Forms of Business Organization

Forms of Business Organization

For Discussion • What kind of business would you like to start?

Entrepreneurship, Sole Proprietorships, and General Partnerships

PRINCIPAL BUSINESS FORMS • Sole proprietorships • Partnerships • Corporations

Entrepreneurial Forms of Conducting Business Sole Proprietorship General Partnership Limited Partnership Limited Liability Partnership Limited Liability Company

Sole Proprietorship • Owner is actually the business. • Business is not a separate legal entity. • Most common form of business organization in the United States.

Advantages of a Sole Proprietorship • Ease and low cost of formation. • Owner can make all management decisions. • hiring and firing employees. • No other approvals required. • Sole proprietor owns all of the business • Has the right to receive all of the business’s profits. • Easily transferred or sold

Disadvantages of a Sole Proprietorship • Access to capital is limited to: • personal funds plus • any loans he or she can obtain. • Legally responsible for the business’s contracts • Responsible for any torts committed in the course of employment.

Creation of a Sole Proprietorship • No formalities. • No federal or state government approval is required. • Some local governments require a license to do business within the city.

Personal Liability of a Sole Proprietor • The sole proprietor bears the risk of loss of the business. • Will lose his or her entire capital contribution if the business fails. • The sole proprietor has unlimited personal liability. • Creditors may recover claims against the business from the sole proprietor’s personal assets.

Personal Liability of a Sole Proprietor (continued) Debt or obligation owed Sole Proprietorship Third Party Capital investment Sole Proprietor (Owner) Personal liability for sole proprietorship’s debts and obligations

For Discussion Scenario • After a year of losses, your business turned a sizable profit in its second year. You worked 70-hour weeks to produce it and you are now considering bringing in a partner. Questions • What attributes would you look for in a partner? • What could you offer a potential partner? • What kind and size of investments would you expect in turn? • How would you divide the business duties with your partner? • What could go wrong with the partnership?

General Partnership • Voluntary association • Two or more people • Carry on business for profit • Creates rights and duties between partners and with third parties • General partners personally liable for the debts and obligations of the partnership.

General Partnership Debt or obligation owed General Partnership Third Party Personal liability for partnership’s debts and obligations Capital investment Capital investment General Partner General Partner General Partner

Partnership Agreement • May be written or oral • Statute of Frauds applies • No formalities required • Recommended that it be in writing • Called partnership agreement or articles of partnership • UPA will fill gaps

CREATION OF A PARTNERSHIP • Form and content of the partnership agreement • Types of partnerships • Classification by purpose • Classification by extent of liability • General partners • Limited partners

CREATION OF A PARTNERSHIP • Status of minors • Powers of a partnership • Status of a partnership (continued)

TERMINATION OF A PARTNERSHIP • By action of one or more of the partners • By operation of law • By court decree

Dissolution of General Partnership • Defined as: • “Change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business”. • Partnership for a term • For a fixed duration • Until event occurs • Terminates automatically at end of time or when objective accomplished. • Partnership at will • Partner may rightfully withdraw and dissolve partnership at any time.

Winding-Up • Process of liquidating the partnership’s assets and distributing the proceeds to satisfy claims against the partnership. • The surviving or remaining partners have the right to wind-up the partnership. • A bankrupt partner cannot participate in the winding-up of a partnership.

Notice of Dissolution • Terminates partners’ actual authority to enter into contracts or act on behalf of partnership • Notice must be given to certain third parties • Third parties who dealt with partnership must be given actual notice. • Third parties who had knowledge of partnership must be given actual or constructive notice. • Third parties who had no knowledge owed no notice. • If no notice given, apparent authority to continue to bind partnership

Distribution of Assets Upon the winding-up of a dissolved partnership, the assets of the partnership are distributed in the following order : • Creditors (except partners who are creditors) • Creditor-partners • Capital contributions • Profits

Wrongful Dissolution • Partner has power to withdraw at any time, but may not have the right to withdraw. • Withdraws before expiration of term • Withdraws before occurrence of event • Partner is liable for damages caused by the wrongful dissolution of the partnership.

