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Sole Props

Structural & Organizatio n Single owner business. Sole/only proprietor. Maybe other employees within the company. Maybe lender+, supplier+, clients+ based on contractual relationships. Only one owner.

General Partnership
General parties who are owners. 6/7: 6(1): partnership is association of 2+ persons who are in business for profit. Joint ownership. All states have adopted a version of UPA 1914 or the more recent 1997 RUPA, and Profit sharing arrangement creates presumption of a GP even if the parties do not intend to be parties. UPA 7; RUPA 202(c)(3) A GP without a definite term (at-will partnership) dissolves on the withdrawal of any partner. UPA 31; RUPA 801(a). Absent any agreement, the withdrawing partner may demand tht the business be liquidated and the net proceeds be distributed to the partners in cash. UPA 38(1); RUPA 807;

Limited Partnership
A limited partnership must have at least one general partner and one limited partner. The general partner can have three individual general partners/promoters (the ones who come up with the business idea, go into business, and then sell it to make the money) within it. They get different people (natural persons or businesses) to be investors (these are the limited partners). More often than not businesses will look for all different kinds of financing from different places. They borrow from the bank they take capital from investors, etc. General partners strike a deal with the investors--the limited partners and the bank will provide capital and both expect to be paid back.

Limited Liability Partnership Pop for Law, accts, architects


all states have also adopted LLP statutes. Each LLP statute LLP is Gen Partnership, not a limited partnership. All of the partners have the right to participate in the management of the venture without risking a loss of their limited liability. UPA controlling

Liability: whether or not the ind standing behind the business liable for the debts and obligations of the business for losses.

SP is liable for debts and obligations of the business. What if 3 party car got run into by the company who is liable? and SP: agency law. Respondeat superior: owner of business is liable for torts of employee if employee was acting in scope of

Under RUPA 701, when a partner dies: surviving partners may continue the GP and buyout deceased partners interest, without liquidation. Important to know what you have, and make the What does RULPA have to say about the decision to have a partnership and structure your liability issue for the limited partners? = business accordingly. Know the characteristics of 303. it. 303(a) = makes it clear that limited Joint and several liability. partners have limited liability as long as they are not general partners and do not GP can obtain limited liability by filing a "participate in the control of the statement of qualification or registation with business." General partners want the state officials as a LLP and adopt a name that limited partners' money but not their identifies its LLP status. Rupa 1001. LLP: advice. statutes protect the personal assets of partners 303(b) = But what does "participate in from risk of negligence or malpractice by others the control of the business" entail? What in firms. happens if the limited partner wants to participate in the control of the business GP have unlimited liabitly for partnership (especially if the business is losing money obligations. Their personal assets are at risk for and the limited partner is scared of losing partnership obligations, whether contractual or his investment)? 303(b) lists activities from misconduct (torts) of the partners or the limited partner can participate in partnership employees. UPA 15, RUPA 306. without giving up his limited liability. It concerns certain types of formal relations GP: characterized by: that over the years began to come up.

There is one basic exception to an LLP - if the partner, him/herself screwed up. Limited liability does not trump illegal actions of an individual who normally would be liable. If you have a partner who helps structure and negotiate fraudulent tax shelters, for example, you can go after that particular partner without going after the other partners in the partnership or the partnership itself. So, one point here is the notion that if one person did something violating the law, well, that is violating the law and even if you theoretically had limited liability, all bets are off. Tax shelters can be legal and acceptable or fraudulent. LLP statutes graft Limited Liability onto the GP statutes. LLP partners avoid personal liability for partnership obligations unless the partners own conduct makes him personally liable or the partner supervised the wrongful conduct of another partner or associate. RUPA 306(c). Partners remain personally liable for their

employment. Owner is in position to ensure that employees acting accordingly. Responsibilit y.

structural flexibility (the partners can contractually arrange to run the business largely as they see fit. Restricted transferability of ownerships interest ( a transferee of partnership interest can only become a partner with the unanimous consent of the other partners) Pass-through taxation (partnership income is only taxed at the partner level, rather than doubly taxed at both the parnerhsip and the partner levels

