk and the personal assets of that member, but not the personal assets of the other members. Kulper - Econ 189 Kulper 20 ...
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