BLaw 301 Final Exam.pdf

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Business Law
Course Code
BULW 301

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BLaw 301 Final Exam Chapter 17Sole Proprietorships and PartnershipsChoice of Business Organization o A person starting a new business should be aware of the advantages and disadvantages of alternative business forms o Considerations includeEase and expense of formation and maintenancePersonal liability of owners for business debtsTaxation of business incomeCapitalization requirementsManagement and operationsEntitlement to income and assets o Sole Proprietorships not a legal entity o Unincorporated entityGeneral partnership GPJoint venturea GP organized for a limited purpose Limited partnership LPLimited liability partnership LLPLimited liability company LLC o Corporation an incorporated entityBusiness Formation Summary o Sole Proprietorshipnot a separate legal entity the owner and the business are considered to be one and the same not required to file formation documents with the state o General partnershipunincorporated entitythat is not required to file formation documents with the stateo Unincorporated entities that are required to file formation documents with the stateLimited partnershipLimited liability partnershipLimited liability company o Corporation entity required to file formation documents with the state of incorporationSec 1Sole Proprietorships oA sole proprietorship is a business form where ownership and control are vested in one personIt is an unincorporated business with no separate legal identity from its owner o A person who owns a business by himself that is not a separate legal entity has a sole proprietorshipCan have employeesCan operate under an assumed or fictitious name o More than 23 of US businesses are sole proprietorships 99 have less than 1 million of annual revenues and more have no employees o No formation documents required to be filed with the secretary of state but sales tax and employment tax registrations and business licenses may be required in states and local jurisdictions where doing business o Owner is personally liable for businesss debts o No special entity laws govern sole proprietorships however many laws affect business operations eg employment tax contracts torts business licenses o Sole proprietors are liable for their employees actions that are committed within the scope their employments Ie related to the businesss operationsSee Case in Point p 381 Garden City Boxing Club Inc vs Dominguez Rule A sole proprietor is personally liable for the actions committed by his employees within the scope of their employmentTaxation of Sole Proprietorships o Income from a sole proprietorship is reported on the owners individual tax return Form 1040Schedule CThe owner not the business pays any tax due on the business incomeThe businesss losses can offset the owners other income and thereby reduce the owners overall taxes o In 2010 23 million individual tax returns reported incomeloss from nonfarm sole proprietorships activityAdvantages of Sole Proprietorships o Owner is in complete control and is entitled to all profits generated by the business o Ease of creation and maintenance o Flexibility convenience of operations o Single level of taxation owner pays individual income taxes on business profits but the business does not pay income taxesDisadvantages of Sole Proprietorships o Unlimited personal liability the owner is personally liable for business losses and debts business contracts and employee torts o Difficult to raise financing debt is generally the only source for working capital other than operations o No continuity after death of ownerSec 3 Partnerships o A partnership is an association of 2 or more persons to carry on as coowners a business for profit o Each partner is a coowner of the businessPartners have joint control over the businesss management and operations and they have the right to share in profits o Partnerships are recognized under state law as legal entities separate from their owners partners o A partnership is a general partnership except when organized and registered with the state as a limited partnershipPartnership Taxation o Partnerships are considered passthrough entities for federal income tax purposesThis means that partnerships do not pay federal income taxes instead its partners report and pay taxes on the businesss incomePartnerships file a form 1065 information return with the IRS this form includes a Schedule K1 for each partner which shows the incomelosses attributable to the partner o Each partner reports its share of partnership incomeloss on its own tax return using the info reported on its K1Partners must pay income taxes on their share of partnership income even if the partnership does not distribute the income to them in cashPartnership losses may offset a partners income from other sourcesPartnership Law o Several common law agency law concepts are incorporated into partnership lawEach partner is an agent of the partnership for the purpose of conducting the partnerships businessPartners have liability for the acts of other partners that occur in the course of conducting partnership businessEach partner is a fiduciary of the other partnersFormation and operation of partnerships are governed by state lawThe Uniform Partnership Act UPA has been adopted by all states except LouisianaFor class purposes UPA will refer to state partnership statutes as revised in 1997UPA provides a states default rules governing a partnerships formation and operation these rules apply if a partnership agreement does not provide otherwiseEX All partners share equally in profits and managementThe provisions of a partnership agreement can override most default rules provided by UPA except those governing obligations to outsiders and those establishing fiduciary obligations of the partnersPartnership Existence o If there is a dispute about the ownershipformation of a business a court may find that a partnership exists even where one or more parties did not intend to form a partnership o The existence of a partnership may be inferred based on established factsThree primary factors used by courts to determine whether a partnership existsProfit sharing creates a presumption of a partnershipJoint ownership of the business not simply joint ownership of items of property
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