303(b) tried to create a safe harbor whereby certain activities done by a limited partner were not considered participating in the control of the business. The list is from the real world and the cases. No such provisions were ever included in earlier versions of this statute. 303(c) = just specifies that if a limited partner did an activity not enumerated within 303(b), it doesn't automatically mean that the partner participated in the control of the business. 303(d) = But then there is the question: who can actually sue a limited partner successfully and recover? 303(d) says that if a limited partner permits him/herself to be known as a general partner to creditors, then the creditors (and only the creditors) have the right to sue that person as a general partner. What does RULPA have to say about the liability issue for the general partners? = 403. 403 makes it clear that a general partner in a limited partnership has the exact same liability (unlimited joint and several liability) that would a general partner in a general partnership. A limited partnership with a Corporate GP But with the formation of the limited partnership with a corporate general partner, A, B, and C could set up a corporation as the general partner of the limited partnership and the corporation, not A, B, or C, would be liable if anything happened. A, B, and C could be shareholders, officers, and board members without having joint and several, unlimited liability GP have authority to bind the LP as to ordinary matters. RULPA 403. LP have voting authority over specified matters but cannot bind LP. RULPA 302.

personal misconduct. 306(c): provision that lays out the liability scheme for the limited liability partnership Ederer v. Gursky LLP liability shield does not protect partners from claims by other partners. Partner creditors are better off than non-partner creditors. Courts could presumably impose personal liability on LLP partners under a piercing the veil theory. Wikipedia: One partner is not responsible or liable for another partners misconduct or negligence. Some partners have form of limited liability similar to that of shareholders of a corp.

Control&M anagement: efficiency in the control. Contemplate certain ways

Partners control and manage. Each partner is an agent of all other partners and can bind the GP, either by transacting business as agreed by the partners (actual authority) or by appearing in the eyes of third parties to carry on partnership business Apparent authority UPA

of controlling.

9, RUPA 301; Unless otherwise agreed, a majority vote of the partners decides ordinary partnership matters, but anything that is extraordinary or contravenes the agreement requires unanimity. UPA 18(h); RUPA 401(j). Fiduciary Duty: Partners have FD to each other to act in good faith with due care and loyalty. RUPA 404. -Partners must inform co-parterns of material information affecting the GP and share in any benefits from transactions connected to GP. UPA 20, 21; RUPA 404(b). Breaches of FD are actionable in court. UPA 22, RUPA 405(b).

Fiduciary Duties: GP have FD akin to those of partners in a GP

Profit

Partners can choose proportion from their investment? They can choose.. Partners share equally in profits and losses, unless agreed otherwise. UPA18a, RUPA 401(b). A partner may enforce the right to profits in an action for accounting.UPA 22, RUPA 406(b):Partners have no right to compensation for their services, unless provided by agreement. UPA 18(f); RUPA 401(h); On dissolution, after discharging partnership obligations, profits and losses are divided among the partners. UPA 40, RUPA 807 1065: partnership and entities have to fill out. Partnership does not owe taxes, the partners pay taxes on their proportion of their income. form 1065: since the partnership does not pay taxes, that form 1065 is a reporting form. Reports to the IRS, we have a partnership in existence, certain income, certain expenses, and law allows us to deduct or deduce by sales by the amount of the expenses and net. Remaining number: taxable income- basis for the payment of taxes, but the partners, not the partnership that has to pay the taxes, some payment based on their proportion of obligation. Flowing through of the obligation. Form 1065: Form 1040: line 17: each individual partner reports her/his portion of income tax, because that partner individually owes. A+B: partnership makes money as a business: no

Limited and general partners share profits, losses, and distributions according to their capital contributions, absent a contrary agreement. RULPA 503-504; Predissolution distributions are by agreement, as is compensation of the general partner. RULPA 601

Profits of LLP are allocated among the partners for tax purposes. Avoiding the porblem

Taxation

Federal tax purposes: set up that allows the SP to include tax calculations and tax-owed on SP individual tax forms. Form 1040: Line 12: Schedule C: Business income or losses for SP. Your Income, Expenses

Paying Taxes on a Limited Partnership All partnerships have pass-through status. The limited partnership will have to fill out form 1065, but it won't pay a separate tax. The profits/losses will pass to both the limited partner(s) and the general partner(s), who will claim it on their individual 1040s. Paying taxes on a Limited Partnership with a Corporate General Partner All partnerships have pass-through status. As mentioned above, the limited partnership will fill out form 1065 but it does not have to pay a tax. Rather, the general partner(s) and the limited partner(s) will fill out their individual 1040's showing the profits/losses of the limited partnership. If the general partner is a corporation, the corporation will

(allow you to deduct)

Formalities

Simplest form of business associations. No state statute. Doesnt exist, statutory structure and regime, basic rules of rights, duties and liabilities.

