Michigan Business Entities - BTB lecture outline - BUSINESS ENTITIES GENERAL CONSIDERATIONS FOR BUSINESS Limitations on Liability Tax

Michigan Business Entities - BTB lecture outline -...

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BUSINESS ENTITIES GENERAL CONSIDERATIONS FOR BUSINESS Limitations on Liability Tax considerations Continuity of Life Financial Capital SOLE PROPRIETORSHIP An unincorporated business owned by one person. o Default option if only one person o Does not require any formal steps to create a sole proprietorship o However, Michigan and many states require sole proprietors to register their business name if different from their own Advantages: o All profits retained by Owner o Flow-through tax entity Business does not pay taxes, the individual accounts for the income earned on his/her personal tax return o Owner controls all decision making Disadvantages: o Unlimited liability Tort: Personal liability Contract: Personal liability o Difficult to raise capital Debt is the only source of working capital No stock or membership to sell More difficult to obtain loans o Limited continuity in case of illness/death of owner Page 2 of 12
Page 2 of 12
GENERAL PARTNERSHIPS An association of two or more persons to carry on as co-owners a business for profit. Formation o Default option if more than one person o A person who shares in profits & losses is presumed to be a partner o The right to control may be enough even if control is never exercised o Capital contribution is not required to be a partner Writing o Partnership law does not require a writing to form a partnership But the Statute of Frauds may Partnership, however, must file a certificate with the clerk of the county where it’s located before commencing a lawsuit Relations Among Partners o Unless otherwise Agreed : Statute supplies the default rules, but the partners may contract around them; thus, the partnership agreement usually governs o Partnership Agreement : A written agreement – sometimes called articles of partnership – that sets forth the rights and obligations of each partner with respect to the partnership. o Profits and losses shared equally , not in proportion to capital contributions o Management Equal management rights Each partner is an Agent of the other partners Page 2 of 12
Duty of care Duty of loyalty Duty to render full information about the partnership on demand Right to inspect books; can get an accounting when just No right to compensation for running day-to-day operations unless UOA Right to reimbursement for out of pocket expenses on behalf of the partnership o Voting Rights Each partner has an equal vote, regardless of capital contribution UOA – Majority rules (a majority in # not in capital contribution) Most partnership decisions require majority vote of partners, except Altering the essential nature of the partnership’s business or entering a wholly new business; Admitting new partners or altering the capital structure of the partnership; Confessing judgment against the partnership; Amending the partnership agreement.

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