This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Types of Business Organization in Which There May Be Both Limitations of Liability for Owners and Favorable Income Tax Treatment. The age-old choice of entity in starting a business has always been a threefold one: sole proprietorship, general partnership, or corporation. But now there are some alternative forms of unincorporated business organizations that offer protection against liability and minimum taxation. a) Limited Partnership (LP) A Limited Partnership (LP) consists of one or more general partners together with one or more limited partners to conduct business for profit as co-owners. On the one hand, general partners manage the business and are personally liable for all the legal debts and obligations of the LP. Thus, general partners’ personal assets are at risk due to their unlimited liabilities. On the other hand, limited partners contribute capital and share profits but cannot manage the business. They are not liable for the debt and obligations of the LP beyond the amount contributed. However, if a limited partner does participate in the control of the business, the limited partner is liable only to persons who transact business with the LP reasonably believing that the limited partner is a general partner. Generally, an individual or a legal body such as a corporation may be a partner in an LP. In term of income tax treatment, the LP itself does not pay income tax, but it files an annual information return. Each partner reports his/her share of the profit and loss on his/her individual federal and state income tax returns. Thus, profits are taxed only once. Under Texas Revised Limited Partnership Act, the formalities of setting up and operating an LP require a partnership agreement and the filing of a certificate with the secretary of state. Section 2.01 provides that the certificate must contain the name of the LP, the address of the registered office and the name and address of the agent for service of process, the address of the principal office in the U.S, the name and the address of the business or residence of each general partner, and other matters that the general partners determine to include. According to Section 1.03, the name of an LP must contain the words “L.P.” or “Ltd.” As the last words or letters of its names and may not contain the name of a limited partner. Section 5.01 states that the contribution of a limited partner may consist of any tangible or intangible benefit to the LP or other property of any kind or nature, including cash, promissory notes, and services. As provided by the act and partnership agreement, traditional fiduciary duties are applied in order to operate an LP with fairness standard between general and limited partners. Since limited partners are not involved in the management of an LP, general partners owe fiduciary duties of loyalty and care to treat the LP and limited partners in accordance with the fairness standard. If general partners breach the provision of partnership agreement, they are liable for their wrongdoings and malpractices. partnership agreement, they are liable for their wrongdoings and malpractices....
View Full Document
- Spring '08
- Corporation, Types of business entity, partner, gross negligence