tax. Positive for the partnership, other entities because there is only one level of taxation. Small business: practical response HYPO = partnership has $3 million in taxable income. Who pays? Individual partners. And they will pay their own portions, agreed to earlier. This is contrasted to the corporation which has to pay a corporate tax. There is NO partnership tax. Although a partnership has to report its taxable income on Form 1065, at the end of the day (line 22 on form 1065) does not ask you to calculate your partnership tax. Rather, there is pass through/flow through to the individual partners. Let's say each partner's share adds up to $1 million. Partner A doesn't have to actually take that $1 million. He may leave it in the firm to support and finance future firm endeavors. But Partner A will still have to declare that $1 million on line 17 on Form 1040, regardless Does not require legal documentation. UPA 6; RUPA 202(a). : no filing. Potentially dangerous part, esp if you dont know that you have a partnership. Simple form to set up and operate. Easy simple. Unlimited joint liability is the ugly part.

have to pay its own corporate tax because the corporation is taxed on this level. Then, when the dividends are issued to the shareholders/investors/limited partners, the limited partners will pay the tax on the dividends extended to them from the corporation.

An LP arises when a Certificate is filed Article 10 of UPA = Limited Liability with a state official. RULPA 201. An LP Partnership lasts as long as the parties agree or, absent 1001(a) = allows a partnership to become agreement, until a general partner withdraws. an LLP RULPA 801. 1001(c) = deals with the practical requirements of how to form a limited liability partnership. It requires one to file a document with the state and pay a fee claiming to be an LLP. The filing process incorporates another requirement = notice. Notice. The notice requirement creates knowledge on the part of the public even if it usually does not actually notify the public that this partnership has limited liability. So, there is a notice requirement but there is no guarantee that there actually is knowledge. No one really reads the newspapers for notice on which firms became/changed to become an LLP. Law firms and accounting firms particularly have made use of this business form. Partnership statutes typically provide that LLP is a Partnership RUPA 101(5). LLP must fall within the statutory definition of a partnership ie- an association of two or more persons to

carry on as co-owners a business for profit. Beyond meeting the partnership definition, an LLP must satisfy certain statutory formalities. I. LLP is required to file a document (generally called an application, registration, or certificate) with the sec of state or other designated official. II. Jdx require an LLP to provide a specified amount of liability insurance or, alternatively, a pool of funds designated and segregated for the satisfaction of judgments against the partnership. Vote of partners is needed to approve LLP registration: Depending on the statute, unanimous, majority in interest or majority approval may be required. Most LLP statutes provide that limited liability begins as soon as the registration statement is filed.

Structural & Organization

Limited Liability Company Hybrid entity between corp and partnership. GP: members of LLC provide capital and manage the business according to their agreement; their interests generally are not freely transferable. All states have LLC statutes, ULLCA was approved in 2006, but few states have adopted it.

Corporation The board of directors is on top The inS- quail control/management; the board of directors passes that control/management to the officers. These officers are more often than not the ones that make the big decisions. Then the shareholders own the corporation. Profits come in the form of dividends. The corporation is a business; it is in the business of making money. If the net profits are a plus, then the corporation has made money. But this doesn't mean that the shareholders will make money. The Board has to decide that. The declaration and payment of dividends is a decision made by the Board. A corp arises when the articles of incorporation are filed with a state official. MBCA 2.03. Corporate existence is perpetual, regardless of what happens to shareholders, directors or officers, MBCA 3.02

S-Corporation

Non-Profit Tax-Exempt Corporation Non-Profit Tax Exemption: Corporation is just like a regular corporation answering except that question: must be that it enjoys a special tax treatment. Thesignificant S stands for that businesses have a Subchapter S of the internal Revenue Code. raised The hell idea with lawmakers that many was to take the regular characteristics of anon=profits corporationengage in activities that including limited liability and yet not have are to just pay as a just as the ones with corporate tax. Instead, the S-corporation allows businesses the and qualify and dont pass-through status of a partnership. But not have just to pay every taxes, giving them a corporation can be a S-Corporation, there competitive are certain advantage that is unfair. As a choice to operate an Must be eligible entity: Domestic corp or organization. LLC which has elected ot be taxed as a corp Non Profit: no one earns a salary? Fundamental questions for exam. Cannot Must be only one class of stock be divided up to shareholders or Most not have more than 100 members, People in the organization Shareholders. manage or general audience of members. Shareholders US citizens The organization can make a profit, and many successful ones do. The business profit, pays out a certain amount, and brings in a certain amount if it is paying out. -officers directors fiduciary principals apply. You have an inducement to engage in activities that are profitable in the human sense to society. business, making significant profits over the years, not interested in NP tax exempt But I fyou have a qualifying tax activity and would be satisfied with a decent salary. Grants/chartiable contributions, not for profit tax org. youre image to the public, automatic sense of being more trusted because you arent trying to take people.

