Ch 14 Business Forms and Arrangements.docx

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Management and Organizational Studies
Management and Organizational Studies 2275A/B
Frederick King

Business Forms and Arrangements 11/16/2012 11:14:00 AM Chapter 14 Forms of the Business Organization  Choosing how to own a business determines who: o Is financially liable for the business o Shares in business profits and other assets o Makes and is accountable for management decisions  Sole proprietorship – an unincorporated business organization that has only one owner o Oldest form of business organization o Unlimited liability – unrestricted legal responsibility for obligations, the owner’s personal assets can be seized to pay debts o Profit sharing – owner enjoys all the profits after taxes o Decision making – owner can make decisions very quickly and independently  Disadvantages:  The business is terminated upon death of the owner  Few people are good at everything o Sources of capital – owner has limited access to capital o Taxation – there are no formal or specialized tax rules governing it, profits and losses are reported on the individuals tax return o Transferability – cannot be transferred or sold to another because it has no legal status, assets and inventory are transferable o Regulations – one simply begins business activity to establish the business  Generally people who offer specialized services must be licensed to practice their skill  If the business has a name other than the owners, they must register the name at the local registry office  Partnership – a business carried on by two or more people with the intention of making a profit o Joint liability – liability shared by two or more people where each is personally liable for the full amount of the obligation, each partner’s personal assets can be seized and sold o Profit sharing – the partners decide how profits and other firm assets are to be divided, if they cant decide, partnership legislation requires them to share profits equally o Decision making – partnerships can pool their individual strengths and resources, but making decisions requires consultation among the partners causing potential disputes o Sources of capital – more sources of capital are provided with more people o Taxation – not a separate legal entity so the profits are allocated to the partners and included on individual tax returns o Transferability – not transferable between on owner to another, partners don’t individually own or have a share in specific partnership property, each has an interest in all property o Agency and the partnership act  Partnership act – provides mandatory rules with respect to when a partnership exists and what their relationship is to outsiders  There are optional rules that can be included with respect to the relationship of partners to one another and how and why a partnership ends  A partnership exists when two or more people carry on business with a common view towards profit, excluding charitable and non-profit ventures  If two or more people own property together this doesn’t make them partners o The relationship of partners – partners also becomes on another’s agents, meaning the partners owe fiduciary duties to one another requiring the partners to put the interests of their partners over their own  Partners should have a partnership agreement that summarizes their relationship and address the following issues:  Creation of the partnership – names, addresses, partnership name, term, etc.  Capital contribution – contribution of each partner, how shortfalls are handled, etc.  Decision making – duties, limits on authority, dispute resolution mechanism, etc.  Profit distribution – how profits are to be shared, how and when they are distributed, etc.  Changes to partnership – rules for changing the relationship, admission of new partners, retirement, valuation of interests, etc.  Dissolution of partnership – what events trigger dissolution, how it will be handled, valuation of assets o Relationship with outsiders – a partner is an agent of the firm acting for herself as well as her partners so the firm is responsible for contracts she enters into with actual or apparent authority o Joint and several liability – individual and collective liability for a debt  Each liable party is individually responsible for the entire debt as well as being collectively liable for the entire debt  A client can recover all of the damages resulting from a tort from any partner or recover some from each o How and why a partnership ends:  If entered into for a fixed term, at expiration  If enter
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