Provide the following information about a sole proprietorship: (a) what does it take to form one, (b) what are the owners’ limits of liability, (c) who manages the entity, and (d) is the entity transferable?
(a) No formal filing; owner operates
(b) Unlimited liability
(c) Manages directly or hires someone
(d) Owner can sell at will
Provide the following information about a General Partnership or Joint Venture: (a) what does it take to form one, (b) what are the owners’ limits of liability, (c) who manages the entity, and (d) is the entity transferable?
(a) Formed by verbal or written agreement, or by conduct
(b) Unlimited liability
(c) Partners share management or can agree to appoint a managing partner
(d) Can only transfer interest with unanimous consent
Provide the following information about a Limited Liability Partnership: (a) what does it take to form one, (b) what are the owners’ limits of liability, (c) who manages the entity, and (d) is the entity transferable?
(a) Must file with the state
(b) Not liable unless caused by their own negligence
(c) Partners share management or can agree to appoint a managing partner
(d) Can only transfer interest with unanimous consent
Provide the following information about a Limited Partnership: (a) what does it take to form one, (b) what are the owners’ limits of liability, (c) who manages the entity, and (d) is the entity transferable?
(a) Must file with the state
(b) General Partners have unlimited liability. Limited Partners are only liable to their at-risk amount
(c) General Partners are the managers
(d) Can only transfer interest with unanimous consent
Provide the following information about a Limited Liability Company: (a) what does it take to form one, (b) what are the owners’ limits of liability, (c) who manages the entity, and (d) is the entity transferable?
(a) Must file with the state
(b) Liable to their own investment
(c) Manages directly or appoints someone
(d) Typically can only transfer interest with unanimous consent
Provide the following information about a Corporation: (a) what does it take to form one, (b) what are the owners’ limits of liability, (c) who manages the entity, and (d) is the entity transferable?
(a) Must file with the state
(b) Shareholders are liable only to their investment
(c) Managed by Board of Directors which appoints officers
(d) Shareholders can transfer interest at any time
Provide the following information about a Subchapter S Corp: (a) what does it take to form one, (b) what are the owners’ limits of liability, (c) who manages the entity, and (d) is the entity transferable?
(a) Must file with the state and also file for S-Corp status
(b) Shareholders are liable only to their investment
(c) Managed by Board of Directors which appoints officers
(d) Can transfer interest, but not to a corporation (entity) or to foreign shareholders
What are the advantages and disadvantages of a Sole Proprietorship?
Advantages: easy to establish, not a lot of formality
Disadvantages: total risk of liability including risk of all personal assets
What business entities can be formed without filing organizational documents with the state?
Sole Proprietorship
General Partnership / Joint Venture
When it is unclear whether the parties intended to enter into a partnership, what agreement gives rise to a presumption that the parties intended to form a partnership?
An agreement to share profits
True / False: A writing is necessary to form a general partnership
False UNLESS THE PARTNERSHP IS EXPECTED TO LAST MORE THAN A YEAR
The general partnership or joint venture can be assumed to exist based on behavior or action
True / False: Management rights of a general partnership are based on the amount each has contributed to the venture.
False
All partners in a general partnership have equal rights to manage regardless of their amount contributed.
When is unanimous consent of all partners for a general partnership required?
Admitting new partners
Confessing a judgment (admitting liability in a lawsuit)
Submitting a claim to arbitration
Making a fundamental change in partnership business (such as sale of a partnership, or change in line of business)
True / False: When PartnerA transfers his interest in the partnership to PersonB, PersonB become in-effect, PartnerA and can act as his agent.
False
PersonB would receive all the distributions that would otherwise have gone to PartnerA, but PartnerA remains the partner and PersonB remains an outsider with no rights in the partnership. The same remains true for heirs if PartnerA dies, the heirs receive the distributions, but do not become Partners.
A bankruptcy forces a partner to become disassociated from the partnership. Does the partner have the right to continue to manage the partnership? Does he have the authority to bind the partnership? Does he remain liable for partnership debts?
He does NOT have the right to continue to manage
He DOES have the authority to bind the partnership until 3rd parties are given notice of the disassociation
He DOES remain liable for partnership debts that occurred prior to the disassociation
++ The leaving partner must give notice to 3rd parties so that they don’t hold him liable for any new bindings
A partner dies. Does this cause termination (dissolution) of the partnership?
Yes, unless the other partners agree to continue within 90 days of the partner’s death.
True / False: A partnership is of unlimited duration.
False
Any number of events can trigger the dissolution of the partnership.
When a solvent partnership is dissolved and its assets are reduced to cash, in which order are the liabilities paid?
Creditors, including partners who are creditors
To former partners in satisfaction of liabilities that were not paid on their withdrawal
Partners, first to return their contributions and then on account of profits
If the partners’ contributions cannot be fully returned, the loss is divided among the partners.
Profits and losses are divided equally regardless of contribution unless the agreement states otherwise.
True / False: In a general partnership, the partners are NOT liable for the obligations or liabilities of the partnership arising from errors, omissions, negligence, malpractice or wrongful acts, but a partner of an LLP IS liable.
False
It’s the opposite
Except the partner of an LLP is obligated for their own negligent acts AND for the acts of those under their direct supervision or control.
True / False: Partners in an LLP ARE personally liable for debts and contractual obligations.
False
True / False: A limited partnership can be formed with limited liability for ALL partners.
False
At least one general partner is necessary
True / False: A limited partner has the right to review the financial statements and tax returns of the limited partnership.
True
True / False: A limited partner may act as an agent of the partnership and form binding agreements.
False
But if a 3rd party believes he is a general partner and enters into a binding agreement, only the limited partner (not the partnership) is personally liable.
General partners are treated equally, unless otherwise stated in an agreement, for distribution of profits and losses. Are limited partners treated equally?
No, they receive a share of the profits and losses in proportion to the value of the limited partners’ contributions.
True / False: Death of a limited partner will dissolve the partnership.
False
True / False: One person may form an LLC.
True
This is considered a disregarded entity for tax purposes
If the members are managing the LLC, each member is an _____ of the LLC and has the power to ____ the LLC.
Agent
Bind
Profits and losses for an LLC are allocated based on what factor?
The basis of the members’ contributions unless the state operates under the Uniform Limited Liability Company Act (ULLCA) in which case the profits are shared equally.
A member of an LLC must obtain what before he can transfer all of his interest in the LLC.
The consent of all other members
What is the major difference between a general partnership and a joint venture?
Joint ventures tend to be formed for a particular project or transaction (or limited series of transactions).
What level of approval is needed within a general partnership for (1) ordinary business, (2) admitting a new partner
(1) majority of the partners must approve
(2) unanimous consent
A creditor is suing a partner for failure to pay their bills. Can the creditor sue the partnership to which he belongs?
No. It can sue to receive the distributions that would have gone to the partner, but it can’t sue the partnership.
A creditor is suing the general partnership for failure to pay their bills. Can the creditor sue the partners for their personal assets to pay the bills?
Yes
True / False: Each partner is jointly and severably liable for the entire debts of the partnership.
True
Typically, if an entity wants to limit their personal liability, the entity must do want regarding formation?
File with the state
True / False: A limited partner is protected from all liabilities of the partnership.
False
Limited partners are liable up to the amount of their investment, but cannot be pursued for personal liability