Liability

Only liable for the amount that you invest into the business. If the business takes on huge debts, you are not automatically liable. Members are not personally liable for debts of the LLC entity. ULLCA 303(a): debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. a member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager. RULLCA304(a): substantially the same. Limited liability, however, has its limits LLC members: both in capacity as capital contributors and managers are not liable for LLC obligations. ULLCA 303. Some LLC statutes suggest that member can become individually liable if equity or justice so requires: VeilPiercing.

Shareholders have limited liability for corporate obligations MBCA 6.22. True for directors/officers acting on behalf of corporation. Corproate participants can lose only what they invested unless there is fraud or an inequity that justifies piercing the corporate veil. Often, large creditors of small corps will demand that corporate participants personally guarantee the corps obligations, thus reducing the significance of corporate limited liability.

Control& Management

LLCs can be member-managed or manager-managed. ULLCA 203: manager-member must be specified). Under most statutes, members in member-managed LLC:

When deciding where to incorporate, the So, an S-corporation allows us to likely question to ask is whether to have a vehicle that is: incorporate in DE (where many other 1. simple to form and maintain business have chosen to incorporate due it doesn't require anyone to file to DE's reputation) or in the state where anything to create it the business has its principle place of 2. associated with limited liability

broad authority to bind the LLC in much same way as partners. ULLCA 301(a). Members have no authority to bind the LLC in managermanaged LLC. Generally voting in a member-managed LLC: is in proportion to members capital contributions, though some statutes specify equal management rights. ULLCA 404. Members and Managers of LLC have Fiduciary Duties of Care and loyalty, which vary depending on mondel. Member-Managed: FD parallel those in GP. Manager-Managed: only managers have fD; a member who is not a manger is said not to owe FD as a member.

business (if it is not DE). Remember though, that even if the directors/officers/shareholders decide to incorporate the business in DE, (and, of course, if the principle place of business is another state besides DE), they still have to file in the state of the principle place of business to get permission to do business as a foreign business in that 3. state. So, to sum up: who incorporates in DE? Publicly held companies where most shareholders are citizens without any connection to the control of the company all want to incorporate in DE because of these reasons. After all, public companies get sued a lot! They will want courts that favor their interests. Smaller, more sophisticated, closely (privately) held companies may also choose to incorporate or reincorporate in DE as well because maybe it has 30 shareholders but only 5 are officers. The answer to the question of who incorporates in DE depends on the business animal that produces a bunch of different players that do not all have interests in common. When the different players' interests are not exactly the same, the business will want to incorporate or reincorporate in DE. Corp has centralized management structure. Business and affairds are under management and supervision of Board of Directors. MBCA 8.01. Officers: carry out policies formulated by board. MBCA 8.41. Shareholders elect the board. MBCA 8.03 and decide specified fundamental matters, they cannot bind the board.

and pass through tax status the rule is don't check the box unless you want to be taxed as a corporation; otherwise, all you have to do is form the Scorporation and make money and file tax forms at the federal level each year; and flexible so that we can choose to have a Board (or not).

Corporate Directors and Officers owe

FD to the corp and in some circumstances to shareholders. Controlling shareholders: have more limited Fid Duties, principally in exercising their control when the corps business is sold. Shareholders may seek relief on behlf of the corp in a deriviate suit for breaches of corp fid duties. Profit Most LLC statutes allocate financial rights according to member contributions, though some provide for equal shares. ULLCA 405(a)( equal shares). Under many statutes, member can take share certificates to reflect their relative financial interests. Distributions must be approved by all the members. ULLCA 404(c). Absent agreement, members generally have no right to remuneration ULLCA 403(d). provides the limited liability of a corprorations but the pass through tax features of partnership. Provides advantageous approach to organization Financial rights are allocated according to shares. MBCA 6.01. Distributions, from surplus or earnings, must be approved by the Board of Directors. MBCA 6.40; Directors and officers have no right remuneration, except as fixed by contract. Profit and losses must be allocated to shareholders proportionately to each ones interest in the business.

