BUSINESS ENTITIESGENERAL CONSIDERATIONS FOR BUSINESSLimitations on LiabilityTax considerationsContinuity of LifeFinancial Capital SOLE PROPRIETORSHIPAn unincorporated business owned by one person.oDefault option if only one personoDoes not require any formal steps to create a soleproprietorshipoHowever, Michigan and many states require sole proprietorsto register their business name if different from their ownAdvantages:oAll profits retained by OwneroFlow-through tax entityBusiness does not pay taxes, the individual accounts forthe income earned on his/her personal tax returnoOwner controls all decision makingDisadvantages:oUnlimited liabilityTort: Personal liabilityContract: Personal liabilityoDifficult to raise capitalDebt is the only source of working capitalNo stock or membership to sellMore difficult to obtain loansoLimited continuity in case of illness/death of ownerPage 2of 12
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GENERAL PARTNERSHIPSAn association of two or more persons to carry on as co-owners abusiness for profit. FormationoDefault option if more than one personoA person who shares in profits & lossesis presumed to be apartneroThe right to control may be enough even if controlis neverexercisedoCapital contributionis not required to be a partnerWritingoPartnership law does not require a writing to form apartnershipBut the Statute of Frauds mayPartnership, however, must file a certificate with theclerk of the county where it’s located beforecommencing a lawsuitRelations Among PartnersoUnless otherwise Agreed: Statute supplies the default rules,but the partners may contract around them; thus, thepartnership agreement usually governsoPartnership Agreement: A written agreement – sometimescalled articles of partnership– that sets forth the rights andobligations of each partner with respect to the partnership.oProfits and losses shared equally, not in proportion to capitalcontributionsoManagementEqual management rightsEach partner is an Agentof the other partnersPage 2of 12
Duty of care Duty of loyaltyDuty to render full information about thepartnership on demandRight to inspect books; can get an accounting when justNo right to compensation for running day-to-dayoperations unless UOARight to reimbursement for out of pocket expenses onbehalf of the partnershipoVoting RightsEach partner has an equal vote, regardless of capitalcontributionUOA – Majority rules (a majority in # not in capitalcontribution)Most partnership decisions require majority vote ofpartners, exceptAltering the essential nature of the partnership’sbusiness or entering a wholly new business;Admitting new partners or altering the capitalstructure of the partnership;Confessing judgment against the partnership;Amending the partnership agreement.