Continuation of Partnership after Dissolution • Remaining partners have right to continue after dissolution • Continuation agreement • Sets forth events that allow for continuation, amount paid to out-going partners, and other details. • Old partnership dissolved and new partnership created • Creditors of old partnership become creditors of new partnership • Have equal status with creditors of new partnership

Liability of Outgoing Partners • Dissolution of partnership does not discharge liability of outgoing partners for existing partnership debts and obligations

Right of Survivorship • Upon the death of a partner, deceased partner’s right in specific partnership property vests in the remaining partner or partners • Does not pass to heirs or next of kin • Value passes to beneficiaries and heirs • Upon death of last partner, rights in specific partnership property vest in the deceased partner’s legal representative

A PARTNER’S POWERS • A partner’s rights • A partner’s authority

A PARTNER’S RIGHTS • Right to participate in management • Right to profits • Right in partnership property • Right to extra compensation

A PARTNER’S AUTHORITY • Make binding contracts for the firm • Receive money owed to and settle claims against the firm • Borrow money in the firm’s name • Sell • Buy • Make • Draw and cash checks and drafts • Hire and fire employees and agents • Receive notice of matters affecting the partnership

A PARTNER’S DUTIES AND LIABILITIES • A partner’s duties • Comply with partnership agreement and decisions • Use reasonable care • Act with integrity and good faith • Not conduct competing business • Keep accurate records • A partner’s potential liabilities

Tort Liability • Partnership is liable for the tortious act of a partner, employee, or agent that is committed while the person is acting within the ordinary course of partnership business or with the authority of his or her co-partners. • Both negligence and intentional torts covered

Joint and Several Liability • Partners are jointly and severallyliable for tort liability of the partnership. • i.e., the plaintiff can sue one or more of the partners separately. • If successful, the plaintiff can recover the entire amount of the judgment from any or all of the defendant-partners. • Release of one partner does not discharge the others.

Contract Liability • Partners are jointly liable for contracts and debts of partnership. • Third party must name all partners in suit. • If suit does not list all, judgment cannot be collected. • If one is released, all are released. • Successful third party may collect judgment against any or all partners. • Partners may seek indemnification if they pay more than their share.

Limited Partnerships

Limited Partnership • A type of partnership that has two types of partners: • General Partners –invest capital, manage the business, and are personally liable for partnership debts. • Limited Partners –invest capital, but do not participate in management and are not personally liable for partnership debts beyond their capital contribution.

Limited Partnership(continued) • A limited partnership must have at least one general partner and one limited partner. • There are no restrictions on the number of general or limited partners allowed. • Any person may be a general or limited partner. • Corporation may be sole general partner. • Shareholders are liable only up to their capital contributions.

Limited Partnership (continued) Debt or obligation owed Limited Partnership Third Party Capital investment General Partner General Partner Limited Partner Limited Partner Liability limited to capital contribution Personal liability for partnership’s debts and obligations No personal liability for partnership’s debts and obligations

Formation of Limited Partnerships • The creation of limited partnerships is formal • Requires public disclosure. • Entity must comply with the statutory requirements of the RULPA or other state statute.

Certificate of Limited Partnership • Document that two or more persons must execute and sign. • Contains name of limited partnership, purpose, names and addresses of partners, agent, and principal place of business, contributions of each partner. • Must be filed with secretary of state. • Not formed until certificate filed.

Name of Limited Partnership • The firm name of a limited partnership may not include the surname of a limited partner unless: • it is also the surname of a general partner, or • The business was carried on under that name before the admission of the limited partner.

Name of Limited Partnership (continued) • Other restrictions: • The name cannot be the same as or deceptively similar to the names of other businesses or partnerships. • States can designate the words that cannot be used in limited partnership names • The name must contain without abbreviation the words limited partnership

Limited Partnership Agreement • Document that sets forth: • The rights and duties of the general and limited partners; and • The terms and conditions regarding the operation • dissolution and termination terms. • If no agreement, certificate serves as articles.

Share of Profits & Losses(continued) • The limited partnership agreement may specify how profits and losses are to be allocated among the general and limited partners. • If there is no such agreement, RULPA provides that profits and losses from a limited partnership are shared on the basis of the value of the partner’s capital contribution • A limited partner is not liable for losses beyond his or her capital contribution

Liability of General and Limited Partners • General partners of a limited partnership have unlimited liability for debts and obligations of the partnership. • Limited partners are liable only up to amount of their capital contributions. • Give up right to participate in the control and management

Participation in Management • General partners have management rights. • Limited partners give up these right in exchange for limited liability. • Liable as general partner if participation is substantially the same. • Only liable to persons who reasonably believe them to be general partners.

Summary: Liability of Limited Partners

Dissolution of a Limited Partnership • Partnership may be dissolved: • At the end of the life of the limited partnership as specified in the certificate of limited partnership. • With the written consent of all general and limited partners. • Because of the withdrawal of a general partner. • With the entry of a decree of judicial dissolution.

Winding-Up a Limited Partnership • A limited partnership must wind up its affairs upon dissolution. • Certificate of cancellation must be filed by the limited partnership with the secretary of state of the state in which the limited partnership is organized.

Distribution of Assets • After the assets of the limited partnership have been liquidated, the proceeds must be distributed. • The RULPA provides the following order of distribution of partnership assets: • Creditors of the limited partnership • Partners with respect to • Unpaid distributions • Capital contributions • The remainder of the proceeds

Forms of Business Organization