Taxation

Corporation: double taxation: two levels of corporate taxation: separate legal person under the law. Separate legal entity, under tax laws, when it has income, it has to pay a corporate tax. Income. Pays out salary and profit to A+B: assume that they are individuals, individual tax: two levels of taxation, at the level of the entity and taxation by the individual. Two levels.

Form 1120S. At the very end, you'll see a "Tax due" line and an "overpayment" line. These are lines that an S-Corporation will have to fill out when they didn't get it right. S-Corporations have pass-through status, like partnerships (which explains line 17, where the amount of pension, profit sharing, etc. plans will be passed down to shareholders). But the S-Corporation - even though it is not taxed on a corporate level - will still have to pay taxes on certain types of activities that it engages in. These activities are not activities that arise in the ordinary course of making income. So, these activities are not in the category of income that includes sales,

Tax Exempt: in general, the entity does not have to pay taxes. The Entity has exemption from Taxation because the kind of purpose (public service) many times activities that sometimes that government would have to perform, Activities where it might not be profitable for business to do. Encourage this kind of provision of services to society, that would have to do with essential matters.

services, etc. Rather, they are certain technical activities that include screw-ups in the way the officers operated the S corporation. The S-Corporation will have to account for these screw-ups. This is what lines 25 and 26 are for Formalities An LLC arises with the filing of a certificate or AoOrganization with a state official. ULLCA 202. Many LLC statutes require there to be at least two members, though increasingly onemembet LLCs are possible. More recent statutes do not limit the duration of LLCs. ULLCA 203. As to formation/formalities, the corporation has the largest number of formalities. The corporation must file articles of incorporation, submit documents, hold meetings and record minutes, host an annual meeting of shareholders, etc.

Limited Liability Partnerships LLP LP ( LLC) on the test look out for Wallace trying to trick me between LLPs and LPs. (mostly law firms and accounting firms) Frequent question on exam = distinguish a limited partnership from a limited liability partnership. Sometimes the question is "a limited liability partnership is" and what follows is the definition of the limited partnership. Obviously the answer is FALSE. Another frequent question on the exam is: "the ULLPA provides that" NO! The correct answer is that "the UPA provides that " There is no ULLPA. The idea is that a lawyer practicing law should know what statute creates the basis for the business forms he is dealing with. Distinguishing the LLP from the LP: We have the UPA and the UPA (1997) which yield two possibilities: 1. A General Partnership = where there is joint and several liability of the partners 2. A Limited Liability Partnership = new form of business association = where there is a partnership but the partners have limited liability. It has all features of a general partnership with just one exception - limited liability. However, if a particular partner is committing fraudulent or illegal acts, that partner can be held liable for his/her actions. This is why the crooked partner will be liable but the other partners and the partnership itself will still have limited liability. Then we have the RULPA and the ULPA(2001) which yield only one possibility: 1. A Limited Partnership = the general partners who run the business are held jointly and severally liable but the limited partners (investors) have limited liability (provided they do not participate in the control of the business and are not "held out" as general partners).

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Distinguishing the LLP from the LLC What is the difference between an LLP and an LLC? Why choose one form over another? Business forms have evolved over time. It may be that an LLP and an LLC in a particular state are two different forms of the exact same thing. The answer will all depend on the statutes for that particular state. The Formation of a Closely Held Corporation Chapter 6. Pg. 208. We are dealing with the closely held corporation here i.e. not the big, publicly held corporation. Thus, we are not bringing federal law into the discussion here. If we learn how to form a closely held corporation, then it won't be as difficult for us to learn how to form a publicly held corporation. DEFECTIVE INCORPORATION De Jure Corporation = A corporation formed correctly and legally recognized as a corporation. You have prepared the articles the way you are supposed to, included all info required, filed them with the proper government offices, and then went on to do business. De Facto Corporation = you may/may not have prepared the articles or incorporation the way you were supposed to. Somehow, you didn't get everything right (even though you did try to do something). There is no recognized corporation. But then (even though you knew you didn't have a properly formed corporation) you went out to do business and generated a liability which the company cannot afford to pay. Now the injured party wants their money. Corporation by Estoppel = you have done even less or nothing to correctly form the corporation, yet you went out and did business and generated a liability. As a matter of equity, you are estopped to deny the existence of a corporation even though there was never one formed. The court is making you liable as a notion of fairness.

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