Business Law Chapter 35

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Major Forms of Business Organizations (4)
1. Sole proprietorship
2. General partnership
3. Limited partnership
4. Corporation
Sole Proprietorship
unincorporated business owned by one person
Terminates if owner dies
Most popular business form in the US
Sole Proprietorship Advantages (3)
1. Ease of creation (few legal formalities)
2. Owner has total managerial control
3. Owner retains profits
Sole Proprietorship Disadvantages (2)
1. Unlimited Legal liability
2. Funding limited to personal contributions and loans
General Partnership
voluntary association between two parties who co-own a business for profit; share control and the profits of the business
Each partner has equal control
Each partner has unlimited, personal liability for business debts/obligations
Profits taxed as income to partner
Partnership Advantages
1. Ease of creation
2. Partnership income is partner income
3. Business losses quality for tax deduction
Partnership Disadvantage
1. Personal liability for all business debts/obligations, including those incurred by other partners on behalf of the partnership
Limited Partnership (LP)
unincorporated business with at least one general partner, and one limited partner
Only dissolves if general partner dies, not if limited partner dies
General Partner in Limited Partnership (LP)
has managerial/operational control over business
assume unlimited personal liability for the partnerships debts
Limited partner In Limited Partnership (LP)
Assume no liabilities beyond the capital they invested
They do pay taxes on their share of the profits
Limited partner has no managerial/operational control over business
Requirements for Limited Partnership (LP)
Must use word limited partnership
Must file certificate of partnership
Limited Liability Partnership(LLP)
All the partners assume liability for other partners malpractice, but only to the extent of the partnership assets
Personal assets can’t be taken
Each partner is liable for their own negligence AND the negligence of those that they supervise
Not a separate legal entity
Each partner pays their taxes on their share of profits or income
Limited Liability Partnership(LLP) Requirements
Business name must include LLP
Must file a form with the secretary of state
Corporation
state-sanctioned business with legal identity separate and apart from its owners
Shareholders elect a board of directors who manage the business
The board then hires officers to run the day to day business (CEO, CFO, COO)
Shareholders
Owners of corporations that purchased company stock
liability limited to amount to investment in corporation
The corporation does not dissolve when shareholders die
Advantages of Corporations (2)
1. limited legal liability
2. Easy to collect funds
Disadvantages of Corporations (2)
1. Double-taxation
2. Formalities required for corporation establishment and maintenance
S Corporation
business organization formed under federal tax law that is considered corporation, yet taxed like a partnership
Formed under federal law
Can’t have more than 100 shareholders
Income is taxed only when its distributed to shareholders, who then must report it on their personal income tax
Limited Liability Company (LLC)
business organization with limited liability of a corporation, yet taxed like a partnership
Formed under state law
Owners of LLC are called members
Members pay personal income taxes on shares they report
No limitation on number of owners permitted in LLC
Members don’t have to be US citizens (unlike S corporation)
No separate/double tax
Formation of Limited Liability Company (LLC)
File articles
Register in every state they intent to do business
Qualification
Operating Agreement
Qualification in LLC
Act of filing a certificate of authority or similar document, getting a business license in each state where business is conducted
Operating Agreement in LLC
foundational contract among the member/owners
Spells out how the company will run
Franchise
form of business organization that exists because of an agreement between “franchisor” (owner of trade name/trademark) and “franchisee” (person why, by specific terms of agreement, sells goods/ services under trade name/ trademark)
Types of Franchises (3)
1. Chain style business operation
2. Distributorship
3. Manufacturer Arrangement
Chain style business operation
Franchisor helps franchisee establish a business (using franchisor’s business name, and franchisor’s standard “methods and practices”)
franchise operates under the franchisors business name and required to follow the franchisors standards and method of business operation
Ex. mcDonalds
Distributorship
The franchisor manufactures a product and licenses a dealer to sell it in an exclusive territory
Ex. a car dealership
Manufacturer Arrangement
a franchisor provides the franchisee with the formula or necessary ingredient to manufacture a product
ex. a soft drink company
Franchise Law
there are both federal and state laws in place to regulate the franchisor/franchisee relationship
Contract law and the UCC also apply
Termination of a Franchise
A lot of litigation stems from wrongful termination of a franchise by the franchisor
Usually must be “for cause”- example is repeatedly violating the franchise agreement
Must give sufficient notice
Categories: Business Law